Europe continues to fight the threat of debt contagion as Greece warns that it will miss its deficit targets for this year.  German Chancellor Angela Merkel and French President Nicolas Sarkozy have pledged to unveil a new plan to combat the region’s debilitating debt crisis and help recapitalize banks by the end of October, but investors still remain wary.

Greece’s deficit targets were set in July as part of a comprehensive financial bailout package.  As a condition to the bailout, Greece agreed to reduce its budget by 30 billion euros.

Although the country enacted a controversial budget to slash thousands of public-sector jobs, European finance minister Jean-Claude Juncker announced the Euro Group would delay its next aid payment to Greece so its inspectors could continue evaluating Greece’s financial health.  This announcement roiled stock markets recently as investors fled equities amid concern that the debt crisis would spread to other nations.

In May 2010, global policymakers created an emergency safety net of approximately $1 trillion to bolster financial markets and prevent the Greek crisis from damaging the euro.  The package was comprised of 440 billion euros in guarantees from euro zone states, plus 60 billion euros in European debt instruments.  EU finance ministers said the IMF would contribute a further 250 billion euros to the fund.

In July, EU leaders agreed to increase the fund by an additional 109 billion euros with investors swapping some of their Greek bonds for loans for bonds with longer maturities and European guarantees.  The EU leaders have since debated the best course of action to combat the Greek debt crisis.  In September, European officials angrily stormed out of meetings in Athens, saying that Greece was failing to live up to austerity promises.

The so-called PIGS (Portugal, Italy, Greece and Spain) are so overburdened with debt as to threaten the fiscal stability of the entire Eurozone.  Three of these countries have debt which exceeds their GDP.  Only Spain has a debt-to-GDP ratio below 100% even though this country currently has 20% unemployment.  Italy, which has the third largest economy in Europe, has a debt-to-GDP ratio is 120%.

Banks in both France and Germany, hold a great deal of the PIGS’s sovereign debt and, as such, are at risk of failing if the countries default on their debt.  Overall, the banks in Europe are experiencing a crisis similar to what the United States saw after the Lehman collapse.   As a result, France and Germany are working on a plan to recapitalize financial institutions in Europe.

Goldman Sachs is now forecasting that the euro zone will slip into a “mild recession” in the fourth quarter of 2011 and first quarter of 2012.  The firm cut its gross domestic product outlook for advanced economies for 2012, lowering its growth forecast to 1.3 percent from 2.1 percent, saying “the main driver of our shift in views has been the escalation of bank funding stress in the Euro area, alongside deeper public budget cuts in a number of European countries.”

With equity markets selling off strongly on news of a worsening situation in Greece, several analysts expect gold to separate from the recent flight from risk and liquidation of stronger-performing assets.   “After the recent washout, gold positioning is far from extended and this is quite a bullish signal for price strength ahead, said UBS analyst Edel Tully.  The ‘clean’ nature of current [speculative] positions, along with physical and long-term demand, is creating a very healthy foundation for gold to climb from,” the bank said.

Commenting on gold, Simon Denham, CEO of Capital Spreads, said “investors were seen to still be considering the precious metal a safety haven and buying in to protect themselves from the market limbo caused by a looming Greek default.”  Price moves higher, which have not been hampered by a strengthening dollar, may indicate “the resumption of a new rally after the recent correction.”

Societe Generale said it remains broadly bullish on the outlook for gold and now expects the 2012 gold price to average $2,175 per ounce. The precious metal has averaged approximately $1,540 an ounce so far this year.

(Source: Source: “Gold strengthens as Greek fears worsen,” MarketWatch, October 4, 2011 “S&P enters bear market, Greece Sinks Wall Street,” Reuters, October 4, 2011; “Wall Street set to open in bear market,” Reuters, October 4, 2011; “Gold turns lower as wider markets slide,” Reuters, October 4, 2011; “PRECIOUS-Gold rises 1 pct on fears of Greek default,” Reuters, October 4, 2011; “Spot Gold Gains On Euro Debt Fears,” Wall Street Journal, October 3, 2011; “PRECIOUS-Gold rises for third day after Greece rocks markets,” Reuters, October 3, 2011; “PRECIOUS-Gold extends gains, equities drop on Europe debt fears,” Reuters, October 3, 2011; “Greece,” New York Times, September 27, 2011; “European Financial Stability Facility Expansion Could Stop Contagion, If Voters Approve,” 247WallStreet.com, September 23, 2011; “Euro Zone Debt is a Greek Tragedy,” AmericanAdvisor.com, June 2, 2011)

Scott Carter is Chief Executive Officer of Goldline International, Inc.

Delegates attending the London Bullion Market Association’s (LBMA) annual conference in Montreal in late September provided their forecasts for the precious metals markets as they shared their informed outlooks for the gold, silver and platinum markets.  As one of the major conferences on the precious metals calendar, it was attended by more than 500 analysts, traders, fund managers, refiners, fabricators and miners, as well as official sector central bankers and wider industry delegates.

The meeting’s attendance has swelled as precious metals have become increasingly recognized as an important part of investors’ portfolios.  Investor participation in the event has also grown in recent years, said Stewart Murray, chief executive of the LBMA.

LBMA polled the audience using an electronic system both at the start and end of the two-day event.  Of the 530 delegates who voted, the average price expectation on Sept. 19 was for gold at $2,075 per ounce by Nov. 5, 2012.  A second vote taken the following day placed the average at $2,019 per ounce.

The delegates collectively projected all precious metals will be higher in a year.  The end-of-conference vote showed an average expectation for silver to be $47 per ounce in November 2012.  Delegates forecast a platinum price of $2,163 per ounce in November of next year, up from a price of $1,770 an ounce when the survey was taken.

“That forecast of a pretty well-informed group from the professional market is something that is followed by all of the media,” Murray said. “And for the last couple of years, that forecast has been correctly bullish.”

At the end last year’s conference, attendees collectively forecast gold would rise by approximately $190 to $1,450 by the end of the next twelve months.  This projection proved to be too modest with gold rising several hundred dollars above the forecast.  .

Metals consultancy GMFS noted a reemergence in investor demand for silver in a presentation at the conference.  After a recent correction, silver investment is expected to top more than $10 billion in value terms this year, a new record for the market, said GFMS Research Director Philip Newman.  Newman said, “We are looking for investor demand to set a new record high of just over $10 billion this year.”

With gold forecasts projecting gold to top $2,000/oz later in this year, silver should continue to benefit in its role as a “poor man’s gold,” Newman added.  Claymore Investments president Som Seif argued in his presentation at the conference that rising demand for silver from the industrial and investment sectors and supply constraints would lead to higher silver prices.

Discussing gold, Seif said, “We expect to see $2,500 some time in the next 12 months.” John Fallon, president of hedge fund Pia Capital Management, noted that gold is “in an orbit by itself” among commodities and remains his favorite investment in the sector, due to its high liquidity and the support offered by solid physical demand.

HSBC analyst Jim Steel, who has a 2012 gold forecast of $2,025 per ounce, commented at the conference, “The macroeconomic climate remains positive for gold. The fact that there’s a high level of volatility in the market doesn’t take away from its safe-haven status. You’ve got to look at it over time compared to paper assets.”

(Sources:  “Gold to Top $2,000 Next Year – LBMA Conference Participants,” International Business Times, September 20, 2011;  “Gold forecast to beat $2,000?in the next year,” Financial Times, September 20, 2011; “GFMS: 2011 Silver Investor Demand To Hit New Record Above $10 Billion,” Fox Business, September 20, 2011; “LBMA Delegates See Gold Above $2,000/Oz by November 2012,” NASDAQ, September 20, 2011; “LBMA Conference Coming To Montreal With Gold At Historically High Prices,” Forbes, September 16, 2011)

Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.

Global gold purchases in the second quarter of the year equaled $44.5 billion – the second highest quarterly amount on record, according to the recent Gold Demand Trends report from the World Gold Council.  This represents a 5% year-over-year rise.

India and China stood above other nations in terms of gold acquisitions, as these two markets accounted for 52% of total bar and coin demand and 55% of global jewelry demand.  They were major contributors to investment and jewelry gold demand in the quarter.

Despite a higher gold price, Indian and Chinese demand grew 38% and 25% respectively during Q2 2011 compared to the same period of 2010. This growth is likely to continue due to increasing levels of economic prosperity, high levels of inflation and key upcoming gold purchasing festivals.

The impact of the European sovereign debt crisis, the downgrading of U.S. debt, inflationary pressures and the still-fragile outlook for economic growth in the West are all likely to drive high levels of investment demand for the foreseeable future, the report says.

Central banks are likely to remain net purchasers of gold and continue to turn to gold to diversify their reserves.   Central bank purchases in the quarter were the second highest since the official sector began buying in the second quarter of 2009, according to the report.  Nations purchasing gold included Russia, South Korea, Thailand and Mexico.

Although China holds the largest gold reserves among Asian countries, central bank activity in the next four largest Asian economies holding gold (Vietnam, Indonesia, South Korea and Thailand) in the first half of 2011 has seen a 28% increase in gold holdings.  This is notable in a sector which has remained largely dormant in the last ten years, partly reflecting concerns over major reserve currencies and also providing a seal of approval to investors on the benefits of holding gold.

Jewelry gold demand was 6% higher year-over-year as a number of key markets posted solid growth. India, China and Turkey (which collectively accounted for almost 60% of global jewelry demand) generated combined growth of 16%.  Increasing prosperity among Chinese consumers, supported by very strong growth in the domestic economy, is still a driving force behind gold jewelry demand.  However, the perception of jewelry as an investment also plays a key influence, fuelled by the persistent high inflation that has kept real interest rates negative in China for some time.

Physical demand for gold bars and coins grew 9% in the second quarter.  Beyond India and China, the geographical distribution of this demand was widespread, with a number of countries across all regions generating solid growth.

The strong rise in Indian demand for gold suggests Indian investors continue to hold bullish price expectations.  Inflation concerns and the relative underperformance of other assets (notably the domestic equity market and property) continued to bolster demand for gold bars and coins among Indian investors.  Combined demand from India and China accounted for more than half of the global total, with both generating impressive year-over-year rates of growth.  Indian demand alone drove the second highest quarter for investment demand on record and 78% up on the second quarter of last year.

Second quarter demand for gold used in the technology sector was up by a modest 2%. This growth was entirely attributable to the electronics segment, which generated a record value of $4.1 billion.

The second quarter supply of gold was little changed year-over year.  Mine production, the only component of supply to make a positive contribution, rose by 7%.  Recycling activity was 3% down year-over-year, as consumers in many markets held off on selling their existing ‘loose’ holdings of gold in anticipation of higher prices.

(Source:   “Gold Demand Trends:  Second Quarter Report” World Gold Council, August, 2011)

Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.

At his widely anticipated address from Jackson Hole, Wyoming, Fed Chairman Ben Bernanke said the central bank stands ready to use additional tools to help the U.S. economy in its recovery, but provided little direction as to further Fed action.

“Bernanke gave markets no hints that another liquidity injection was imminent,” Ritesh Gandhi, an analyst at Mumbai- based investment bank Anand Rathi Group, said in a report. Buyers were “returning to the gold market in search of a refuge,” Gandhi said.  A second day has been added to the Federal Open Market Committee meeting next month for “a fuller discussion” of the economy and the Fed’s possible response, Bernanke said Aug. 26.

The central bank’s leaders are split over what steps to take to bolster growth, so the Fed’s decision to extend its meeting an additional day fueled speculation about the possibility of additional monetary easing measures in September.   “An extra day of deliberations scheduled for the September FOMC meeting kept hope of another QE3 on the table,” said ANZ Bank in a note.

“For now, the Fed has managed to buy itself some time to gather more data and mull over what to do next. This is positive for gold, in our view,” wrote UBS strategist Edel Tully in a note. “The market is likely to be volatile over the next few weeks, until there is clearer guidance from the Fed, which will likely come after the two-day FOMC meeting in September. That the scheduled meeting has been extended for an extra day suggests that deliberations on potential policy actions will be comprehensive.”

Regardless of Fed action, it is clear the U.S. economy continues to struggle with recessionary trends. Recent data showed the U.S. economy grew much slower than previously projected in the second quarter as business inventories and exports were flat while consumer spending was revised higher. U.S. manufacturing contracted for the first time in two years, economists noted. U.S. gross domestic product climbed at a 1 percent annual rate from April through June, down from a 1.3 percent prior estimate.

Confidence among U.S. consumers in August plunged to the lowest level in more than two years as America’s outlook for employment soured and incomes stagnated. Employers added 75,000 jobs in August, compared with 117,000 in July, as the unemployment rate held at 9.1 percent.  “This paints a picture of underlying demand weakening,” said Bricklin Dwyer, an economist at BNP Paribas in New York. “Consumers are seeing their wealth deteriorate. We’ve seen a huge decline continuing in the housing market. They’ve also been hit on the chin by the equity markets.”  The Bloomberg Consumer Comfort Index has been hovering at levels previously consistent with recessions.

Pu Yonghao, chief investment strategist at UBS Wealth Management said, “People are concerned the probability of recession has increased.  Gold is a kind of insurance, to insure against the potential quantitative easing.”  As the U.S. government makes money available through stimulus such as quantitative easing, interest rates for the dollar hover at very low levels.

Given the uncertainties in the economic landscape, “there’s every reason to see gold regaining the $1,900 level in the not-too-distant future and pushing through $2,000 before the end of the year,” said David Wilson, a commodity strategist at Société Générale.

(Sources: “U.S. Consumer Confidence Falls to Two-Year Low,” Bloomberg, August 30, 2011; :  “Gold Climbs Above 2 Percent, Nears $1,830 an Ounce,” CNBC, August 30, 2011; “PRECIOUS-Gold softens but easing talk lifts prices from lows,” Reuters, August 29, 2011;  “Gold Advances on Wealth-Protection Demand After Bernanke Offers No Boost,” Bloomberg, August 29, 2011;  “Spot gold drifts lower, eyes $1,800/oz,” MarketWatch, August 29, 2011 “Gold’s Wild Ride Shows Strains Among Investors’ Ranks,” Wall Street Journal, August 26, 2011;  “Gold Rises, Reducing Weekly Decline, as Lower Prices Fuel Investor Demand,” Bloomberg, August 26, 2011;  “Gold Pulls Back Following Bernanke Speech,” CNBC, August 26, 2011)

Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.

With so much attention focused on this month’s dramatic market fireworks, including a gold price at record levels, the steady accumulation of gold by central banks globally (one of the drivers of gold’s appreciation over the last few years) has temporarily moved off the radar screen.  However, this trend is continuing:  South Korea has just completed purchases that almost triple the country’s gold reserves.

The Bank of Korea said recently that it had purchased 25 tons of gold worth $1.24 billion, its first gold acquisition since the Asian financial crisis of 1997-1998.  The move makes South Korea the latest of a number of countries that are increasing gold  reserves and diversifying out of a variety of currencies.

“The gold purchase, as a safety net, will help us cope with volatile global financial markets and enhance investor confidence in Korea in times of crisis,” said Hong Taeg-ki, chief of the Bank of Korea’s reserve management group.

So far in 2011, emerging market central banks have bought nearly 204 tons of gold, more than double the amount purchased by all central banks in 2010.  These purchases represent a shift from a decade before when central banks were net sellers of gold.  “We definitely have seen a sea change” in central bank attitudes toward gold, said David Greely, chief commodities strategist at Goldman Sachs Group.  Central bank buying provides “longer-term support for gold prices,” he said.

Among the central banks who have recently added to their gold reserves are Russia, China, India, Mexico, Thailand, and Greece.  Mexico has been the largest buyer of gold acquiring 98 tons of gold, followed by Russia, which acquired approximately $2.6 billion worth of gold based upon current prices.

Central banks will continue to be net buyers of gold, purchasing “several hundred” tons a year, according to Eugen Weinberg, head of commodities research at Commerzbank AG.  The most likely buyers are those nations with the largest overall reserves but relatively small bullion holdings such as China.  The Chinese central bank is the sixth largest official sector owner of gold, yet its holdings account for just 1.6 percent of its $2.5 trillion total reserves.

These acquisitions are in part a response to the challenges of the global economy. According to David Meger, director of metals trading at Vision Financial Markets in Chicago, purchasing additional gold reserves “reiterates the fundamental view that most investors, asset managers, and even central banks hold true—that gold remains the quintessential currency hedge, a stabilizing asset for portfolios, and a safe haven in uncertain economic times.”

(Sources:   “South Korea bolsters gold reserves,” Financial Times, August 2, 2011;  “Gold Hits Record as Misery Mounts Over Debt,” CNBC, August 2, 2011; “Gold Prices Will Reach $1,700 an Ounce,” Bloomberg, August 3, 2011; “Emerging world buys $10 billion in gold as West wobbles,” Reuters, August 3, 2011; “Central Banks Join Rush to Gold,” August 3, 2011; Sources:  “Gold at Record as Debt Worries Mount; Central Banks Buy,” CNBC, August 3, 2011; “Gold Rallies to Record for Second Day as Signs of Slowdown Fire Up Demand,” Bloomberg, August 3, 2011)

Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.

A new report from Oxford Economics looks at historical gold prices along with the current dynamics of the gold market.   The report, titled “The impact of Inflation and Deflation on the Case for Gold,” takes an in-depth look at what influences gold prices metal in light of its recent historic price rise, noting a changing perception of gold as an asset in today’s economic environment.

Since 2007, the world has seen a period of considerable economic and financial volatility, including the steepest recession since the 1930s.  During this time, the price of gold has more than doubled.  Over the very long-term, gold tends to hold its value in real terms, but several short-run factors can move gold away from its long run equilibrium for extended periods, the report states.   These major factors may include financial stress, political turmoil, real interest rates, inflation, central bank activity and the US dollar exchange rate.

To explain gold price movements from 1976 through2010, Oxford Economics created an equation including the six factors listed above.  These factors have significant short-run influences on the gold price, the report notes, showing that shocks to the gold price wear off relatively slowly.  The equation also highlights the fact that while the current price of gold is comparatively high, the adjustment back to equilibrium could take place via a rise in the general price level, rather than a fall in the nominal value of gold.

Such an adjustment assumes that influencing factors would stay constant and not worsen, but there is considerable uncertainty on this point.  In particular, the euro zone sovereign debt crisis has the potential to generate major financial stresses if it ends in sovereign defaults – possibly on a scale comparable to that seen in the global financial crisis of 2008-2009, the report states.  Major sovereign defaults could also prompt a serious reassessment by investors of the nature of government bonds as a safe asset.

An additional significant risk is that inflation accelerates considerably as a result of the expansion of central bank balance sheets since 2009.  While inflation pressures appear to be contained at present, this may not remain the case as the global banking system heals itself and the monetary liquidity of recent years leads to faster money and asset price growth. The possibility that central banks may miscalculate when and by how much to withdraw their stimulus must be a very real one, given their limited experience in implementing monetary policies of this kind, the report suggests.  Also, rapid growth leading to inflation in emerging economies such as India and China presents a significant risk and could support gold.

Using the Oxford Economics Global Model, the researchers project the performance of gold relative to other assets from 2011-2015 over a number of variant economic scenarios.  They find that while other assets outperform gold in the baseline scenario, gold performs relatively strongly in a high inflation scenario and also does comparatively well in a deflation scenario derived from a wave of defaults in the peripheral eurozone countries. This is because such a deflation scenario includes a sharp rise in financial stress.

Gold has been used for centuries as a store of value and to protect wealth, the report notes, given that it is relatively immune to inflation, financial crises and credit default.  These special properties have asserted themselves in the recent performance of gold, and investors may continue to value these attributes given the uncertainties still facing the global economy.

The report also notes that the path of the US dollar is a long-range factor that could boost gold prices.  Dollar moves can have a substantial short-term impact on gold prices, and a weakening of the trade-weighted dollar connected with loose monetary policy, along with a faster increase in the value of Asian currencies or perhaps a loss of international investor confidence connected with U.S. debt, could all support gold.

Gold’s potential role as “risk insurance” in a balanced investment portfolio is clear, the report states.  Its lack of correlation with other assets means that it has a role to play in reducing the volatility of investment portfolios even in optimistic times.  In more cautious times, it also is seen as a means to preserve wealth.  As a result, Oxford Economics places gold’s optimal portfolio allocation in a baseline scenario at 4-9%, depending on risk appetite.

All of these elements help to explain investors continue to acquire gold, with investment-driven demand up to around 40% of the total in 2010 from less than 15% in 2002.  The report suggests there is evidence of a reappraisal of gold’s value by various classes of investors including central banks which have become net buyers for the first time since the last 1980s.

(Source:   “The impact of Inflation and Deflation on the Case for Gold,“ Oxford Economics, July 2011)

Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.

By Scott Carter, CEO, Goldline International
June 29, 2011

Gold traded at new records on the New York Spot Market as the House fails to pass a debt ceiling bill and GDP numbers signal a stalled recovery. The GDP report, which revealed a tepid 1.3% growth rate in the second quarter, raises the possibility of further monetary easing, thus, prompting investors to buy the yellow metal as a hedge against a weaker dollar. “It was quite a bad release and it raises hopes that there will be more monetary easing in the form of quantitative easing and that’s positive for gold as an investment asset,” said Matthew Turner, precious metals analyst at Mitsubishi.

As the possibility of a U.S. default becomes increasingly likely, many analysts are predicting that gold could see a parabolic spike to $1,800 an ounce or higher overnight. Jeff Casey, Casey Research Senior Precious Metals Analyst says if there is no resolution, there will be “quite a rush into gold.” Casey told investors he sees gold at $2,000 an ounce in the unlikely event of a default. Even if congress votes to raise the debt ceiling before the August 2 deadline, Casey believes sovereign debt concerns and the debasement of currencies around the world will continue to drive gold prices higher. According to Casey, “Long-term, gold would have to move higher.”

In a note to clients, Citigroup Analyst Heath Jansen says concerns over sovereign debt in the US and Europe could push gold up to $2,500 an ounce and potentially $5,000 an ounce. According to Jansen, “When investors are hungry for gold, the metal has a habit of rising exponentially which has no parallel amongst metals.” Jansen also cites debasement of fiat currencies are a primary driver for gold continuing to hit new record highs.

(Sources: “Gold Rises to Session High on Weak GDP Report” Reuters, June 29, 2011; “Gold Prices Spike on Sour GDP Data” The Street, June 29, 2011; “Citigroup Analyst Sees Potential for $2500 Gold, Randgold Resources Favored Equity Play” Proactive Investors, June 29, 2011)

Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.

Gold prices reached new record highs on the New York Spot Market before falling lower on profit taking.   Gold’s new record was attributed to continuing concerns of a U.S. default and credit downgrade.  Politicians from both parties remain divided on a plan to raise the debt ceiling with less than a week before the August 2 deadline. “If you have a default of U.S. government debt, there are consequences and it is better to remain in safe haven assets such as gold,” said Peter Fertig, a metals consultant at Quantitative Commodity Research. “If there isn’t a last minute compromise (in the U.S. debt talks) then the situation will get more and more critical. Gold is one of the alternatives to U.S. treasuries and therefore there is further upside potential.”

David Banister, chief investment strategist at ActiveTradingPartners.com, thinks that gold will hit $1,730 in a few weeks and maybe reach $1,800 an ounce. Banister is less concerned with a potential default, instead cautioning investors that the potential for a credit downgrade by one or more agencies is increasingly likely. Stan Dash, vice president of applied technical analysis at TradeStation, also sees prices at $1,730. “You can’t argue with price,” says Dash. “It’s making new highs. It’s still a bull market”

Eugen Weinberg, head of commodity research at Commerzbank AG is another analyst who has shifted his focus from the debt ceiling to concerns over the lack of a long-term plan to deal with the country’s debt burden. “Virtually everybody expects the debt-ceiling issue in the U.S. to be resolved,” said Eugen Weinberg, head of commodity research at Commerzbank AG. “On the other hand, the huge debt burden is not going to disappear following the agreement, and if the agreement is not reached, it would be a massive blow to the market.”

(Sources: “Gold Rises to Record as ‘Go-to Asset’ Amid Debt-Talk Stalemate” Bloomberg, June 27 2011; “Gold, Silver Shine as the U.S. Falters” The Street, June 27, 2011; “Gold Hits Record as Debt Fears Deepen” Rueters, June 27, 2011)

Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.

Gold prices are relatively flat during Tuesday afternoon trading in a mix of profit taking and safe haven asset purchases on a weaker dollar. A final deal to raise the debt ceiling remains out of reach as lawmakers continue to pursue separate proposals before the August 2 deadline. President Obama delivered a plea to Americans via primetime television Monday night, encouraging people to contact lawmakers and urge a compromise. “For the first time in history, our country’s triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet,” Mr. Obama said.

Despite a diminishing timeline for a debt deal, some investors have shifted focus to taking profits on gold’s record highs. “It would appear that markets are perhaps growing weary of the drip-feed of bad news from the U.S. debt negotiations, in the belief that some accord will eventually be reached,” said Marc Ground, a precious metals analyst with Standard Bank. Meanwhile, analysts at Morgan Stanley raised their average gold price forecast for 2012 by 22% to $1,624 an ounce as investor demand will likely remain strong amid ongoing government debt concerns. The bank also raised its silver forecast to $36.90 an ounce, up 30% from previous estimates.

Peter Fung, head of trading at Wing Fung Precious Metals in Hong Kong, believes gold is likely to continue in an upward trajectory regardless of the outcome of debt discussions in Washington. “President Obama tried to add some confidence on the debt talks, but people still have doubt,” he said. “But over the medium- to long-term, gold is still going to be on the upside as people will still be seeking a safe haven in gold with the problems around the world.”

Also benefiting gold is the increasing likelihood of a credit downgrade from ratings agencies such as Standard and Poor which warned last week there is a 50-50 chance the U.S.’s AAA rating could be cut within three months. “There is an increasing chance of downgrading, even if the debt ceiling is raised in the last minute,” said Ong Yi Ling, an analyst at Phillip Futures in Singapore. “Unless a long-term, more credible deficit reduction plan comes along, rating agencies will keep the U.S. on negative watch, which will benefit gold.”

James Moore, research analyst at FastMarkets, said that as the dollar’s dominance as a safe-haven continues to erode, gold will benefit and hit new record highs. “Dips [should] be viewed as buying opportunities and the metal [will] look towards $1,650,” Moore said.

(Sources: “Gold Settles at Another Record” Wall Street Journal, June 26, 2011; “Gold Up on Investor Uncertainty” Reuters, June 26, 2011; “Modest Gold Buying Signals Mild Concern” The Street, June 26, 2011)

Scott Carter is Chief Executive Officer of Goldline International, Inc. and host of The American Advisor talk radio show.