Gold and Silver Up, Fiscal Deal Could See Another U.S. Downgrade

The spot price of gold reached two-week highs in early trade on Wednesday following a belated agreement by Congress over the U.S. budget crisis.

U.S. gold futures for February delivery gained 0.95 percent, adding $16.00 to $1,691.80 per troy ounce. The spot price of gold gained $14.58, or 0.87 percent, to $1,690.44 per troy ounce.

The bill passed by the House of Representatives and the Senate extends tax cuts for all Americans except those in the top 1 percent of earners. U.S. President Barack Obama said the agreement enshrines a principle into law that the deficit must be reduced in a way that is balanced.

The fiscal cliff debate took effect in earnest following the reelection of the President, when markets contended with the reality that the policy of the Federal Reserve, headed by Chairman Ben Bernanke, would not be challenged. While the price of gold did experience a rally in early November, the unseen story has been the record demand for gold and silver bullion at the U.S. Mint, which sold out of American Eagle Silver Coins for 2012 by mid-December at 33,742,500 ounces, the third highest sales level in the coin’s 27-year history.

A note from Citi fixed-income strategist Steven Englander said of the fiscal cliff that the process has been so chaotic and the outcome so unsatisfactory that we are likely to see a further U.S. downgrade at some point.

Edward Meir, metals analyst at brokerage INTL FC Stone, said the colossal failure of political will to get America’s fiscal house in order should provide fodder for the gold bugs to bid prices higher. He added they suspect gold will likely do better over the next few weeks.

UBS, in its 2013 outlook, said the first quarter of 2013 has already suffered economic uncertainty on the outcome of the U.S fiscal cliff, warranting a defensive posture. The bank therefore thinks gold and platinum are an outright buy at present levels as both metals have very low supply elasticity and are key beneficiaries of loose monetary policy. In the case of gold, the outlook said, UBS still targets the level of $1,950 per troy ounce over the next three months.

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