U.S. Debt Limit To Be Raised For 18th Time In 20 Years - Gold Vulnerable Short Term But Real Record High Likely

Today’s AM fix was USD 1,285.75, EUR 947.15 and GBP 804.30 per ounce.
Yesterday’s AM fix was USD 1,298.00, EUR 959.56 and GBP 814.51 per ounce.

Gold fell $18.90 or 1.45% yesterday, closing at $1,287.40/oz. Silver slipped $0.26 or 1.19% closing at $21.59. Platinum rose $9.20 or 0.7% to $1,382.00/oz, while palladium climbed $6.50 or 0.9% to $707/oz.

Premiums in China and India remained robust overnight. Shanghai premiums are at $28 over spot and in Mumbai premiums jumped to $30 to $40 an ounce from last week's $5 to $7 an ounce.

Bullion premiums in western markets remain flat. Gold bullion bars (1 oz) are trading at $1,335.25 or premiums between 3.75% and 4.5% and gold  bars (1 kilo) are trading at $42,602 or premiums between 3% and 3.5%.

Gold is headed for the second week of losses and is looking vulnerable to further weakness technically. Gold’s close below $1,300/oz yesterday makes it vulnerable to a sell off to test the next level of support at $1,200/oz and the June 28th low of $1,180/oz.

A daily or weekly close below $1,180/oz would be bearish and could result in gold falling to test support at $1,000/oz which was previous resistance in 2009 (see chart below).


US Debt Limit (Black) Versus Gold (Gold) - Bloomberg

Gold analysts have turned the most bearish in a month on increased confidence that U.S. lawmakers will reach a deal to avoid default. Fifteen analysts surveyed by Bloomberg News expect prices to decline next week, eight are bullish and four neutral, the highest proportion of bears since September 13.

Analysts are citing an increased confidence that U.S. lawmakers will agree to a deal to avoid default coupled with a decrease in physical Asian demand. Although there is little evidence of any decrease in demand from Asia as seen in robust premiums and import figures.

Prices rose since the first partial U.S. government shutdown in 17 years began October 1st, as investors sought a haven. President Barack Obama has not accepted or rejected a House Republicans’ plan to increase the debt limit and end the government shutdown as the two sides entered further talks.

A new and potentially large source of demand and gold buying may soon come from Russia. OAO Moscow Exchange, Russia’s stock and currency exchange, will introduce trading of deliverable gold and silver bars as early as this month. It is part of plans to make precious metals more accessible to Russian investors and savers.

The exchange will quote gold and silver in Russian rubles per gram, with minimum trades starting at 10 grams of gold and 100 grams of silver, the bourse’s Deputy Chief Executive Officer
Andrey Shemetov said in an e-mailed response to Bloomberg questions yesterday.
Most metals trading in the country takes place via the over-the-counter market, which is dominated by Russia’s biggest banks, such as OAO Sberbank. The exchange is hoping to work with mid sized and smaller banks by reducing transaction costs.

The Moscow Exchange is following the Shanghai Gold Exchange in listing precious metals to augment over the counter, or OTC, trading and broaden the range of instruments available for hedging and liquidity purposes.

It’s an “unusual move” for the stock and currency exchange to list physical metals, and has the “potential to affect the gold market as trading volume grows”, Marcus Grubb, managing director of investment research at the World Gold Council, said in an e-mailed response to questions.

The exchange will quote prices and enable traders to settle contracts via delivery to and from unallocated metals accounts at its National Clearing Center. Banks can deposit or withdraw precious metals in the form of physical bullion bars, and delivery and collection will occur at a nominated Moscow vault, the bourse said. The contracts are also likely to appeal to brokers, producers, jewelers and private investors in the long run, it said.

The U.S. Debt Ceiling will be raised once again. It will be the 18th raise in the debt limit in 20 years. Raising the limit will happen, it is a question of when rather than if.


Debt Ceiling (billions of dollars)

Change in Debt Ceiling (billions of dollars)


Source: United States Debt Ceiling - Wikipedia

Continuing imprudent and profligate fiscal and monetary policies in the U.S. are likely to lead to higher interest rates and have dire consequences for the U.S. economy and indeed the global economy.

Until, fiscal and monetary discipline and sanity returns to America and the world, gold and silver will continue to be bought by prudent individuals, companies, pension funds, family offices and central banks, in order to hedge the continuing debasement of paper currencies.

Another increase in the debt ceiling will allow U.S. politicians to continue spending money like drunken sailors. The “guns and butter” fiscal policies since the end of the Gold  Standard in 1971 are set to continue until there is a crisis. The crisis will likely manifest when there are sharp falls in the value of the U.S. dollars, U.S. bonds, and a U.S. debt crisis.

Unfortunately for U.S. citizens and people around the world, the huge opportunity costs of these profligate monetary policies and the ongoing spending spree is soon to be felt. Many would argue that it is already being felt as U.S. governments have continuously elected to spend more money on ‘guns’ and the massive military complex and less money on ‘butter’, the production of necessary goods.

In recent years, this was particularly the case during President Bush Junior’s term and unfrotunately, President Obama, despite the Nobel Peace prize has continued the more gun than butter policies.

As an economy produces more ‘guns’ or military spending, it generally reduces its production of ‘butter’ or food and other necessary goods, and vice versa.  A nation has to choose between two options when spending its finite resources.

Nations that elect the military option tend to end up as empires. Military spending, currency debasement and imperial overstretch have been the undoing of many Empires including the Roman Empire and the British Empire.

A historical perspective is valuable in these ‘interesting times’.

Today, without U.S. government spending and state aid, consumer activity would be greatly diminished and many corporations who suckle on the teat of government would simply go out of business - with attendant consequences on the jobs market.

A staggering proportion of American personal income now comes straight from government transfer payments - welfare, unemployment and other forms of benefit.

An even more staggering proportion of American banking and corporate income and profits comes from government stimulus, grants, state aid  and other forms of corporate welfare.

Every strata of U.S. society is saturated with debt and there is no signs of a reduction in debt levels or deleveraging of the economy. The appointment of Janet Yellen as Federal Reserve Chairwoman will lead to a continuation of ultra loose monetary policies and this will likely  exacerbate this trend and lead to more debt being piled on top of the already huge U.S. debt mountain.

At some stage the whole ‘house of cards’ will come tumbling down and result in a dollar crisis and an international monetary crisis.

The analysis of the debt ceiling crisis has been extremely superficial and very short term in nature. Very few analysts are pointing out the long term risks of a nation, still the world’s leading economy, living beyond its means for an extended period of time.

The dangerous habit of politicians and governments continually ‘kicking the can down the road’ cannot go on indefinitely. Eventually, the ramifications of this profligacy will be clear to all.

Yet another increase in the debt ceiling and the increasingly parabolic nature of the rise in U.S. government debt will be very supportive of gold in the medium and long term.

It should lead to gold reaching our long term price target, held since 2003, of  a new real (inflation adjusted) high over $2,500/oz.
Gold in US Dollars 5 Years with Support and Resistance - (Bloomberg)

In these uncertain times, all owners of gold and those considering owning gold should acquaint themselves with the most appropriate storage options for their own particular circumstances.

GoldCore’s ebook How To Store Gold Bullion - The Seven Key Must Haves is a must read in this regard Download here.


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