House Republicans are unwilling to raise taxes as part of a deal, leaving President Obama in the difficult position of having to forge a deal unpopular among the great majority of his voting base. The possibility of a short-term deal that raises the debt ceiling in stages – a scenario the President repeatedly stated he did not want to do – appears to be back on the negotiating table. The gold price – as well as the broader stock and commodity markets – will likely be volatile this week as every piece of news related to the negotiations is parsed.
Last week the gold price capped off another record-setting week by rallying back above $1,600 per ounce. Strength in the price of gold was fueled by continued uncertainty over not only the United States’ debt ceiling discussions, but also over the ongoing European sovereign debt crisis. Silver continues to advance alongside the gold price, rallying 17.5% in the month of July alone. Silver, currently trading at eleven-week highs, remains 18% below its 31-year high of $49.82, reached on April 25, 2011. On a year-to-date basis, the prices of gold and silver have rallied 13.7% and 32.1%, respectively.
Precious metals equities have powered higher alongside the price of gold and silver as the Philadelphia Gold & Silver Index (XAU) rose 1.1% to 220.36 on Friday. For the week, the XAU rallied 1.6%, marking its fifth consecutive weekly advance. Although the XAU remains lower by 2.7% year-to-date, over the past five weeks it has significantly outperformed the metals – with a gain of 15.9% versus 4.0% and 11.7% for the price of gold and silver, respectively. Gold mining stocks moved higher Monday morning on the back of strength in the gold price.
Over the next several weeks, many of the world’s largest gold companies are scheduled to report second quarter earnings results, during which time the gold price averaged $1,509 per ounce. Macquarie’s equity research team wrote in a report to clients that “given the strong metal price environment, we expect sequential earnings improvement” from a host of North American gold producers.
In the report, Macquarie raised its long-term gold price to $1,709 from $1,649 per ounce, and lifted its price target on several large-cap gold miners. The target on shares of Barrick Gold (ABX) was increased to $68 from $66, on Agnico-Eagle Mines (AEM) to $83 from $78, and on Goldcorp (GG) to $66 from $63.
J.P. Morgan also reiterated its bullish outlook on the gold price. In a note to clients, the firm wrote that “Industrial metals as a group are broadly unchanged on the year but precious metals have continued to trade strongly. We remain extremely bullish of gold, looking for a move towards $1800, and above, by year end.”
“We see sovereign risk factors, EM inflation, a weak USD and broad economic uncertainty continuing to underpin gold, and silver by association,” J.P. Morgan continued. “Retail demand is a key driver and overshadows static visible investor length.”
Although euro zone officials approved the next round of bailout funds for Greece at last week’s European summit, the economic situation across the Atlantic remains quite fragile. Investors remain skeptical that policymakers will be able to prevent the crisis from spreading to other members of the PIIGS – including Italy and Spain – whose economies are much larger than that of Greece. Yields on Italian and Spanish governments bonds have risen substantially in recent weeks, signaling declining faith in the credit quality of each nation’s sovereign debt.
The quarrel between President Barack Obama and congressional Republicans over the debt ceiling should continue to drive markets. Movements in the gold price will continue to be driven off the debt ceiling discussions as well as and sovereign debt developments. A busy week of economic data in the U.S. could also impact the precious metals. On Tuesday, the Cash-Shiller report on home prices will be released, followed by reports on consumer confidence and new home sales. Wednesday brings a report on the durable goods and the Fed’s Beige Book.
Thursday’s schedule includes weekly jobless claims and pending home sales, and the week concludes on Friday with second quarter GDP, the Chicago Purchasing Managers’ Index, and University of Michigan Consumer Sentiment. If the upcoming reports reveal that the economy is continuing to sputter, the gold price is likely to remain a prime beneficiary. However, if the data exceeds economists’ expectations, the price of gold could face selling pressure.