Gold Jumps 2.9% on US Debt Downgrade Risk

By: Adrian_Ash

LONDON GOLD moved in a $10 range Wednesday morning around $1281 per ounce – the early August low, down more than 10% from that month's peak – as both the US House and Senate were due to meet in what headline writers called "a last ditch attempt" to resolve the government's debt-limit deadline, set for tomorrow.

US debt will likely be downgraded from its AAA status, the Fitch ratings agency warned yesterday, if the government hits a technical default when it reaches the current debt ceiling of $16.7 trillion on Thursday.

The US debt downgrade by S&P in summer 2011 is widely credited with helping investors take gold to record highs above $1900 per ounce.

US debt sales scheduled for Wednesday included $68 billion in 1-month Treasury bills.

Prices for outstanding 1-month T-bills fell early Wednesday, pushing their yield up to 5-year highs of 0.37% annualized.

"We feel that the onus of providing the countervailing deficit [in trade, to balance export surpluses worldwide] will eventually fall on the United States," Reuters today quotes Deutsche Bank strategist Sanjeev Sanyal.

US deficits will continue to offer the rest of the world's "savings glut" a home in US Treasury bonds, the newswire explains, extending the huge central-bank reserves already seen in Japan and China.

Sanyal has long argued that "the Dollar will most likely remain the dominant global currency long after the US has been [economically] surpassed," pointing to the persistence in world trade of Roman coin, Spanish silver and British Pounds after those empires began their decline and actively devalued their currencies.

The Chinese Yuan today hit a new record high vs. the Dollar for the third session running.

With gold rallying 2.9% at one point from yesterday's sudden 3-month low, world stock markets slipped.

"If the deadline is crossed, it could send gold higher," says Swiss investment bank UBS analyst Daniel Morgan. "But that would be combined with other financial market moves that would exert a lot of pressure on policymakers to find a solution.

"I wouldn't be looking to buy gold on the basis of this short-term debt ceiling issue."

"It is inconceivable," says the daily note from brokers INTL FCStone, "that the politicians in Washington will come up empty-handed."

That makes next week's US Federal Reserve meeting "about the only source of support" for gold.

Speaking Tuesday, Dallas Fed president Richard Fisher said "I personally would have a hard time arguing for us to dial [quantitative easing] back.

"My personal opinion is that [tapering QE is] not in play. This is just too tender a moment."

"Extended spending/quantitative easing augments our constructive view on gold," says a note from Japanese financial group Nomura.

"[So does] tail-risk potential from a US government default, a low-probability outcome, but a noteworthy associated non-linear impact."

Meantime in India, domestic gold prices rose to record highs above international benchmarks as local shortages worsened thanks to the government's strict anti-import policies and the failure – so far – to mobilize existing Indian holdings for resale through gold banking deposits.

Indian premiums over London quotes today hit $100 per ounce, according to dealers, up from $40 only a week ago.

"There is a little demand due to festivals," says Bachhraj Bamalwa of the All India Gems & Jewellery Trade Federation. But "there are no supplies in the domestic market.

"What little supplies that come, go to exporters,"

The Rupee edged higher against the Dollar on Wednesday morning, and the British Pound also jumped, hitting a 1-week high above $1.60 after new data showed the UK's jobless count falling faster than expected in September.

Wednesday morning's London Gold Fix still rose £10 per ounce from Tuesday AM's near-2013 low of £787, the lowest price in Sterling since end-June's 3-year low.

UK wages meantime rose only 0.8% on average this summer from a year earlier, separate data said Wednesday.

The slowest growth in average UK earnings on record, that was less than one-third the pace of consumer-price inflation, reported Tuesday at 2.7%.

By Adrian Ash
BullionVault.com

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Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich, Switzerland for just 0.5% commission.

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