Gold Breaches $1625, U.S. Credit Ratings Downgrade Now Almost Certain

By: Ben_Traynor

U.S. DOLLAR gold bullion prices hit a new intraday record high of $1625 an ounce in Wednesday's Asian trade – a 1.5% gain on Friday's close – before easing back slightly after London opened.

Stocks and commodities were down but US Treasury bonds rose, as the US Congress had to postpone a vote on the $14.3 trillion debt ceiling.

Insuring US debt against default in the next 12 months now costs investors more than for 5-year bonds on the credit default swap market.

The Chicago Mercantile Exchange has meantime introduced a 0.5% 'haircut' on US Treasury bills used as collateral. T-bills were previously considered risk-free.

Silver bullion prices also rose early Wednesday, hitting $41.22 per ounce – a 2.8% gain on last Friday – and remaining just below that level throughout the morning.

"Support [for gold] now appears strong at $1577, the April high," say technical analysts at gold bullion bank Scotia Mocatta.

"Overall, it is believed that market environment should remain favorable and positive technical momentum is likely to see gold test new highs in the near term," adds Swiss precious metals refiner MKS.

A vote on Republican House of Representatives speaker John Boehner's plan to cut the US deficit had to be postponed Wednesday – after the Congressional Budget Office found that his proposals would not actually produce the anticipated reductions in federal borrowing.

Congressional staff were "looking at options to rewrite the legislation" to meet Boehner's pledge, the speaker's spokesman Michael Steel said late on Tuesday.

Boehner's fellow Republicans have indicated that they may not support the final plan when it goes before the House – now due to happen on Thursday. 

Boehner says his plan will build on the principles of Cut, Cap and Balance – the bill, defeated in the Senate last week, which sought to enshrine a balanced budget in the US Constitution.

"The speaker's plan falls short of meeting these principles," Joseph Brettell, spokesman for the Cut, Cap and Balance Coalition – which comprises 100 campaign groups – said on Monday.

"We urge those who have signed the [Cut, Cap and Balance] pledge to oppose it and hold out for a better plan."

"If [Boehner's plan] goes down or isn't brought to the floor, you're at a stalemate, there is no clear path forward," says Chris Kruger, Washington-based political strategy analyst at MF Global.

The US Treasury has said it expects to hit the $14.3 trillion federal debt ceiling next Tuesday – although some analysts have said the US could still remain below that limit further into August.

"A debt hike is almost certain to be agreed before, or very soon after, the August 2nd deadline," reckons Steve Barrow, currency analyst at Standard Bank.

"Instead, the real issue is deficit reduction...[which is] more likely to cause a debt downgrade than a missed bond payment."

"I'm pretty certain that at least by one agency we're going to see a downgrade," adds Kathleen Gaffney, who co-manages the $21 billion Loomis Sayles Bond Fund in Boston.

Ratings agencies Moody's and Standard & Poor's have already put the US on review for a possible downgrade, with S&P saying earlier this month there is a 50% chance this will happen by the end of October.

One smaller ratings agency, Egan Jones – which appears on the Securities and Exchange Commission's list of "Nationally Recognized Statistical Rating Organizations" – has in fact already downgraded US government bonds this month, lowering their rating from AAA to AA+.

"We are taking a negative action not based on the delay in raising the debt ceiling but rather our concern about the high level of debt to GDP," the agency explained.

"If investor confidence in US government bonds wanes," says one gold bullion dealer here in London, "the resulting downward pressure on the Dollar should be bullish for Gold."

Away from the US debt ceiling impasse on Wednesday, politicians in Syria moved to ban anti-government demonstrations as continued unrest saw 21 protesters killed in the last 24 hours, according to Bloomberg.

Weaker-economy Eurozone bond prices meantime fell once again, driving interest rates for the Italian and Spanish governments sharply higher.

The government in Beijing, in contrast, saw the value of its overseas assets rise by 7% in the year to March, according State Administration of Foreign Exchange figures reported by China Daily.

SAFE revealed Tuesday that overall, the value of offshore assets owned by China – home to the world's second-largest private gold bullion market – stood at $4.4 trillion. The bulk of this, over $3 trillion, is held as reserve assets, which include foreign currencies, International Monetary Fund special drawing rights and gold bullion.

The 7% growth rate is slower than that published for year-end 2010. Back in May, SAFE reported the value of overseas assets had grown 19% compared with the end of 2009.

By Ben Traynor
BullionVault.com

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

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