(Kitco News) - The outcome of the debt-ceiling talks will give gold its direction next week and the bias is down for the short term.
The deadline for raising the debt ceiling is Tuesday – that’s the date that the U.S. Treasury said it will run out of money to pay all of its obligations.
With the impasse continuing, gold futures on the Comex division of the New York Mercantile Exchange made an all-time nominal high on Friday, trading to $1,634.90 an ounce, basis the August contract, before retreating modestly. The most-active December contract settled at $1,631.20, up 1.7% on the week. September silver settled at 40.13, flat on the week.
In the Kitco News Gold Survey, out of 34 participants, 24 responded this week. Of those 24 participants, eight see prices up, while 10 see prices down, five are neutral and one sees prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts.
President Obama said at a press conference that there was still time for the two sides to come together and work out a compromise that he can sign. At issue is how much to cut spending. Previous compromises have offered a combination of higher taxes and reduced spending, but some of the “Tea Party” House Republicans have said they will vote for no plan that includes revenue increases, and only for spending cuts.
Phil Streible, senior market strategist for Lind-Waldock, said he still expects Washington to work out a deal to raise the debt ceiling this weekend and keep the U.S. from defaulting. While the U.S. Treasury has said it will run out of money by Tuesday to pay all of its obligations, some bank analysts noted that is likely a soft deadline as recent tax receipts have come in higher than expected, so the Treasury may have a couple of extra days of income to rely on.
What’s important, Streible said, is to see whether the ratings agencies downgrade the U.S.’s triple-A status.
Analysts at Brown Brothers Harriman said a scenario in which the debt ceiling isn’t raised “remains unthinkable, but a scenario where the U.S. loses its AAA rating is now becoming a near certainty.”
They suggested it might take a sharp market sell off to get a deal between Democrats and Republicans, perhaps as much as 500-1,000 points off the Dow Jones Industrial Average to spur a compromise – and they said such a compromise might push the centrist Republicans into a bipartisan deal with Democratic support. “This would be similar dynamics to the TARP vote back in 2008, when a failed first vote led to equity market losses which in turn spurred passage in a second vote,” they said.
So much will depend on what type of deal is hashed out – whether it is a short-term deal that causes Washington to revisit the issue again in a few months – or if it’s a long-term deal that lasts through the 2012 election season. A longer-term deal will be bearish for gold, Streible said.
That said, trying to determine where gold prices go next week will be very difficult. “Gold and silver could be significantly higher or lower, but it’s going to be difficult to predict,” Streible said.
Many market watchers have echoed Streible’s comments. Because of the high volatility expected, several have said they are playing it safe by either using options trades or are on the sidelines completely until a deal is reached.
Streible said $1,600 – whether looking at the August or December contract - has acted as firm support. The next level of support is $1,580, he said. That region could be critical if tested next week. “If we close under $1,580 at any time next week, we could see gold fall to $1,550,” he said.
There are limits to how far gold may fall, he said, because if the U.S. can reach a solution that eases investors, their attention will return to the continued economic instability in Europe.
Other market watchers are less optimistic for gold. Jimmy Tintle, analyst at Transworld Futures, said he’s short-term bearish on gold – for at least the next few weeks. He said a debt ceiling deal will be made which will push gold off its highs. Further, he pointed out gold is in its cyclically weaker time frame, particularly as the market heads into August.
He said Friday’s high in the $1,630s will be the short-term top, and said that in the next 30-45 days front-month gold futures prices could fall as far as $1,475.
Ira Epstein, president of Ira Epstein Division of The Linn Group, Inc., also pointed out that August is often the point in time where the market sets back a bit. By month’s end, in bull market years, it starts to accelerate upward, Epstein said. “The end of August through the end of September has been a seasonally strong time for higher gold prices. I don’t see anything other than knee-jerk reactions on the horizon that will change gold’s uptrend,” he said.
Epstein said savvy traders could use any weakness in gold as a buying opportunity.
Peter Thomas, director of business development, PFG Precious Metals, said the arguing in Washington has been a boon for the cash side of precious metals. While buying of physical silver has been strong and steady, buying interest in gold prior to the heightened debt-ceiling debates was slowing down. Now, though, he said his firm is “breaking records” every day and demand is strong enough that sourcing product is getting difficult in the short term.
Other Metals Prices Strong, But Will Follow Gold’s Action
Silver gained this week on the strength of gold, but there remains some nervousness by investors to hop back on the silver bandwagon following the violent price sell-off in the metal this spring. If gold falls back silver will likely see greater losses, Streible said, because of its more volatile nature. Still, he said September silver could see buying support under the market. “A lot of people missed this rally back up,” he said. If silver can rally and close over $41, it could target $43.
Copper prices have seen some benefit from the strikes at Escondida in Chile, the world’s largest copper mine. Streible said while work stoppages are supportive, upside for the red metal might be limited, unless economic data can give it a boost. He said $4.50 a pound, basis September Comex, will represent strong resistance.
The platinum group metals found support this week from auto news. Requirements for higher auto mileage for cars in the U.S. – now put at 54 miles per gallon beginning with 2017 models -- gave the two metals a boost as they are used in auto catalysts, PGM traders said.
By Debbie Carlson of Kitco News dcarlson@kitco.com
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