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Thursday, July 28, 2011

impact US debt ceiling crisis on US dollar and gold prices

impact US debt ceiling crisis on US dollar and gold prices ; In a nationally televised speech to the nation this week, President Obama warned of dire consequences if Republicans and Democrats can't agree to raise the national debt ceiling by August 2.2011

"If that happens, and we default," said Obama, "we would not have enough money to pay all of our bills -- bills that include monthly Social Security checks, veterans' benefits, and the government contracts we've signed with thousands of businesses."


What is the relationship between the US dollar and gold prices?

As the world's supreme hard asset for centuries, logically, gold is inversely correlated with the world's supreme paper asset, the US dollar (the world’s reserve currency).

This relationship, however, is not perfect and there have been times when investors have turned to both gold and the US dollar simultaneously in their search for safe haven assets.

In the long run, however, we expect the USD/gold inverse relationship to hold; this should be the case for as long as the USD is the world's principal reserve currency.

The USD on a trade-weighted basis is still close to new lows. On a multi-year basis, the USD has been depreciating for decades and in the long run a decline of the USD would continue to help gold prices.

• Will the decision made by the US on its debt ceiling impact gold?

In our view, concern around the long-term ability of the US to repay its debt is one of the factors behind the long-term rally in gold. These concerns are now coming to a head as politicians struggle to negotiate deficit reduction measures in exchange for an increase in the debt ceiling by the 2 August 2011 deadline.

Yet if the gold rally is at least partly predicated on long-term credit concerns, then we believe the long-term view still looks positive for gold as foreign creditors holding US assets will have to cope with very low yields on US treasuries while at the same time facing a generally depreciating currency.

When looked at from this perspective, we believe gold is still attractive as an alternative asset to diversify USD exposure in the longer term. It would seem this has been the rationale behind central banks change of attitude since 2008, becoming net buyers of gold to diversify some of their USD exposure.

• What is your outlook for gold?

We remain constructive towards the gold price and in particular towards gold equities. Gold demand remains robust and we believe the current environment is positive for a safe haven asset such as gold, with European sovereign debt concerns spreading to larger economies such as Italy and Spain, and the US struggling to negotiate an increase in the debt ceiling by 2 August 2011.

Looking ahead, we believe it will continue to be well supported in a world of negative real interest rates, given inflation in both developed and developing markets, central bank buying (from developing economies in particular) US dollar depreciation and continuing sovereign debt issues. (source;http://www.investmentweek.co.uk/)

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