Money Morning Contributing Editor Peter Krauth yesterday (Monday) warned readers that a debt-ceiling deal could spark a short-term drop in gold prices, creating a key chance to stock up on the yellow metal.
As you may have noticed, he was dead on - but what he didn't foresee was that gold prices would bounce back as quickly as they did.
Krauth expected a rebound, no doubt. But when investors delved into the details of the feeble agreement conjured up by President Barack Obama and Congressional leaders, gold resumed its upward trajectory at a rate that eclipsed what even Krauth, a noted gold bull, had anticipated.
Gold futures slipped as much as 1.5% yesterday morning as news broke that a deal to raise the debt ceiling by up to $2.4 trillion was taking shape. But gold for December delivery bounced back enough to close the day down just 0.55% at $1,622.30 an ounce.
Gold prices climbed over the past few weeks as investors turned to the metal as a safer investment than stocks and U.S. Treasuries. Gold is up 14% this year, far outpacing the 2.33% gain in the Standard & Poor's 500 Index. The yellow metal hit an all-time high of $1,637.50 on Friday.
The drop in gold prices was short-lived because investors' concerns about the global economy outweigh the limited progress Congress has made reining in U.S. debt. While the weekend's debt compromise may prevent a U.S. debt default, it likely won't be enough to preserve the United States' top-tier AAA credit rating.
"Washington raising the debt ceiling is leading to still more borrowing and spending, and an ever-expanding money supply," said Krauth. "Over the long haul - as we've told you again and again here in Money Morning - this ever-growing debt load will be highly bullish for gold prices."
The growing federal debt will also continue to erode the U.S. dollar's value, pushing investors away from paper currency and into hard assets.
"On Aug. 1, the U.S. dollar officially lost its place as the world's safe currency as a store of value," Tom Winnifrith, a fund manager at t1ps Investment Management, told The Wall Street Journal. "In the absence of an alternative, the only currency whose value is not being systematically destroyed by politicians remains gold, and if you think recent increases in the gold price were startling, you ain't seen nothing yet."