Gold Price Digests Debt Ceiling Compromise

GOLD PRICE NEWS – The gold price slid $4.22 to $1,584.27 per ounce Wednesday morning, following yesterday’s 1% decline.  The price of gold hovered near unchanged on thin volume this morning after tumbling $16.36 to $1,588.49 per ounce on Tuesday – ending its eleven session winning streak.  Gold prices surged to new all-time highs of $1,610.70, but turned sharply lower following reports that President Obama and congressional Republicans were close to a resolution that would allow the U.S. to meet its August 2 debt ceiling deadline.  The gold price later reached an intra-day low of $1,582.70, but modestly pared its losses into the close.

Silver fell $0.29 to $38.76 per ounce after retreating $1.34, or 3.3%, to $39.20 per ounce during yesterday’s liquidation in the precious metals.  Gold’s sister precious metal initially climbed to a ten-week high of $40.88, but headed south alongside the gold price following reports of the debt ceiling compromise.  Silver hit an intra-day low of $38.61, before bouncing back above $39 per ounce in afternoon trading.

In contrast to Monday, when gold and silver equities rallied and the broader markets plunged, on Tuesday precious metals shares dropped while cyclical stocks posted large gains.  The Philadelphia Gold & Silver Index (XAU) fell 0.7% to 217.84, while the Dow Jones Industrial Average (DJIA) surged over 200 points to 12,587.42.  Notable decliners in the precious metals sector included XAU components Agnico-Eagle Mines (AEM), Yamana Gold (AUY), and Silver Wheaton (SLW) – with losses of 3.4%, 2.9%, and 3.1%, respectively.  Gold stocks traded near unchanged early Wednesday.

Tuesday’s gold price sell-off followed numerous signals that the yellow metal was becoming extended in price and might be due for a correction.  Two of the most closely-followed gold sentiment indicators – the Hulbert Gold Newsletter Sentiment Index and the Market Vane Bullish Consensus – neared levels often associated with intermediate-term peaks in the gold price.  Furthermore, the front page of theFinancial Times included a headline saying “Gold price breaches $1,600 on debt fears.”  As if on cue, the gold price moved sharply to the downside.

However, despite yesterday’s gold price decline, the yellow metal remains higher by 5.6% in July and 11.8% year-to-date.  Although the gold price may experience further short-term weakness due to excessively bullish sentiment, the longer-term outlook appears bright.  Governments and central banks around the world – particularly in the U.S., Europe, and Japan – have done little to address the structural problems of surging debts and deficits.  Instead, policymakers have chosen to move further into debt to stimulate their sluggish economies.

Ray Dalio, head of the world’s largest hedge fund, Bridgewater Associates, discussed this trend in a recent interview with The New Yorker.  Dalio, whose firm oversees close to $100 billion, contended that many of the world’s developed nations, including the United States, will eventually choose to print more money as a way to inflate away their debts.

Such actions will eventually “lead to a collapse in their currency and in their bond markets,” Dalio continued.  “There hasn’t been a case in history where they (governments) haven’t eventually printed money and devalued their currency.”   As for the timing of such events, Dalio forecast that they will begin in late 2012 or early 2013.

While investors often erroneously make such bold predictions, Dalio’s track record suggests he should be taken quite seriously.  In 2007 and 2008, he was one of the few investment professionals warning of a severe financial crisis stemming from the credit and housing bubbles.  Bridgewater significantly outperformed its peers in those years.

Although the Bridgewater founder did not specifically discuss the gold price, the implications of Dalio’s predictions are quite bullish for the yellow metal.  If central banks continue to print money and the Federal Reserve launches additional rounds of quantitative easing – as Chairman Bernanke discussed last week – the fiat currency debasement inherent in those policies will likely make the gold price a prime beneficiary.