Forex Exchange

When most would think that the gold price couldn’t possible continue going up, a Korea Investment chart is being used to argue that a higher US debt ceiling will increase the gold price in USD.

Now Bloomberg’s Chart of the Day, the chart shows the climb of the gold price in dollars has matched the climb of the US debt ceiling since the mid ’90s.

Julia Yoo of Korea Investment has called gold’s rally ‘explosive’. She argues that ‘increasing the debt limit means you print more dollars, which will weaken the dollar and consequently lift the gold price.’

Obama is currently negotiating with Congress to raise the USD14.3 trillion debt ceiling before August 2, the date by which the US will default. If a decision isn’t made in time, ratings agencies Standard & Poor’s and Moody’s are likely to downgrade the government’s credit rating.

The yellow metal has risen 33% against the dollar over the past year, and hit a new high at USD1,626 per ounce on July 27. It received support from dollar weakness due to debt ceiling uncertainty, sovereign debt issues in Europe, and a TD Securities report upping its gold price target. The company has now raised its target from USD1,400 per ounce to USD1,512 per ounce for 2011, and from USD1,400 to USD1,700 per ounce for 2012, arguing that uncertainties facing the global economy will benefit gold as a safe haven asset.

However, not all analysts agree that the price of gold is, in fact, being impacted by US debt, with contending that gold remains undervalued over the long term. The yellow metal has risen nearly 6.5 times in the last eleven years. In contrast, in the 1970s the metal rose 24 times in nine years from USD35 an ounce to over USD850 an ounce. Today’s macroeconomic conditions are also more conducive to gold’s strength than those of the 1970s, when economies like Germany, the US and Japan were creditor nations. In contrast, the US is the world’s largest debtor nation today, with a national debt of nearly USD14.5 trillion and government liabilities estimated between USD60 and USD100 trillion.

And, gold is still below its inflatino-adjusted high of USD2,400, hit in 1980.

All of this indicates that the price of gold still has some room to rise, and it is likely to do it regardless of the debt ceiling decision. If a decision is passed by the August 2 deadline, trading gold is likely to continue trending up, though there might be some initial volatility due to a relief rally in the US dollar and across US indices. If Congress misses the deadline, we can infer that a widespread sell-off of the USD will cause gold to leap suddenly.