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Gold falls away from 1-year high after new debt limit plan emerges

  • Fed postponing policy normalization is a plus for gold.
  • Debt ceiling standoff sets off alarm bells.
Gold bullion bars and coins.
Getty Images
Gold bullion bars and coins.

Gold hit sessions lows on Wednesday after top Democratic leaders said President Trump was on board with their idea of tying Hurricane Harvey aid to a short-term increase in the debt limit and government funding.

Spot gold was down 0.39 at $1,333.20 an ounce. U.S. gold futures for December delivery settled lower at $1,339 an ounce.

Prices had slipped earlier in the session after House minority leader Nancy Pelosi and Senate minority Chuck Schumer said they are prepared to vote in favor of a three-month debt limit increase and government spending. The plan would also include Hurricane Harvey aid.

However, House Speaker Paul Ryan, a Republican, said the Democrats' proposal is "ridiculous" and "unworkable." The three major indexes pared their gains after Ryan's comments. If a deal is not reached, it could lead to a government shutdown, which would be catastrophic, Standard & Poor's said last week.

Investors have been fretting about the possibility of a government shutdown if the debt limit wasn't raised.

Earlier gold prices hovered around a one-year high touched Tuesday at $1,344.21 an ounce, amidst lingering tension from North Korea's nuclear test on Sunday.

"Rising geopolitical tensions, the hurricane hitting the U.S. and the looming debt ceiling are increasing demand for safe assets," said Danske Bank analyst Jens Pederson.

"These extraordinary factors are also weakening the dollar from the point of view that the Fed may further postpone normalisation of monetary policy, which would be good news as it would keep a lid on U.S. yields."

Both U.S. government bonds and gold are seen as risk-free by investors. Low U.S. Treasury bond yields mean there is little opportunity cost in holding gold, which earns nothing and costs money to insure and store.

Analysts say low U.S. yields mean investors are unlikely to buy Treasuries, which would also weigh on the dollar.

A lower U.S. currency makes dollar-denominated gold cheaper for holders of other currencies, which could boost demand.

A potential standoff over the U.S. federal debt ceiling has raised alarm bells among investors who fear a repeat of 2011 when a prolonged showdown over increasing the borrowing limit and subsequent downgrade of U.S. credit quality led to slump in the S&P 500 stock index.

Investor unease was reinforced after a North Korean diplomat warned his country is ready to send "more gift packages" to the United States as world powers struggled for a response to
Pyongyang's latest nuclear weapons test.

"The concern now is that another launch could take place on September 9th, which is the (North Korea's) Independence Day," said INTL FCStine analyst Edward Meir.

"Gold is likely to move higher over the course of September, sustained by a weaker dollar and North Korean tensions...Any further wobbles in US equities could provide further support and
perhaps nudge it towards our $1390 price target."

On technicals, resistance is at $1,352, near the high from last September, followed by $1,376, the upper Bollinger band on the monthly charts. But the momentum indicator near zero suggests gold may be in for a period of consolidation.

Elsewhere silver slipped 0.23 percent to $17.849, platinum was down 0.63 percent to $999.65 and palladium declined 1.83 percent to $941.50 an ounce.