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Gold Steady, Debt Stalemate Continues

Release Date: 
Tuesday, July 26, 2011

Gold prices are relatively flat during Tuesday afternoon trading in a mix of profit taking and safe haven asset purchases on a weaker dollar. A final deal to raise the debt ceiling remains out of reach as lawmakers continue to pursue separate proposals before the August 2 deadline. President Obama delivered a plea to Americans via primetime television Monday night, encouraging people to contact lawmakers and urge a compromise. "For the first time in history, our country's triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet," Mr. Obama said.

Despite a diminishing timeline for a debt deal, some investors have shifted focus to taking profits on gold's record highs. "It would appear that markets are perhaps growing weary of the drip-feed of bad news from the U.S. debt negotiations, in the belief that some accord will eventually be reached," said Marc Ground, a precious metals analyst with Standard Bank. Meanwhile, analysts at Morgan Stanley raised their average gold price forecast for 2012 by 22% to $1,624 an ounce as investor demand will likely remain strong amid ongoing government debt concerns. The bank also raised its silver forecast to $36.90 an ounce, up 30% from previous estimates.

Peter Fung, head of trading at Wing Fung Precious Metals in Hong Kong, believes gold is likely to continue in an upward trajectory regardless of the outcome of debt discussions in Washington. "President Obama tried to add some confidence on the debt talks, but people still have doubt," he said. "But over the medium- to long-term, gold is still going to be on the upside as people will still be seeking a safe haven in gold with the problems around the world."

Also benefiting gold is the increasing likelihood of a credit downgrade from ratings agencies such as Standard and Poor which warned last week there is a 50-50 chance the U.S.'s AAA rating could be cut within three months. "There is an increasing chance of downgrading, even if the debt ceiling is raised in the last minute," said Ong Yi Ling, an analyst at Phillip Futures in Singapore. "Unless a long-term, more credible deficit reduction plan comes along, rating agencies will keep the U.S. on negative watch, which will benefit gold."

James Moore, research analyst at FastMarkets, said that as the dollar's dominance as a safe-haven continues to erode, gold will benefit and hit new record highs. "Dips [should] be viewed as buying opportunities and the metal [will] look towards $1,650," Moore said.

(Sources: "Gold Settles at Another Record" Wall Street Journal, June 26, 2011; "Gold Up on Investor Uncertainty" Reuters, June 26, 2011; "Modest Gold Buying Signals Mild Concern" The Street, June 26, 2011)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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