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Gold Prices Take Debt Deal in Stride

NEW YORK (TheStreet ) -- Gold prices were selling off slightly as a bipartisan deal to raise the debt ceiling heads to Congress for a vote later today.
Gold for December delivery was losing $11.40 to $1,619.8 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,623.40 and as low as $1,608.20 while the spot gold price was shedding $10.20, according to Kitco's gold index.
Silver prices were losing 78 cents to $39.34 an ounce. TheU.S. dollar index was flat at $73.72while the euro was also flat vs. the dollar.
Gold's 0.6% correction from its record settle Friday of $1,631.20 an ounce indicates that investors are skeptical Washington's weekend debt deal can avoid a credit rating downgrade and does anything to really strengthen the fiscal health of the U.S.
Jeff Clark, Casey's senior precious metals analyst, predicted Friday that gold could see a 5% correction if a debt plan is reached in Washington, which would bring prices down to $1,550 an ounce based on Friday's closing price. Gold is nowhere near that level as the debt ceiling plan might face some hurdles in the House and falls short of $4 trillion in cuts, the amount Standard & Poor's recommended as a good start to attack the U.S.' debt problems.
"Despite the pullback in gold this morning there still remains some pessimism that the deal could fall at the last hurdle," argues James Moore, research analyst at "Given the scale of gains posted in recent weeks the yellow metal is vulnerable to a deeper correction should the deal be given full approval."
Other investment houses disagree. JPMorgan Chase wrote in a recent note that it raised its gold price forecast to $1,800 an ounce for the fourth quarter due to seasonality, that is strong physical buying from India in the fall, and rising debt levels.
"Some people may argue that $1,600 an ounce is the top of the bubble," wrote analyst John Bridges in the report. "But we suggest that unless governments control their debt levels, investors' fear of paper currencies will drive gold higher." The current debt ceiling plan does nothing to cut the deficit but just cuts spending enough to justify paying its current bills.
The same sentiment was echoed by Dundee Capital Markets, which wrote that a weaker dollar and lack of trust in paper currencies would "generate sustained demand for bullion." Dundee has raised its 2012 price target to $1,750 from $1,573 an ounce
One variable for gold prices is slowing global growth. China's July Purchasing Managers' Index fell to 50.7, around 28 month lows, which puts China between a rock and a hard place -- managing slowing growth coupled with rising inflation, at 6.4% in June. The central bank is expected to raise interest rates at least one more time this year to fight high prices but its monetary tightening policies are starting to have a negative ripple effect.
China is now competing with India to become the biggest gold consumer in the world. The World Gold Council estimates that the country's gold demand is growing on an average of 14% per year since 2001 and that demand could double in the next 10 years. The country consumed 245.5 tons of gold in the first quarter of 2011, according to data compiled by the World Gold Council.
A big slowdown in China could reverberate throughout the gold market as well. The U.S. is also in peril with first quarter growth revised down to 0.4%, flirting dangerously with recession territory. Slowing growth will only be made worse by spending cuts. "Austerity measures in the U.S. are likely to lead to further unemployment and may result in deflation (which would be negative for gold)," admits Dundee Capital Markets.