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Portfolio > Alternative Investments > Hedge Funds

Gold Soars on Threat of U.S. Debt Default

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Default is in the air. Last week Greek woes threatened to scuttle the euro zone economy; this week, with the U.S. embroiled in a debt-ceiling-vs.-deficit standoff, investors are fleeing other holdings and sinking their funds in safe-haven gold. Early European trading saw the precious metal hit new highs as the yield on U.S. Treasuries was also pushed higher.

Reuters reported that, in the wake of news over the weekend of a complete breakdown in Washington debt talks, the likelihood of default by the U.S. scared investors on Monday into seeking out gold and German Bunds over U.S. Treasuries, and exiting the dollar as well. Spot gold rose to a new high of $1,622.49 per ounce, and was up 1.2% to $1,618.40 an ounce in very early trading.

Criticism for the U.S. situation was pointed in Britain, where Vince Cable, the nation’s business secretary, denounced the stalemate. He said Sunday on a BBC report that “irresponsible” people who had been hoping for the failure of the euro had been forestalled by a second Greek rescue package, but continued, “The irony of the situation at the moment, with markets opening tomorrow morning, is that the biggest threat to the world financial system comes from a few right-wing nutters in the American Congress rather than the euro zone.”

Mitsubishi analyst Matthew Turner was quoted in the report saying, “This has reminded people of the risks involved in government bonds. For some investors, gold is a competitor as a safe-haven asset. If a deal is done, as I expect, the gold price will come down.” He added, “It might go higher first, though.”

U.S. gold futures for August delivery rose $16.90 an ounce to $1,618.40, off a high of $1,624.30; hedge funds have been boosting their gold holdings and driving up the price since last week.

UBS said in a note, “With little optimism on U.S. debt talks at the moment, the gold price acutely reflects investor nervousness that limited progress will be made before the August 2 deadline. This nervousness is in many ways justified as the threat of a U.S. ratings downgrade is very real. S&P has threatened that a ratings downgrade is possible even this month, if progress on the negotiations is insufficient. With just a few days left in the month, it is increasingly likely that investors will continue to buy gold as a defensive trade.”

Last week Standard & Poor’s said last week that the odds were even that the U.S. would lose its AAA credit rating within the next three months.


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