Gold prices hit record highs on Monday after negotiations to lift the US debt ceiling hit stalemate over the weekend, raising fears over a possible default and boosting the appeal of bullion versus US assets like Treasuries and the dollar.
Democrats and Republicans in Congress are bitterly divided over plans to cut the US deficit, a necessary move before the debt ceiling can be raised.
With the August 2 deadline for a resolution fast approaching, the world's largest economy is facing an unprecedented debt default. If this happens, investors could dump the dollar and US Treasuries.
While most investors believe a deal will be done, nervousness ahead of the decision is still pressuring the dollar, lifting US Treasury yields and benefiting gold.
'This has reminded people of the risks involved in government bonds,' said Mitsubishi analyst Matthew Turner. '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 said. 'It might go higher first, though.'
Spot gold hit a new peak at $1,622.49 an ounce and was up 1.2 per cent at $1,618.40 an ounce at 0849 GMT.
It has reached record highs in each of the last five consecutive quarters, and is on track for its biggest monthly gain since April this month on concerns over euro zone debt levels as well as the US negotiations.
The stalemate in Washington led to safe-haven German Bunds outperforming US Treasuries on Monday, as risks of a US default outweighed worries over euro zone debt. US Treasury yields rose and European shares opened lower. .EU
The dollar dipped against a basket of currencies, while the Swiss franc, often seen as a safe haven for investors, rose sharply against the euro and the US unit. The euro slipped after Moody's downgraded Greece by three notches.
'With little optimism on US debt talks at the moment, the gold price acutely reflects investor nervousness that limited progress will be made before the August 2 deadline,' said UBS in a note. 'This nervousness is in many ways justified as the threat of a US ratings downgrade is very real.'
Source : New Age
