Tuesday, August 2, 2011

Gold Sets New Record, US Downgrade Risk "Substantially High"

London Gold Market Report
from Ben Traynor
Tuesday 2 August, 08:00 EDT
  
Gold Sets New Record, US Downgrade Risk "Substantially High" on "Incessant Borrowing", Korea Chooses to Buy Gold

U.S. DOLLAR prices to buy gold set a new intraday record Tuesday lunchtime in London, breaking through last Friday's previous high of $1632 per ounce – while stocks and commodities fell and US Treasury bonds rose after the US debt ceiling deal passed its first key vote last night.  

Over in Europe, meantime, borrowing costs soared for Italy and Spain as yields rose on each country's 10-Year government bonds.

The price to buy gold in Euros meantime set a new record at this morning's London Fix, at €1145.28 – while the Sterling gold price is yet to break £1000 at the Gold Fix, coming in at £997.298.

Silver prices rose to $39.86 per ounce – just below Friday's close.

"Intuition might have suggested that increased confidence in the US Dollar and the prospect of more certain times ahead would bring the beginning of a move away from gold," says one London bullion dealer, noting that the metal's performance tells a "different story" – with investors continuing to buy gold.

"If this really is the end of the debt ceiling saga, global fears over growth...may be poised to take its place in support of gold."

"The gold price remains well-supported in the near term," adds VTB Capital analyst Andrey Kryuchenkov.

"The focus of attention is to remain on the US economy and persistent concerns over the country's AAA sovereign rating downgrade are unlikely to dissipate just yet." 

The US House of Representatives voted 269 to 161 Monday night in favor of raising the federal debt ceiling. The government borrowing limit will be raised to $16.4 trillion – enough to get through to 2013 – while spending will be cut by $2.4 trillion over the course of a decade.

"The 'cuts' being discussed are illusory," says Republican senator Ron Paul.

"[They] are not cuts from current amounts being spent, but cuts in projected spending increases."

The US Senate is expected to vote on the proposals later today – which if passed would allow the US Treasury to continue borrowing and avoid a default on government bonds.

Prices to buy gold and silver would then be "set for further downside" reckons Marc Ground, commodities strategist at Standard Bank, although he notes that this could be limited by ongoing fears of a downgrade by ratings agencies.

"The chances of a downgrade after this deal remain substantially high," adds Ajay Rajadhyaksha, head of US fixed-income strategy at Barclays Capital.

"Lower growth in 2011 will add about $1.2 trillion to the deficit over the next 10 years, which wipes away most of the savings we're supposed to get from this deal."

Ratings agency Standard & Poor's warned last month that there is a 50% chance it will downgrade the US by the end of October. So far none of the three main ratings agencies – S&P, Moody's and Fitch – has commented publicly on the debt ceiling deal.

 "The US has averted a national default by borrowing more," notes an editorial on the website of China's People's Daily – the main official newspaper of China's communist party.

"[This] does not mean it could avoid default forever by incessant borrowing."

Americans "are living like parasites off the global economy and their monopoly of the Dollar," Russian prime minister Vladimir Putin said Monday.

"There should be other reserve currencies."

"People still have faith in the US and faith in the Dollar as the world's reserve currency," counters David Bloom, global head of currency strategy at HSBC in London.

"If the US is downgraded, the Dollar might sell off at the margins, but there isn't going to be a slam-dunk, cataclysmic selloff."

Away from the US, South Korea's central bank opted to use over $1 billion of foreign exchange reserves to buy gold over the last two months, according to a statement it released on Tuesday.

The Bank of Korea bought 25 tonnes of gold bullion – a 173% increase in its official gold holdings.

The Dollar and Euro "have been losing their clout since the recent global financial crisis," news agency Reuters quotes a BoK official who commented anonymously on the decision to buy gold
"[This is] partly due to abnormal monetary policy adopted in many countries and fiscal deficit problems." 

Here in the UK, buying of 10-Year government bonds – known as gilts – pushed bond prices up, and pushed the yield down to a record low of 2.766% on Tuesday. Accounting for retail price inflation, the real yield on 10-Year gilts also hit a record low of minus 2.2%.

In contrast, the yield on 10-Year Italian debt spiked to over 6.2%, while Spanish 10-Year yields breached 6.4% - both countries' bonds setting a Euro-era record for the spread above benchmark German bund yields.

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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