Bloomberg News

Gold to Extend Gain If U.S. Raises Debt Limit: Chart of the Day

July 19, 2011

July 20 (Bloomberg) -- Gold may rally further from this month’s record if President Barack Obama wins lawmakers’ agreement to raise the U.S.’s debt ceiling, weakening the dollar and boosting demand for the precious metal as a store of value, according to Korea Investment & Securities Co.

The CHART OF THE DAY shows the spot gold price in dollars has climbed along with increases in the U.S.’s statutory debt limit over the past 16 years. Immediate-delivery gold reached a record $1,610.10 an ounce yesterday, as concerns that debt crises in Europe and the U.S. will roil global financial markets boosted demand for the precious metal as a haven.

“Gold’s rally is quite explosive,” said Julia Yoo, a Seoul-based analyst at Korea Investment. “Increasing the debt limit means you print more dollars, which will weaken the dollar and consequently lift the gold price,” adding to gains this year that were driven by demand from countries including China, she said.

Obama is negotiating with Congressional leaders to raise the $14.3 trillion debt limit before Aug. 2, the date when Treasury Secretary Timothy F. Geithner has said the government will run out of options to prevent a default. Standard & Poor’s Ratings Services and Moody’s Investors Service have said they are likely to downgrade the government’s credit rating if Congress doesn’t act.

Gold has climbed 33 percent against the U.S. dollar over the past year, outpacing all of the more than 150 currencies tracked by Bloomberg.

“The debt ceiling is important in 2011 given the dangers of a technical default in the U.S. and the increasing focus on sustainable debt levels going forward,” London-based Michael Lewis, head of commodities research at Deutsche Bank AG, said in an e-mailed response to questions. “Although I expect we can avoid a technical default, if it were to occur I would expect to see more downside risks to U.S. equity markets and additional upside in the gold price.”

--With assistance from Nicholas Reynolds in Tokyo. Editors: Garfield Reynolds, Richard Dobson.

To contact the reporters on this story: Sungwoo Park in Seoul at spark47@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net

To contact the editors responsible for this story: Richard Dobson at rdobson4@bloomberg.net; Darren Boey at dboey@bloomberg.net


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