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Gold prices may hit US$2,000 as result of Swiss franc peg

LONDON -- Switzerland's decision to peg the erstwhile safe-haven franc to the euro may finally give gold bugs the chance to see prices hit the once-unimaginable US$2,000 an ounce mark, as the metal holds on track for its strongest annual rally in three decades.

The Swiss National Bank (SNB) shocked global markets on Tuesday by saying it would buy unlimited quantities of foreign currencies to prevent the franc from rising above 1.20 Swiss francs to the euro, as it fights to contain the meteoric rise of its currency that threatens its exports and economy.

By buying euros in unlimited amounts to weaken the franc, the SNB is in effect putting more of its own currency into circulation, which threatens to trigger inflation.

It has also impacted the Swiss currency's status as a haven in its own right. While gold prices initially dipped as the move sparked a rush to liquidity in the form of other currencies such as the dollar, the SNB move is likely to lend firm support to gold in the medium term, analysts said.

“All in all, Switzerland is now on a quantitative easing policy in the foreign exchange markets,” said Peter Fertig, a consultant for Quantitative Commodity Research. “If the Swiss franc is no longer a preferred safe haven due to intervention by the SNB, it will have (a positive) impact on the demand for gold.”

Much of gold's rise this year — it is currently up 34 percent since January, on track for its largest yearly gain since 1979 — has been fuelled by cheap cash, provided chiefly by Western central banks battling debt piles large enough to derail global growth.

Even without the SNB, the deterioration in the eurozone debt crisis and the U.S. economy's inability to create a single job last month had already prompted many analysts to upgrade their gold price targets this year.

The US$2,000 mark is now coming clearly into view — though its sustainability at that level is unclear.

“US$2,000 is just another number. There is no reason why it can't go through that, can't go a long way through that,” said Natixis strategist Nic Brown. “This explosion in liquidity creates demand for gold and creates the perception for gold prices to go higher,” he said. “But ultimately, this is a bubble fuelled by liquidity.”

Adjusted for inflation, gold already hit US$2,000 an ounce in October 1980. In 1980s money, Tuesday's record high gold price of US$1,920.30 an ounce is only worth US$720.

But its rally is impressive nonetheless, with the metal set to end September with its twelfth quarterly gain in a row, its longest such winning streak in at least 30 years. Switzerland's move is just the latest piece of supportive news for the metal.

“I think gold is headed for US$2,000. In theory, this could happen in a matter of days,” said Frank McGhee, head of precious metals trading at Chicago's Integrated Brokerage Services.

“In reality, if this type of intervention action was taken and was ultimately seen to be ineffective, then the market will get new strength from that.”

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