Gold prices hit a fresh record high overnight, with both central banks and nervous investors seeking to insure themselves against future turbulence by taking refuge in the yellow metal.

The gold price rallied to just under $US1275 an ounce, eclipsing its former record of $US1265.50 an ounce back in June, boosted by a report which predicted that central banks will be net buyers of bullion this year, for the first time in two decades.

London-based metals consultancy GFMS Ltd estimated that central banks would buy about 15 tonnes of bullion on a net basis this year, a situation last seen in 1988. The consulting group predicted that gold could climb close to $US1350 an ounce by the end of the year, due to worries about the anemic global recovery, and the high debt levels in developed countries.

Increasing central bank buying has changed the dynamics of the market, and boosted the yellow metal’s reputation as a reliable store of value. Some central banks have chosen to diversify their reserves because of fears that the weak outlook for the US, Japanese and European economies will translate into currency instability.

Countries such as Russia, China, India and Saudi Arabia have bolstered their gold reserves since the onset of the financial crisis in 2008.

GFMS pointed out that this is an important shift from the past decade when central banks – mainly in Europe – were responsible for selling an average of 442 tonnes of gold each year.

At the same time, private investors have been piling into gold, fearful that central banks in developed countries may have to resort to printing money to stimulate moribund economies and bail-out debt-laden governments.

With US interest rates already close to zero, there is a growing expectation that the US Federal Reserve will resort to unconventional monetary stimulus in order to stimulate the sluggish economy. This could see the US central bank embarking on a fresh round of quantitative easing, in which it buys a further $US1 trillion or so in Treasuries and other financial assets, and pays for these securities by printing new money.

Many investors are fearful that the side effect of a fresh round of quantitative easing will be a collapse in the value of the US dollar.

The rise in the gold price overnight was helped by weakness in the US dollar, which touched a 15-year low against the Japanese yen after Japanese Prime Minister Naoto Kan successfully defeated a political challenger.

At the same time, investors are arguably even more worried about the outlook for the euro, as the eurozone grapples with the problem of how to rein in the budget deficits of some of its debt-laden members.

Many investors are worried that central banks in the developed world – especially those that control their own currencies – will increasingly respond to disappointing economic growth by running their printing presses, leading to massive devaluations of currencies, such as the US dollar, the UK pound and the Japanese yen. And the resulting turmoil in foreign exchange markets could ultimately lead to new currency controls being introduced.

As a result, investors are turning towards to gold in the hope that the yellow metal will maintain its purchasing power, even if paper currencies end up being seriously debased.