THE GOLD PRICE will continue to perform well until the US resolves its fiscal problems, according to a leading analyst.
Axel Merk, portfolio manager of the $600 million Merk Mutual Funds, believes the Dollar's status as the world's reserve currency has allowed it to postpone taking action on debt and deficit issues.
"The challenge is that the US has relied for too long on its reserve status and not engaged in the reform that got us to be the reserve currency in the first place," said Merk, responding to the decision by Standard & Poor's (S&P), the ratings agency, to revise its outlook for US sovereign debt from "stable" to "negative".
"It's a wake up call that we need to do something in the US," added Merk. "Unfortunately, the political dynamics are unlikely to dictate that. Gold is going to benefit for an extended period, meaning that we are not going to resolve those issues."
Edel Tully, London-based precious metals strategist at UBS, also believes the revised outlook could be indicative of a benign environment for Gold Prices.
"It brings up the debate again about gold being the alternative currency," she said. "I was in the US last week, and you could feel the growing unease regarding the state of the US fiscal imbalances."
Mohamed El-Erian, chief executive at PIMCO, the world's largest bond fund, warned that failure by the US to address its debt problems would risk greater problems in future.
"This new warning [from S&P] highlights the need for the U.S. to take better control of its fiscal destiny if it is to avoid higher borrowing costs and maintain its central role at the core of the global economy," he said.
Earlier this month Bill Gross, the head of PIMCO, took a net short position on US Treasuries worth 3% of PIMCO's $236 billion Total Return Fund.
There are concerns, however, that US fiscal problems are now too entrenched to be easily resolved.
"The debt is a bit like an escalator," said Kevin Logan, HSBC's chief US economist. "It's easy to turn round and get off after the first three steps, but becomes much harder after that."
Jeffrey Currie, head of commodities research at Goldman Sachs – who last week sold out of several commodities positions – believes that US monetary policy, along with its fiscal position, will determine when the Gold Price reaches its peak.
"Gold is ultimately dependent upon real rates, which are a function of both inflation expectations and monetary policy, he said earlier this month. "A top in Gold Prices will only become apparent when the risks of sovereign default are behind us with a clear and successful exit of the stimulus we’ve seen over the last few years."
S&P's rationale explaining its decision included the following:
"[We] note the US's fiscal profile has deteriorated steadily during the past decade and, in our view, has worsened further as a result of the recent financial crisis and ensuing recession. Moreover, more than two years after the beginning of the recent crisis, US policymakers have still not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures."