* S&P downgrades US credit outlook to negative from stable
* Investors fret over prospect of Greek debt restructuring
* Gold volatility index rises to four-month high
* Coming up: U.S. March housing starts on Tuesday (Recasts, updates prices, market activity; adds link to Insider interview)
By Frank Tang
NEW YORK, April 18 (Reuters) - Gold prices rallied to a record high $1,497.20 an ounce on Monday after Standard & Poor's downgraded its credit outlook for the United States and as investors worried about debt in the euro zone and inflation in China.
S&P said it might eventually cut its long-term rating on the United States within two years, prompting investors to buy gold as a hedge against economic uncertainty. The ratings agency cited a risk that policymakers may not reach agreement on a plan to slash the huge federal budget deficit. [ID:nN18195555]
The CBOE gold volatility index <.GVZ>, a bullion market fear gauge, surged to its highest level in four months, up 8 percent for its biggest one-day rise since March 1.
"It's a wake up call that we need to do something in the
U.S. Unfortunately, the political dynamics are unlikely to
dictate that. Gold is going to benefit for an extended period,
meaning that we are not going to resolve those issues," said
Axel Merk, portfolio manager of Merk Hard Currency Fund
Spot gold
U.S. gold futures for June delivery
Gold rose even as the Reuters/Jefferies CRB index <.CRB> fell 1 percent, led by a more than 2 percent drop in U.S. crude futures. Global equity markets <.MIWD00000PUS> also tumbled.
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Gold-oil chart graphic: http://link.reuters.com/tat98r
Reuters Insider interview: http://link.reuters.com/qus98r
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"The U.S. debt situation got a reality check this morning from the move by S&P," said John Kilduff, a partner at Again Capital in New York.
"Only precious metals will be seen as attractive in the aftermath of the outlook downgrade. The overall economic outlook becomes more opaque with this; equities and energies will be very much under pressure now," Kilduff said.
Gold prices were also underpinned after Atlanta Federal Reserve President Dennis Lockhart said economic growth may have been slower than expected early this year. Investors took this as an indication that the Fed is not likely to rush to scale back its vast support for the economy. [ID:nN18212836]
Bullion prices have almost doubled since the Fed cut interest rates to the bone in 2008 to boost economic growth.
DOLLAR RISE, CHINA TIGHTENING
Gold gained support from talk that Greece may be forced to restructure its debt and on uncertainty over a bailout for Portugal. [ID:nLDE73H0IC]
"There is ongoing concern that the (European) debt problems haven't been fixed. The negative outlook just undermines the role of the dollar as a safe-haven currency," said Leo Larkin, metals equity analyst of Standard & Poor's.
Defying market expectations, the dollar remained broadly higher as mounting concerns about Greece's fiscal conditions more than offset S&P's move. [FRX/]
Larkin, whose work is separate from that of S&P's sovereign rating unit, said he expected gold to hit a record $1,600 an ounce by year-end on inflation worries and low real interest rates.
Gold remained far below its all-time inflation-adjusted high, estimated at almost $2,500 an ounce, set in 1980, an era of Cold War tension, oil shocks and hyperinflation. (Graphic: http://r.reuters.com/ren88r )
Gold also got a boost from concerns about inflation in emerging markets. China raised banks' required reserves on Sunday for the fourth time this year, extending the fight against stubbornly high inflation. [ID:nL3E7FH05Y]
Among other precious metals, silver
Platinum
LAST/ NET PCT YTD
CLOSE CHG CHG CHG
US gold