Gold price rises in wake of stalemate over US deficit

The Democrat government led by Barack Obama 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 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 monetisation 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.”

Yesterday spot gold peaked at $1,622.49 an ounce.

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 euro zone debt levels as well as the US negotiations.

The stalemate in Washington led to safe-haven German Bunds outperforming US Treasuries yesterday, as risks of a US default outweighed worries over euro zone 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 dollar 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.”

It added: “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.