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US debt fears keep gold above $1600

London - Gold eased on Tuesday as investors cashed in some gains after the previous session’s record high, but the political impasse in the United States over raising the debt ceiling kept prices firmly supported above $1 600 an ounce.
 
Spot gold edged down 0.3% to $1 609.79 in morning trade. It hit a record $1 622.49 on Monday as US President Barack Obama warned that failure to reach an agreement to avert default could cause a deep economic crisis, and urged Republican and Democratic leaders to reach a compromise.

“What is different now is the implications it (raising the US debt ceiling) could have on the credit status of the US, Fed policy, potential QE3 and how that affects the dollar so there are tail events here that could be quite problematic,” said Michael Lewis, head of commodity research at Deutsche Bank.

“Clearly there are substantial tail events to hit the market so the appeal of gold will still be very strong, just given the unstable equilibrium that we’re in at the moment in terms of debt levels and zero interest rates.”

Bullion has gained nearly 7.4% in July as politicians in Washington clashed over raising the US debt ceiling beyond $14.3 trillion to avoid a default.

US gold was down $2.00/oz at $1 610.30.

European shares edged lower on concerns over the lack of a debt deal, while the dollar fell to record lows against the Swiss franc and slid 0.6% versus the euro as political wrangling in Washington kept investors on edge.
 
A weaker dollar would usually support gold, but the relationship between the two has weakened in recent years.

“Overall, we think the environment should remain favourable and positive technical momentum is likely to see gold test new highs in the near term. The next technical resistance is at $1 630/34,” Credit Suisse analysts wrote in a note.

Downgrade worries

The United States edged closer to a default on Tuesday as Republicans and Democrats struggled to reach agreement over plans to raise the debt ceiling, one week before a deadline to act.
 
Last week Standard & Poor’s warned there was a 50-50 chance the US AAA credit rating could be cut within three months.

“The market is clearly very worried about the small, but undeniable risk of a US default and more pressingly, the growing threat of a ratings downgrade,” said UBS analyst Edel Tully in a note. “Comments out of Washington overnight highlighted the lack of significant headway in the debt debate.

“While we expect some additions to core gold longs on the back of this, it is more likely that investors who go long here would be inclined to bank profits immediately, rather than run the risk of a pullback on any positive news out of Washington.”

The National Union of Mineworkers said on Monday wage talks with the country’s big gold miners had broken down and it would give them a 48-hour strike notice on Tuesday.
 
South Africa is the world’s fourth-largest gold producer in 2010, after China, Australia and the United States.

“It’s the wage negotiation season, which happens every year,” said Credit Agricole analyst Robin Bhar.

“We’ll have to wait and see. But if you’re holding gold, you’re not going to want to sell it against a background of strikes in South Africa, which is the fourth-biggest producer.”

Spot silver eased 0.1% to $40.27. It hit $41.05 in the previous session, its highest since May 4 when prices were tumbling from a record $49.51 set on April 28.
 
Holdings in iShares Silver Trust , the world’s biggest silver exchange-traded fund, rose 42.44 tonnes to 9,891.61t - their highest since June 10.

Spot platinum was down 0.3% at $1 779.49/oz, while spot palladium was up 0.3% at $805.97.
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