Gold News

Debt Ceiling Tensions Rise But Gold Bullion Falls Even as Monetary Outlook "Turns Positive"

GOLD BULLION prices fell $25 per ounce Friday morning from yesterday's 7-session high, while concerns grew that next month's US "debt ceiling" deadline could spark panic in financial markets.
 
Slipping with world stock markets and commodity prices as the US Dollar rallied, gold cut its post-Fed surge – made when the central bank failed to taper its $85 billion per month QE program as expected on Wednesday – by one third.
 
Silver dropped alongside gold bullion, also cutting its week-on-week rise to the same 1.8% at $22.60 per ounce.
 
"Although the price of gold has been dropping since the end of August," says French bank and London bullion dealer Natixis, "we would not be surprised to see a re-emergence of the tensions that existed in summer 2011 when the US was downgraded due to the danger that Congress might reject a budget or debt ceiling increase.
 
"Then, the price of gold reached a record high because of the market's impression that no agreement could be reached," says head of commodities research Nic Brown, noting greater intransigence between Republicans and Democrats in 2013 over funding health care.
 
"I think," said Fed chairman Ben Bernanke on Wednesday, "that a government shutdown, and...a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy."
 
The debt ceiling wrangle of 2011 led to ratings agency S&P downgrading US bonds that August. Gold bullion prices rose $300 per ounce to new record highs above $1900.
 
Today some 43% of US citizens want Congress to keep the debt ceiling at $16.7 trillion, says a new Washington Post-ABC poll, defaulting on America's bills and obligations to do so.
 
Yet 73% also fear that not raising the debt ceiling would therefore do "serious harm" to the US economy.
 
"We cannot afford for Congress to gamble with the full faith and credit of the United States," Treasury secretary Jack Lew told the Economic Club of Washington on Tuesday, ahead of the US Fed's decision not to taper its QE bond-buying.
 
Despite the debt ceiling deadline next month, however, "October is a live meeting" for the US Federal Reserve to discuss tapering its QE program, St.Louis Fed president James Bullard told Bloomberg today.
 
Back in the gold bullion market, and "just as the monetary indicators are turning positive," said HSBC in a report Thursday, "physical demand – a mainstay of the market through the summer – is turning less supportive."
 
Reuters today notes a sharp fall this week in Asian premiums for gold bullion, over and above benchmark London prices.
 
Hong Kong premiums fell to $1.50 per ounce from $2.50, the newswire says. Tokyo gold went to a slight discount to London settlement.
 
"There has only been investment buying because of the Fed decision," says Hong Kong dealer Ronald Leung at Lee Cheong Gold.
 
"There is no physical interest" from jewelry stockists.
 
Sales of American Eagle gold bullion coins by the US Mint ticked higher this week, latest data show. But at current rates they remain 80% below September last year and 85% below September 2011.
 
Speaking about the debt ceiling debate, "[People] expect Washington will only act irrationally for a certain length of time," says Warren Buffett in a CNBC interview today.
 
Not raising the debt ceiling would be "pretty damn dumb." 
 
The volume of gold bullion held to back the giant SPDR Gold Trust for US investors – the most valuable ETF in the world when the debt ceiling downgrade of 2011 drove prices to record highs – was unchanged Thursday.

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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