Gold hasn’t hit the top as debt remains a risk

Philip Salter
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PRESIDENT Obama’s deal on debt pushed gold off its record high, but it bounced back sharply. Now is not the time to sell, as over the foreseeable future the ongoing US and Eurozone debt crises will see it break new highs.

On Friday, gold hit a record high of $1,632.30/oz, but on Monday morning the yellow metal fell to $1,607.69 in response to the belated, if largely anticipated, agreement to raise the debt ceiling and begin to tackle the country’s mammoth structural budget deficit. However, traders were not convinced, as they bought in and pushed gold back up. David Jones of IG Markets says despite the drop, most traders avoided getting their fingers burnt, saying: “There will have been a lot more pain over recent years in trying to call the top, only to see the metal carry on higher.” Angus Campbell of London Capital Group explains that many traders have been long on gold for months and years, so apart from a few selling to take profits, most remain long.

It’s pretty jittery on the Western front right now. Simon Smith, chief economist at FXPro, thinks the agreement is not the best deal for the US, adding that the issue of a US downgrade won’t go off the agenda. He points out that the $2.5 trillion of cuts is less than expected by the ratings agencies, with the remaining cuts coming before a committee, which only reports later in the year. Smith notes: “The past year has shown that Washington has always backed away from the tough choices on government borrowing and shunned higher taxes, so unless there is a change in approach on Capitol Hill, a debt downgrade is still on the cards.”

It is a sign of the times that some of the clearest and most present dangers are found in the developed world. Elena Kolchina, head of fixed income at Renaissance Asset Managers, says: “Today the global economy is being threatened by political instability in Washington.” And the Eurozone’s outlook looks equally dire.

Tom Winnifrith, senior fund manager at t1ps, predicts gold will hit $2,100 before Obama faces re-election in November 2012. He bluntly says: “The addict has been given another big fix. It is still an addict and a hopeless one at that. It’s clear that the deficit is not under control.” Winnifrith thinks in the absence of an alternative, the only currency whose value is not being systematically destroyed by politicians remains gold.

Gold’s rebound showed that traders remain unconvinced that politicians have saved the day. Many still suggest gold is a bubble. However, for every gold bug crawling around the darker recesses of the internet chanting apocalyptically “the end is nigh”, there is a highly respected trader betting the same way. Those calling a bubble on gold have their heads buried deep in the sand, ignoring the US and Eurozone debt crises which have been decades – if not longer – in the making. The West might turn it around – but not for a while. Until then gold will be the best bet in town.