Gold surges to a new record high in amid fresh concerns over debt-ridden countries. Comex gold futures rise to as high as 1254.5 as Fitch Ratings' warned that the UK's deficit challenge is 'formidable'. The pound slides and European equities lose grounds. Crude oil prices also reverse earlier gains.
While maintaining Britain's AAA rating with 'stable' outlook, Fitch said 'the scale of the UK's fiscal challenge is formidable and warrants a strong medium-term consolidation strategy, including a faster pace of deficit reduction than set out in the April 2010 budget'. The agency said while the UK's AAA rating is supported by its 'strong policy institutions, advanced, diversified and flexible economy, exceptional financing flexibility and historical track record of fiscal consolidation', the government needs to adopt 'a strong and credible medium-term adjustment plan' to store market confidence in fiscal sustainability. In fact, UK has fastest rise in public debt ratios since 2008 among the 'AAA' rated economies. Treasury estimated government debt-interest costs will reach 70B pound in 5 years, compared with 31B pound in the last fiscal year.
While the market has been worrying about deficit problems in peripheral European economies, Fitch's report indicates advanced economies are no better. Indeed, the US government expects the Federal debt to rise to 90% of GDP by 2020, with interest payments quadrupling to over US$900B annually.
Elevated sovereign crisis in the Eurozone has triggered demand for safe-haven assets including USD, JPY and gold while the euro and other growth sensitive assets got dumped. We expect capitals that have been flowing into USD and JPY will turn to gold as deficit problems in advanced economies become more obvious. Paul Walker, CEO of GFMS, said the yellow metal may rise to 1300/oz for the rest of this year and may soar to as much as 2000 if the debt crisis spreads from the Eurozone to other countries including the UK and the US. Gold price has actually surged to record highs in EUR-terms and CHF-terms last week (gold in GBP-terms closed at record high yesterday) as deficit risks heightened in the region.
Crude oil pares earlier gains as stocks decline. European stocks edged higher as market opened but reversed ground and are currently losing around -1%. The US Energy Department will release its monthly Short-term Energy Outlook later today. Oil prices may dip further if the Department revised down global oil demand outlook as dragged down by Eurozone's problem. Moreover, the industry-sponsored API will report its estimates on oil inventory after market close.