Gold Rallies, "Credibility Downgrade" Hits "Irresponsible" Washington

By: Ben_Traynor

THE U.S. DOLLAR gold price climbed to $1617 an ounce Friday morning London time – 0.7% off Wednesday's all-time high – as stocks and commodities fell following the decision to cancel a vote on proposals to cut the US deficit.

Heading into the weekend, the gold price was looking at a 1% weekly gain by Friday lunchtime.

The silver price hit $39.83 per ounce – a 0.6% down on last week's close – before easing back around midday.

"If a deal to raise the US debt ceiling is not in place [within a week], federal agencies will be effectively bankrupt," says French investment bank Natixis. 

"Furthermore, fears of a downgrade in the AAA rating of the US are also helping gold, and the country has already received a credibility downgrade in the eye of many investors."

"Investor reluctance to wait until Monday for a resolution that may not come could see gold climb again after a relatively steady day yesterday," adds one gold bullion dealer here in London.

The vote on speaker John Boehner's proposals to reduce the US deficit – due to go before the House of Representatives – was cancelled on Thursday after lobbyists failed to drum up enough support from Boehner's fellow Republicans.

Boehner reportedly told Republican holdouts to "get your ass in line" on Wednesday.

"I didn't come here to go along to get along," responded Republican Congressman Jason Chaffetz. 
"These arguments of 'get behind me' aren't persuasive."

"I'd like something systemic that transcends election cycles," added Republican Congressman Trey Gowdy.

"Like a balanced budget amendment."

Boehner's proposal would raise the debt ceiling by around $900 billion, meaning the US Treasury would likely hit it around December this year.

"No Democrat will vote for a short-term Band-Aid that would put our economy at risk," says Senate majority leader, Democrat Harry Reid.

The White House has also said it would veto Boehner's plan if it got through the Senate.

Beijing's state-run Xinhua news agency said on Friday that the US has been "kidnapped" by "dangerously irresponsible" politicians.

China is meantime poised to overtake India as the world's largest gold bullion consumer, according to the chief executive of world's second largest Gold Mining firm Goldcorp.

Here in Europe, ratings agency Moody's placed Spain on review for possible downgrade on Friday. 

The decision should "return focus to the not entirely settled Eurozone debt situation," says Marc Ground, commodities strategist at Standard Bank.

Spanish prime minister Jose Zapatero announced shortly afterwards that he was calling early elections, "to project political and economic certainty for the next few months".

The elections will take place on November 20.

Eurozone inflation meantime fell to 2.5% this month, compared to 2.7% in June, according to data released Friday by Eurostat, the European Union's statistics body.

By contrast, inflation in the Eurozone's biggest economy, Germany, rose this month – up to 2.4%, compared to 2.3% in June –data published on Thursday show.

The lower-than-expected Eurozone figure gives the European Central Bank " more room for maneuver given signs of a sharper than expected slowdown in economic growth," says ABN Amro economist Nick Kounis.

"Essentially, a more favorable inflation evolution could make it easier for the ECB to take a break from rate hikes if the downside risks to the outlook were to intensify," he adds, citing sovereign debt problems on both sides of the Atlantic.

"Eurostat's methodology for seasonal factors has [however] changed from January," points out Luigi Speranza, economist at BNP Paribas.

"This, we believe, is the main cause underlying the sharp slowdown in [consumer price] inflation."

In Switzerland, meantime, "the appreciation of the Swiss Franc against all major investment currencies resulted in substantial valuation losses" in the first half of the year, the Swiss National Bank said Friday. 

The SNB lost CHF9.9 billion in transactions designed to control the Swiss Franc's rising value on currency markets. The Swiss Franc is regarded by many investors as a 'safe haven' currency.

The Swiss Franc gold price fell 4.8% over the first half of 2011 – while the US Dollar gold price rose 6.1% over the same period.

"Gold is denominated in a unit which is non-constant," points out a note from Citigroup today, adding that the US Dollar "has tended to decline in value thereby artificially inflating the metal's nominal price".

"Given the historical role of gold as a storage of wealth, perceived devaluation in the purchasing power of fiat currencies translates into demand for the what is essentially the ultimate global reserve currency."

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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