How Will the Debt Ceiling Debate Affect Gold Prices?

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If you're wondering how the debt ceiling debate will affect gold prices, you need to check out a new report from Goldman Sachs Group Inc. (NYSE: GS).

Investment powerhouse Goldman believes gold prices will log impressive gains over the next three months as the debt ceiling debate takes center stage on Capitol Hill. The bank is advising investors to position portfolios ahead of upward moves in the precious metal.

"We see current prices as a good entry point to re-establish fresh longs," Goldman analysts Damien Courvalin and Alec Phillips wrote in a Jan. 18 report.

The bank reaffirmed its three-month price target for gold of $1,825 an ounce. (Gold was trading at $1,695.20 in New York Tuesday.)

"The uncertainty associated with these (debt-ceiling) issues, combined with our economists' forecast for weak U.S. GDP growth in the first half of 2013 following the negative impact of higher taxes, will push gold" to the three-month target, the report stated.

The Goldman strategists pointed out six instances between 1996 and 2007 when the country hit the debt ceiling and the Treasury responded by using its muscle to execute "extraordinary measures" to keep the country afloat and running.

Gold prices rallied some 10% in half of these instances in the month prior to the debt-limit increase.

The commodity enjoyed unprecedented robust momentum during the last debt standoff in 2011, which continued for several weeks amid heated negotiations. During that span, the yellow metal set a series of record highs, causing a gargantuan gold-rush frenzy not seen since prospecting days.

The bullish view on gold is shared by bullion bank ScotiaMocatta, as reflected in its January Metal Matters Monthly.

"The financial system is drowning in debt and there seems no end in sight to ongoing massive budget deficits," the bank wrote. "Confidence in the financial system and in the fiat government paper that facilitates it will remain low."

Nic Brown of France's bullion bank Natixis is also bullish on gold prices and recently told Reuters, "If there was a reason for buying gold, you've got two good ones." He cited February's Chinese New Year, a celebratory time trendy for gifting gold, and the coming U.S. debt-ceiling showdown.

"We're surprised at how low gold prices are," Brown added.

How to Buy Gold During Debt Ceiling Debate

Market participants have a bevy of options when considering gold investments that will soar as debt ceiling debates continue. Three popular choices include:

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