Gold and the US debts deal

Gold and the US debts deal

We know that politicians in US are still bickering over the intricacies of the debt deal which will allow US to raise its debt limit so that it can continue with its debt payment to its army, pensioners and most importantly international players holding US bonds. In an unlikely event where US government is not able to raise the debt ceiling we are likely to see US treasuries lose their prime rating as a risk free investment destination. People across the world will start to look for alternative  risk free investment avenues for themselves, and gold will feature prominently in that list.

Gold has historically acted as a hedge against inflation, and now it will act as a safe haven for investments in case US defaults on its debt payments. So it’s important to look at gold chart and ponder over the effect that US debt deal will have on gold.

Any substantial debt deal which promises to cut US deficit significantly and at the same time assures that US congress won’t have to negotiate on another debt ceiling raise in the short term will put pressure on gold and we will most likely see gold fall below its important support level of 1579$.

As it is gold is showing a huge negative divergence on the charts indicating that a US debt deal will be reached in nick of time so it is good to put a trailing stop loss at 1579$ when it comes to long trading positions, however investors who are in gold for long term can continue to hold on to their long positions as globally fiscal situation is still weak and in inflation scenario in India is still not under control.

If a US debt deal is not reached and US defaults we are likely to see a strong spurt in gold as investor will rush in to safe assets and at the same time short positions will be covered up in a hurry. Even a debts deal which is short term in nature and results in credit rating downgrade will result in a further rally in gold.

Right now the most probable scenarios is US congress is able to reach a significant debt deal and we see a softening in gold prices to at least 1579 $.. It is worthwhile to assume that a debt deal will be achieved considering that the US and global economy is at stake.