Monday, July 25, 2011

Gold Breaks Through $1620 with 8 Days Left until US Debt Ceiling "Suicide"

London Gold Market Report
from Ben Traynor
Monday 25 July, 08:30 EDT


Gold Breaks Through $1620 with 8 Days Left until US Debt Ceiling "Suicide"

THE DOLLAR gold price held steady around $1619 an ounce Monday morning London time – up 1.2% from Friday's close – just below its new all-time record of $1623 per ounce set at the start of the day's Asian trade.

Stock and commodity markets and longer-dated US Treasury bonds all fell after it became clear Washington is no closer to solving its debt ceiling stalemate.

Silver prices meantime rose to $41.08 per ounce Monday morning – 2.5% up from Friday's close – before easing back slightly.

"Against the backdrop of [the US debt ceiling] uncertainty, investors unsurprisingly flocked to the precious safe-havens of gold and silver," says one gold bullion dealer here in London.

"A lot of [the gold price rise] is undoubtedly fear," agrees Ben Westmore, commodities economist at National Australia Bank, adding that the outlook for US Treasuries and the Dollar is causing concern for traders.

"At the moment, the US is looking a bit unstable and gold is a pretty good substitute."

Despite leaders from each party calling for a "bipartisan" solution, Republicans and Democrats are now preparing rival plans to deal with the US federal deficit. Eight days remain before the country hits its $14.3 trillion debt ceiling.

Congress will not raise the debt ceiling until it agrees on how to tackle the deficit. 

House of Representatives speaker John Boehner said Sunday he is working on a proposal which would embrace the principles of Cut, Cap and Balance – a bill which called for a balanced budget to be made part of the US Constitution.

Cut, Cap and Balance was passed by the House last week but defeated in the Senate.

Boehner's proposal is "a nonstarter", reckons Senate majority leader, Democrat Harry Reid, as it "would not provide the certainty the markets are looking for".

Reid is working on his own proposal to see the US through to the end of next year. Reid's plan would involve $2.7 trillion of spending cuts and does not include increased tax revenues.

"The debt ceiling debacle unambiguously translates into an intensification of the already-strong headwinds facing US growth and employment creation," says Mohamed El-Erian, chief executive of world's largest bond fund Pimco.

"In most likelihood, a last-minute political compromise will avoid a default but will leave the AAA rating extremely vulnerable."

Ratings agency Standard & Poor's this month warned there is a 50% chance it will downgrade the US within the next three months. Fellow ratings agency Moody's has also put the US on review for a possible downgrade.

Central bankers in charge of foreign exchange reserves "must be more nervous than before," says a senior official at the Bank of Korea – speaking to news agency Reuters on condition of anonymity.

"But nobody thinks Americans will choose suicide when they have known solutions."

More crucial than the debt ceiling "will be the situation in housing, the jobs market and asset prices," says London commodities consultancy VM Group in its latest Metals Monthly.

"If the jobless rate creeps back towards 10% and home prices slide further, then there remains little doubt that further [Federal Reserve] policy stimulus will be unveiled."

A third round of quantitative easing "will prompt a fresh gold rally," the consultancy reckons.

Here in Europe meantime Moody's responded to last week's announcement of a rescue package for Greece by pushing Greek sovereign debt even further into junk territory on Monday – from Caa1 to Ca.

"The support package incorporates the participation of private sector holders of Greek debt, who are now virtually certain to incur credit losses," said a Moody's statement.

"If and when the debt exchanges occur, Moody's would define this as a default by the Greek government on its public debt."

Over in New York, figures from the Commodities Futures Trading Commission for the week ended 19 July show a jump of 11.3% in the net long position of bullish minus bearish contracts held by speculative futures and options traders. 

Long positions grew 7.2%, while short positions fell by 13.9%.

"The drop-off in speculative shorts is encouraging," says Marc Ground, commodities strategist at Standard Bank.

Speculative shorts, however, remain "way above last year's average...which still points to a gold price that is vulnerable to shifts in investor sentiment."

Ben Traynor




Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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