Week's Rise Cut To 1.8% For Gold & Silver As Asian Demand Falls, US Default Risk Rises

SPOT BULLION prices for gold fell $25 Friday morning from yesterday's 7-session high, trading at $1350 per ounce as concerns grew that next month's US "debt limit" deadline could spark panic in financial markets.

Slipping with world stock markets and commodity prices as the US Dollar rallied, gold cut its post-Fed surge – made when the central bank failed to trim its $85 billion per month bond-buying program as expected on Wednesday – by one third.

Silver dropped alongside the gold price, also cutting its week-on-week rise to the same 1.8% at $22.60 per ounce.

"Although the price of gold has been dropping since the end of August," says French bank and London bullion dealer Natixis, "we would not be surprised to see a re-emergence of the tensions that existed in summer 2011 when the US was downgraded due to the danger that Congress might reject a budget or debt ceiling increase.

"Then, the price of gold reached a record high because of the market's impression that no agreement could be reached," says Brown, noting greater intransigence between Republicans and Democrats in 2013 over funding health care.

"I think," said Fed chairman Ben Bernanke on Wednesday, "that a government shutdown, and...a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy."

The debt limit wrangle of 2011 led to ratings agency S&P downgrading US bonds that August. Gold rose $300 per ounce to new record highs above $1900.

Today some 43% of US citizens want Congress to keep the debt ceiling at $16.7 trillion, says a new Washington Post-ABC poll, defaulting on America's bills and obligations to do so.

Yet 73% also fear that not raising the limit would therefore do "serious harm" to the US economy.

"We cannot afford for Congress to gamble with the full faith and credit of the United States," Treasury secretary Jack Lew told the Economic Club of Washington on Tuesday, ahead of the US Fed's decision not to taper its QE bond-buying.

Despite the debt ceiling deadline next month, however, "October is a live meeting" for the US Federal Reserve to discuss tapering once more, St. Louis Fed president James Bullard told Bloomberg today.

"Just as the monetary indicators are turning positive [for gold]," said HSBC in a report Thursday, "physical demand – a mainstay of the market through the summer – is turning less supportive."

Reuters today notes a sharp fall this week in Asian premiums for physical gold, over and above benchmark London prices.

Hong Kong premiums fell to $1.50 per ounce from $2.50, the newswire says. Tokyo gold went to a slight discount to London settlement.

"There has only been investment buying because of the Fed decision," says Hong Kong dealer Ronald Leung at Lee Cheong Gold.

"There is no physical interest" from jewelry stockists.

Sales of American Eagle gold coins by the US Mint ticked higher this week, latest data show. But at current rates they remain 80% below September last year and 85% below September 2011.

Speaking about the debt ceiling debate, "[People] expect Washington will only act irrationally for a certain length of time," says Warren Buffett in a CNBC interview today.

Not raising the debt limit would be "pretty damn dumb." 

The volume of gold held to back the giant SPDR Gold Trust for US investors – the most valuable ETF in the world when the debt ceiling downgrade of 2011 drove prices to record highs – was unchanged Thursday.

Adrian Ash

(c) BullionVault 2013

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