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US Debt Deal Sees Gold, Silver Surge, Still Leaves Foreign Creditors "Reviewing Dollar Holdings"

October 17, 2013

The WHOLESALE price of gold in London leapt at the start of Thursday's trade, rising $45 per ounce to hit 1-week highs above $1320 after the US Congress reached a short-term deal on the government's debt limit.

Avoiding the technical default set to hit today, the compromise extends new borrowing to New Year 2014.

Asian and European shares failed to follow US stocks higher on the news, while the Dollar fell hard and US bond yields also eased back.

Silver rose over 5% this morning to trade above $22 per ounce for the first time in a week.

"The markets had anticipated a last-minute compromise of this kind," says a note from German investment bank and bullion dealers Commerzbank.

"What is more, this also means that the scaling back of Fed bond purchases will be further postponed. A renewed sell-off of precious metals thus failed to materialize."

Issued before the debt-limit fix, "Resistance lies between 1301 and 1307," said Scotiabank's technical analysis Wednesday night, pointing to gold's 50% retracement of both its 2008-2011 uptrend and this year's June-August rally.

Longer-term, however, "Desire to buy gold as a hedge against the consequences of monetary policy has diminished," reckons Credit Suisse analyst Tom Kendall, who in February announced the "beginning of the end of the era of gold".

"When you've got other asset classes, equities in particular, doing so well, then it's hard to divert investments out of them and into something like gold, which is falling."

"A lot of gold," agrees Robin Bhar at Societe Generale, also speaking to Bloomberg today, "has been held for speculative purposes, investment and a store of value, and that's less of a reason going forward.

"If you sell your gold and put your money into equities, other fixed-income assets or real estate, you're going to show a return. The gold bull market is definitely over."

But "although the US has managed to avert a default," counters Nic Brown's commodity team at French investment and bullion bank Natixis, "[it] has clearly lost some credibility" with foreign creditors led by China.

Not only did Washington's behavior annoy T-bond holders, says Natixis, "a concrete long term solution has once again failed to emerge."

As a group, Natixis noted last week, central banks have turned net sellers of gold since May, cutting 20 tonnes from the 10-year record-high gold reserves. But countries holding US debt "may [now] begin to revisit long term plans to diversify away from the Dollar into other currencies or gold," it said Thursday.

Chinese rating agency Dagong today downgraded US government debt from single A to A-minus this morning, regardless of the debt-ceiling deal.

"A potential Fitch downgrade," says Citigroup analysis, pointing to the major US ratings agency's warning over the debt-ceiling deadline on Wednesday, "[would mean] the US will no longer be AAA on average."

Losing that status could see US debt forbidden to many central banks worldwide, says Citi.

The Swiss National Bank, for instance, "insist on investing [only] in high-quality government bonds" with their $430 billion of reserves, one quarter of which s currently in US Dollar assets.

Shortly before the jump in gold, but after the US debt-limit deal, the Indian government revised its import tariff for gold bullion – seen as a key part of this year's collapse in legal imports to the world's No.1 consumer – to reflect lower values.

Cutting the tariff value to $418 per 10 grams from $436, the Central Board of Excise & Customs acted "in line with global rates" according to NDTV, whilst maintaining the 10% duty.

By the end of Indian dealing on Thursday however, the price of gold had recovered to $425 per 10 grams for London settlement, the international benchmark.

For Indian consumers, premiums to buy gold over and above London prices have jumped this week to record highs of $100 per ounce amid falling supply and growing demand for autumn festive season.


Adrian Ash

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash is head of research at BullionVault, the physical gold and silver market for private investors online. City correspondent for Bill Bonner’s Daily Reckoning from 2003 to 2008, and previously head of editorial at London's top publisher of private-investment advice, Adrian is now a regular contributor to many leading analysis sites including Forbes and Gold-Eagle, and a regular guest on the BBC as well as international broadcasters. His views on the gold market are frequently quoted by the Financial Times, Daily Telegraph, MarketWatch and many other leading new outlets.


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