Gold prices hit record highs on Monday after negotiations to lift the US debt ceiling hit stalemate over the weekend, raising fears over a possible default and boosting the appeal of bullion versus US assets like Treasuries and the dollar.
Democrats and Republicans in Congress are bitterly divided over plans to cut the US deficit, a necessary move before the debt ceiling can be raised. With the August 2 deadline for a resolution fast approaching, the world's largest economy is facing an unprecedented debt default. If this happens, investors could dump the dollar and US Treasuries.
While most investors believe a deal will be done, nervousness ahead of the decision is still pressuring the dollar, hurting long-dated US Treasuries and benefiting gold. "Ultimately you need some sort of political resolution, some sort of acknowledgement that there are long-term financial problems that need to be dealt with," said Natixis analyst Nic Brown.
"There are ultimately two options - you either have magnetisation of debt, or you have a move towards fiscal consolidation, and a move towards fiscal sustainability. Until we get the latter, the market will assume the former. That is just a great bid for the gold market."
Spot gold peaked at $1,622.49 an ounce and was up 1.1 percent at $1,615.74 an ounce at 1354 GMT. It has reached record highs in each of the last five consecutive quarters, and is on track for its biggest monthly gain since April this month on concerns over eurozone debt levels as well as the US negotiations.
The stalemate in Washington led to safe-haven German Bunds outperforming US Treasuries on Monday, as risks of a US default outweighed worries over eurozone debt. US Treasury yields rose and European shares slipped. Long-dated US Treasury debt prices fell and the cost of insuring the country's debt from default rose on Monday on investor concern that the world's biggest economy could lose its prized top-notch credit rating after debt talks collapsed.
The dollar dipped against a basket of currencies, while the Swiss franc, often seen as a haven for investors, rose against the euro and the US unit. The euro slipped after Moody's downgraded Greece by three notches. "With little optimism on US debt talks at the moment, the gold price acutely reflects investor nervousness that limited progress will be made before the August 2 deadline," UBS said in a note. "This nervousness is in many ways justified as the threat of a US ratings downgrade is very real."
"S&P has threatened that a ratings downgrade is possible even this month, if progress on the negotiations is insufficient. With just a few days left in the month, it is increasingly likely that investors will continue to buy gold as a defensive trade."
Rating agency Standard & Poor's last week reiterated that there was a 50-50 chance the US AAA credit rating could be cut within three months. Hedge funds and other large speculators last week boosted their bullish bets in US gold futures to the highest in nearly two years as gold rallied on the eurozone's debt crisis and uncertainties around the US debt talks.
Managed money in COMEX gold added 16,135 lots in the week ended July 19, boosting their net long position to 238,319 lots, which marked the highest holding for the key speculator group since the week of October 18, 2009. US gold futures for August delivery were up $16.80 an ounce at $1,618.30, off a high of $1,624.30.
"The stumbling block for gold is the relatively large size of Comex specs," said UBS. "These are of course not normal times, so the extension in the Comex gold book can continue for a while longer. But the danger is that positive headlines out of the US debt ceiling discussions could prompt recent gold specs to liquidate." Among other precious metals, silver was bid at $40.42 an ounce against $40.02, tracking gains in gold.
The gold:silver ratio - the number of ounces of silver needed to buy an ounce of gold: eased back below 40 on Monday as silver ourperformed, approaching last week's two-month low. Spot platinum was bid at $1,787.50 an ounce versus $1,793, while spot palladium was at $796.97 an ounce against $804.25.
Comments
Comments are closed.