Gold shot up to a record high during trading Monday as investors bought the metal to hedge against a looming U.S. debt default and spreading European financial crisis.

Gold for Aug. 1 delivery spiked above $1,600 US an ounce by 4:30 ET, hitting $1,607.00 US, a gain $16.90 in the first session of the week.

Buyers clamoured for more of the shiny yellow metal after the U.S. Congress and the Obama administration failed to reach a deal over the weekend allowing for the raising of the government's borrowing ceiling. Washington faces a possible debt default on Aug. 2 if a deal can't be reached.

Uncertainty over the U.S. financial situation combined with continued worries that Europe's financial crisis might spread beyond Greece have conspired to push up gold values in recent days.

"Safe haven flows have driven gold to $1,600 as investors continue to trade the metal as an alternative currency," commented Camilla Sutton, chief currency strategist at Scotia Capital in a morning note.

A decade ago, an ounce of gold was valued at slightly more than $200 US an ounce.

More demand...

While speculative fears have accounted for some of gold's recent price rise, however, analysts point out that market fundamentals should keep pushing the metal's price higher in the coming years.

On the one hand, consumer demand for gold should keep rising, according to the London-based World Gold Council.

The industry association calculated that the gold demand for jewelry use — as opposed to speculative purposes or to be placed in central bank vaults — rose seven per cent in the first quarter 2011 compared to the period a year earlier. Jewelry demand makes up almost 60 per cent of the total gold demand, the Gold Council noted.

As well, citizens in a growing number of countries, China for example, are boosting their gold purchases.

"The prospects for gold demand in China, the world's second largest gold consuming market … could double in the next 10 years," the council said in its review of the gold market for the first three months of 2011.

Indeed, consumer gold demand in China outstripped that of India, generally considered the largest consumer gold market on the planet, for the first time ever in 2010.

Supply shrinking

Equally compelling, the worldwide supply of gold appears to be falling.

The World Gold Council recorded that producers pulled 872 tonnes out of the ground during the first three months of 2011, down four per cent compared to the first quarter of 2010. The reason for slumping supply was that the supply of recycled gold, which constitutes 40 per cent of the industry's production, slipped by four per cent in the first quarter versus a year ago.

As well, analysts do not expect a tidal wave of new gold supply in response to higher prices. England's Standard Chartered Bank sees an increase of 3.6 per cent annually in gold available for purchase for the next five years.

The constricted gold supply combined with burgeoning demand could drive gold value to $2,100 US by 2014 and $5,000 in subsequent years, Standard Chartered estimated.

In fact, rising gold demand in the face of soaring prices could be a signal that buyers do not expect more supply to come out of the ground any time soon and want to buy the metal before its value shoots up even higher, sector watchers suggested.