A mixed morning for Gold today. Prices gaped higher on open after Republican House Speaker Boehner said that he would never pass a “clean” debt limit bill over the weekend, bringing us closer to a US debt default as the 17th October Debt Ceiling date draws nearer. According to Boehner, US could end up defaulting if President Obama doesn’t negotiate, and it seems just like a game of chicken between to see who gets more uncomfortable as the country drives off the default cliff. Market understandably panicked a little as tensions appeared to have eased on Friday with some House Republicans appearing to have buckle under the pressure and suggested that they are willing to vote for a clean bill just to end this whole saga. This explains the sell-off in Gold late Friday, and market is happy to claw the losses back now that the situation has effectively reversed back to square one.
However, Boehner may actually be wrong. According to Moody’s, even if US debt ceiling is reached, the country’s credit worthiness will still be intact as the debt ceiling only restricts new borrowing, not servicing of past loans. This is a strange assertion considering that Treasury Secretary Jack Lew himself has said that US risks defaulting if the Debt Ceiling is not raised by 17th Oct. This actually makes sense as US has been running budget deficits since 2002. Without additional loans, there is no way debt repayments can be made as cash holdings in the Treasury is dwindling down as we speak.
Why this contradiction? The problem is simply that the legality of all these issues are simply too confusing. Ex President Bill Clinton believed that Obama can utilize Executive Power as President to raise the debt ceiling unilaterally, but Obama lawyers doesn’t think so. In similar vein, S&P and now Moody’s are believing that US will still be able to make good of her obligations while Lew doesn’t think so. The only way to know for sure is to really see the Debt Ceiling not being raised and look at how everything plays out. But even that is a huge leap from where we are now, with many market participants believing that we will never reach a stage like this. Hence, it is no surprise to see the market basically being nonchalant about this whole fiasco, only wanting to be involved when more clarity has emerge.
Given this uncertain back drop, we could continue to see Gold prices continuing to trade sideways between 1,305 – 1,325 for the next few days. It is clear that bullish support is currently in abundance under 1,300. It seems that the institution that sold Gold heavily does not represent the rest of the market – in fact, other institutional speculators actually disagree, as evident by latest COT numbers that showed an increase of Net-Long positions. Hedge funds and other major speculators are actually thinking that Gold is a bargain below 1,300, and this will help to support prices for now.
However, overall outlook continues to remain bearish. And the fact that we did have a net W/W loss for Gold is still a point in favor for the bearish trend that has been in play since 1 year ago. Fundamentally we are still looking at further unwinding of long positions that has been accumulated over the past few years which will weigh on prices. Simply put, with US clawing her way out of the financial crisis, the reasons for such high Gold prices is slowly evaporating as well.
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