Gold Likely Higher as Debt Ceiling Deadline Looms

Gold Likely Higher as Debt Ceiling Deadline Looms

Fundamental Forecast for Gold: Bullish

• Crude Oil to Follow S&P 500 Lower, Gold Safe-Haven Role Challenged
• Gold 1603 Now the Pivot
• Investors Continue Selling Dollars for Gold, Currency Counterparts

As noted last week by Currency Analyst David Song, “the short-term correction in gold is likely to be short-lived, and the bullion should resume its upward trend as prices end the week above $1600 per ounce. In turn, buying dips may turn out to be a favorable strategy amongst market participants, and we are likely to see fresh record-high prices for the precious metal as it benefits from safe-haven flows.” Such appeared to hold true, with the precious metal gaining 1.61 percent over the past week against the U.S. Dollar. Similarly, bullion was also bid higher against the British Pound and the Euro, while losing ground against the New Zealand Dollar and the Swiss Franc. As such, Gold is only lower in Franc-terms in 2011.

The outlook for Gold is a fairly simple forecast for the coming week, as bullion, like the other precious metals, represents arguably the best store for safe haven amid a looming United States government default. The U.S. Treasury’s ability to pay back its obligations expires on August 2, and with debt negotiations at a clear, heavily entrenched impasses over how to deal with the $14.3 trillion debt ceiling – a simple debt ceiling raise, to cut spending or to raise revenue, or some mix of the three – financial markets are likely to become increasingly jittery over the coming days.

Similarly, as investors have fled to safety, most notably by capital outflows from the United States – U.S. equity markets have slide sharply while the Dollar has sold off – Gold has been bid higher along other safe havens, such as the Swiss Franc. The flight to safety was further underscored over the course of the week with three disappointing gross domestic product prints, from Canada (Friday, Great Britain (Tuesday) and the United States (Friday). Slowed growth will likely provoke central banks to keep rates on hold at low periods for an extended period, which in turn would keep easy money available to bid up commodities higher.

Four rate decisions on tap for the coming week are likely to support such a claim, as global growth has stalled of recent, in what many are calling simply a “soft patch” for the recovery. However, with growth slowing in lock-step around the globe, as evidenced by figures released from major economies this past week, central banks are likely keep rates on hold. Among the Reserve Bank of Australia, the Bank of Japan, the Bank of England and the European Central Bank, only the last bank has a greater than a 50.0 percent chance that rates will be hiked at the next meeting. A continued trend of loose monetary policy coupled with uncertainty over the health of the two major global economic powers – the Euro-zone and the United States – all but ensures precious metals, including Gold, will be bid higher, even though resolution to the debt ceiling debate in the United States could provoke a near-term pullback in history’s safe haven. -CV