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Analysts See Gold Support Despite U.S. Debt Plan

Release Date: 
Monday, August 1, 2011

Investor concern over a U.S. debt default receded on Monday following Congress' tentative agreement to raise the debt limit by $2.4 trillion with a corresponding reduction in spending. Lawmakers are expected to vote on the legislation which President Obama's has stated he will sign. Following a slight pullback, gold prices rose as investors remain concerned about the economy. Analysts at Deutsche Bank, Surbiton, JPMorgan Chase, and Dundee Capital Markets cited continued economic uncertainty and other factors which are expected to bolster gold.

"This (plan to raise the debt ceiling) is only one step and the U.S. will still have issues to face looking ahead so it's not an end to the gold bull," said Ross Norman of Sharps Pixley.

"The prospect of a powerful rally in gold reflects ongoing stress in the financial system and the maintenance of super low interest rates," Deutsche Bank analyst said in a research note. "There also appears to be a strong perception among investors that gold can provide protection in environments of inflation and deflation," Deutsche Bank said. "Consequently, in almost any economic scenario today the advancing gold price appears to be irreversible."

The outlook for gold remains positive, mining industry consultant Surbiton Associates Pty Ltd. said Monday. "I can't recall a time when there has been so many factors pushing the gold price up," said Sandra Close, a director at Surbiton. "Uncertainty is the friend of gold."

Close said the U.S. crisis was only one of several factors influencing the gold price, along with concerns about the economies of "weaker members of the European Union" and underlying tensions in the Middle East and North Africa. "The world's problems won't be solved quickly and investors will continue to look for a safe haven to preserve their wealth. There's a lot going for gold at the moment," Close said.

JPMorgan Chase analyst John Bridges noted in a recent report, "We in suggest that unless governments control their debt levels, investors' fear of paper currencies will drive gold higher." The debt ceiling agreement does not decrease the overall deficit, but cuts spending enough to pay the nation's current obligations. JPMorgan Chase estimates the price of gold will be $1,800 per ounce in the fourth quarter.

Dundee Capital Markets wrote that a weaker dollar and lack of trust in paper currencies would "generate sustained demand for bullion." Dundee has raised its 2012 price target to $1,750 from $1,573 per ounce.

(Sources: "PRECIOUS-Gold slips on U.S. debt deal relief," Reuters, August 1, 2011; "Outlook for gold remains positive: Surbiton," MarketWatch, August 1, 2011; "Gold Prices Take Debt Deal in Stride,",  August 1, 2011)

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