Gold News

Gold Prices Jump to $1320 on US Debt-Ceiling Deal as Foreign Creditors "Review Dollar Diversification"

GOLD PRICES leapt at the start of London trade Thursday, rising $45 per ounce to hit 1-week highs above $1320 after the US Congress reached a short-term deal on the government's debt ceiling.
 
Avoiding a debt default set to hit today, the deal extends new borrowing to New Year 2014.
 
Asian and European shares failed this morning to follow US stocks higher on the news, while the Dollar fell hard and US bond yields also eased back.
 
Silver prices rose over 5% this morning to trade above $22 per ounce for the first time in a week.
 
Shortly before the jump in gold prices, but after the US debt-ceiling deal, the Indian government revised its import tariff for gold bullion – seen as a key part of this year's collapse in legal imports to the world's No.1 consumer – to reflect lower values.
 
Cutting the tariff value to $418 per 10 grams from $436, the Central Board of Excise & Customs acted "in line with global rates" according to NDTV, whilst maintaining the 10% duty.
 
By the end of Indian dealing on Thursday however, the gold price had recovered to $425 per 10 grams for London settlement, the international benchmark.
 
For Indian consumers, premiums to buy gold over and above London prices have jumped this week to record highs of $100 per ounce amid falling supply and growing demand for autumn festive season.
 
"The markets had anticipated a last-minute compromise of this kind," says a note on the debt-ceiling deal from German investment bank and bullion dealers Commerzbank.
 
"What is more, this also means that the scaling back of Fed bond purchases will be further postponed. A renewed sell-off of precious metals thus failed to materialize."
 
Issued before the debt-ceiling deal, "Resistance lies between 1301 and 1307," said Scotiabank's technical analysis Wednesday night, pointing to the gold price's 50% retracement of both the 2008 to 2011 uptrend and this year's June-August rally.
 
Longer-term, however, "Desire to buy gold as a hedge against the consequences of monetary policy has diminished," reckons Credit Suisse analyst Tom Kendall, who in February announced the "beginning of the end of the era of gold".
 
"When you've got other asset classes, equities in particular, doing so well, then it's hard to divert investments out of them and into something like gold, which is falling."
 
"A lot of gold," agrees Robin Bhar at Societe Generale, also speaking to Bloomberg today, "has been held for speculative purposes, investment and a store of value, and that's less of a reason going forward.
 
"If you sell your gold and put your money into equities, other fixed-income assets or real estate, you're going to show a return. The gold bull market is definitely over."
 
But "although the US has managed to avert a default," counters Nic Brown's commodity team at French investment and bullion bank Natixis, "[it] has clearly lost some credibility" with foreign creditors led by China.
 
Not only did Washington's behavior annoy T-bond holders, says Natixis, "a concrete long term solution has once again failed to emerge."
 
As a group, Natixis noted last week, central banks have turned net sellers of gold since May, cutting 20 tonnes from the 10-year record-high gold reserves. But countries holding US debt "may [now] begin to revisit long term plans to diversify away from the Dollar into other currencies or gold," it said Thursday.
 
Chinese rating agency Dagong today downgraded US government debt from single A to A-minus this morning, regardless of the debt-ceiling deal.
 
"A potential Fitch downgrade," says Citigroup analysis, pointing to the major US ratings agency's warning over the debt-ceiling deadline on Wednesday, "[would mean] the US will no longer be AAA on average."
 
Losing that status could see US debt forbidden to many central banks worldwide, says Citi.
 
The Swiss National Bank, for instance, "insist on investing [only] in high-quality government bonds" with their $430 billion of reserves, one quarter of which s currently in US Dollar assets.

Adrian Ash is director of research at BullionVault, the physical gold and silver 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 is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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