Nervous investors drove the price of gold to a record high for a third straight session Monday on the eve of Tuesday’s interest rate announcement by the U.S. Federal Reserve.

The remarkable recent run-up in gold has been fuelled by growing concerns about the world’s largest economy and many economists doubt the U.S. central bank will to take more extraordinary measures to prop it up.

“One of the things that has bothered people is the possibility of further quantitative easing by the Federal Reserve Board, which essentially means injecting further liquidity (money) into the market,” said Patricia Mohr, vice-president of economics and a commodity market specialist with the Bank of Nova Scotia.

Spot gold hit a record $1,283.70 (U.S.) an ounce during Monday trading before it retreated slightly. September gold closed at $1,279, up $3.40, on the New York Mercantile Exchange.

Gold, along with energy stocks, also helped Toronto’s S&P/TSX composite index gain 69.95 points to 12,234.51.

The Canadian dollar, meanwhile, profited from weakness in the U.S. greenback by rising 0.19 of a cent to 97.15 cents. Traders generally consider gold a hedge against U.S. currency risk and some are betting the metal will continue its rally in the near term.

Speculators are likely to push gold prices toward the “$1,300 mark” over the next several months, Mohr predicted. “Sometimes the market is really primed to move higher because of the impact of traders,” she said.

While most economists expect the Fed to leave its benchmark interest rate at 0 to 0.25 per cent on Tuesday, they will be scouring its statement for any sign the central bank is considering a fresh round of quantitative easing to shore up a feeble economy.

The Fed has already tried bolstering the U.S. economy by buying back treasuries. More interventionist action along those lines could have the effect of weakening the U.S. dollar, while sending gold prices soaring to new heights.

“It (quantitative easing) is a form of printing money,” Mohr said. “It is not going to have inflationary consequences in the near term but the market worries that in the longer term, in the next several years, that it could be inflationary.”

Nonetheless, some economists say it is unlikely the Fed will signal as soon as Tuesday that it plans to grow its balance sheet through quantitative easing. James Marple, senior economist with TD Economics, says it is simply too early for the Fed to take that route.

“There is too much disagreement in the Fed about it. A lot of members seem to think it is a bad idea,” Marple said. “I think until you see the economic data moving one way or another – they are watching it very closely – I don’t think they are going to change their position.”

On Monday, however, traders digested more glum news about the U.S. housing market. The U.S. National Association of Home Builders said that confidence in the housing market stayed at the lowest level in 18 months in September, with more home builders worried that the traffic of potential buyers is falling.

Even though higher gold prices have historically be a boon for the Canadian dollar, some economists suggest that it may only be a “mild positive” going forward.

“I don’t think the two necessarily go hand-in-hand,” said Douglas Porter, deputy chief economist of BMO Capital Markets.

“It seems like gold is being driven more by investors just deciding there aren’t any compelling alternatives.”

With files from the Star’s wire services

Source: http://www.thestar.com/business/article/863902--u-s-concerns-push-gold-price-higher