Gold spot price jumps on US downgrade by Chinese rating firm

Fed likely to delay stimulus tapering

Gold spot price jumps on US downgrade by Chinese rating firm

iNVEZZ.com, Thursday, October 17: Gold spot price has today jumped about two percent after a Chinese rating agency cut its sovereign credit rating for the US. Speculation that the US Federal Reserve will delay tapering its commodities-friendly monetary stimulus also helped the precious metal record its biggest price gain in four weeks. Gold traded at $1,307.40 an ounce as of 11:00 BST in London after having closed at $1,282.70 in the previous session.

Credit downgrade

China’s Dagong Global Credit Rating Co, one of the four biggest credit rating companies, today cut the local and foreign currency credit ratings for the US to “A-” from “A”, maintaining a negative outlook, the company said in an e-mailed statement as quoted by Bloomberg. The downgrade came just hours after US President Barack Obama signed a last-minute deal to reopen the federal government and raise the US debt ceiling, averting an unprecedented debt default of the world’s biggest economy. The deal funds the government until January 7 and extends the US borrowing authority until February 15.

“A debt crisis evolves into a political crisis, which in turn exacerbates the debt crisis,” Dagong said. “Such political environment over debt repayment renders the dim and pale prospect of the US federal government’s solvency.”

As Bloomberg noted, China is the largest foreign holder of US Treasuries and had increased its holdings to $1.28 trillion as of July.

The news of the downgrade has prompted a rally in the gold spot price, which soared above the $1,300 mark. Bloomberg quoted David Wilson, an analyst at Citigroup Inc in London, who said:

“There was a knee-jerk reaction to the Chinese downgrading. When the ultimate worry is about the dollar, maybe you go to gold. I still think the bigger issue of tapering is still there although we say it’s off the table for the time being.”

Stimulus tapering

With the threat of a US debt default ended, the focus is now back to the outlook for potential scaling back of the Fed’s ultra-loose monetary policy that has benefited commodities including gold.

BlackRock Inc., the world’s biggest money manager in terms of assets, and Pacific Investment Management Co, today said that the Fed would postpone tapering stimulus as a result of the debt-ceiling debate. This opinion put pressure on the US dollar and provided additional support for gold.

“Because of the disruption, because of the uncertainty, what’s likely to happen is a slower pace of tapering by the Fed,” Russ Koesterich, chief investment strategist at BlackRock Inc, told Bloomberg.

The Fed’s monthly bond purchases of $85 billion designed to stimulate the economy have been a key driver for gold prices in recent years, increasing concerns about inflation and increasing demand for bullion as a haven investment. Market expectations that the Fed would slow down the pace of its bond buying programme have contributed to a fall of about 20 percent in the gold price year to date.

The gold spot price was at $1,311.50 an ounce as of 12:18 BST.

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