Gold is one of the hottest investment these days, soaring on an inability in the U.S. to even address gaping deficits much less do something about them as well as on inflationary concerns worldwide. But clouds could lurk on the horizon, analysts say.
Republicans and Democrats in the U.S. could end an impasse on lifting the government's $14.3 trillion debt ceiling that would surprise markets, thus avoiding default but also cutting deficits more than expected in the process.
Plus, a Republican victory in the 2012 elections could spark a dollar rally on expectations of an end to stimulus and monetary policies, which weaken the dollar and make gold an attractive hedge.
|(Associated Press photo)
"The spending policies of the Obama administration and the Democratic-controlled Congress have, by creating much more money and debt, been very good for gold," Brien Lundin, editor of Gold Newsletter, tells MarketWatch.
"Thus, Republican control of the White House and/or the Senate would have to be construed as bearish for the yellow metal."
Less likely but still possible, Chinese mines could also increase production and supply, which would drive down prices, says Philip Romero, a finance professor at the University of Oregon and former chief economist of California.
Monday, gold rose to a record above $1,600 an ounce as debt concerns in Europe and the U.S. boosted demand for the metal as a protection of wealth. Bullion in euros and pounds rose to all-time highs and silver topped $40 an ounce.
Meanwhile, U.S. lawmakers have until Aug. 2 to lift the debt ceiling and avoid a default, yet some say U.S. economic problems won't disappear with a resolution to the debt ceiling.
"In 2008, after Lehman Brothers' failure, people rushed to Treasurys because they knew the U.S. wouldn't default. But with the talks dragging on, people are thinking 'maybe those are not so secure.' Even if they do lift the ceiling, that's just going to bring more inflation, which is bullish for gold," says Kevin Grady, gold trader on Comex floor with MF Global, according to Forbes.
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