Price of gold rebounded back to $1,629

The gold price declined Monday morning as a deal was finally struck between President Obama and House Republicans to raise the debt ceiling. When the news broke last yesterday, gold prices spiked as low as $1,607 per ounce. Stocks and cyclical commodities, such as oil, rallied on the announcement of a deal. Investors and traders who purchased gold as an insurance policy against a debt default liquidated positions. However, the price of gold rebounded back to $1,629 Tuesday morning on lingering worries over the possibility of a credit rating downgrade. Whether the debt ceiling agreement went far enough to address the long-term fiscal issues facing the United States was being hotly debated Monday morning.

In a recent interview with King World News, long-time gold bull John Hathaway discussed his outlook for the gold price in light of the United States debt ceiling impasse. When questioned about the status of the U.S. dollar, Hathaway – who runs the Tocqueville Gold Fund – responded that “At the end of the day where are people going to go? Everybody’s invested in the euro and the dollar so the obvious alternative to all of this is gold. The problems that the US faces from a fiscal point of view didn’t just happen, it’s just that the debt ceiling is bringing it into focus.”

Hathaway noted that “Let’s also remember from a macro-economic point of view that all of these things which are creating pressure on government spending are very deflationary for the economy. A big source of job growth over the last twenty years and certainly in the last ten years has been government related jobs…So if you take that away and actually have some shrinkage in government jobs, that kind of leaves us in a state of perpetual high unemployment. That certainly from a political point of view will create all kinds of anxieties and civil disagreement (civil unrest).”

If the risks of deflation intensify, as Hathaway suggested, the Federal Reserve is likely to respond with additional accommodative monetary policies. Chairman Bernanke has made it very clear that the Fed’s main enemy is deflation, and has made assurances that the Fed will do everything in its power to try to prevent deflation from damaging the U.S. economy. The first two rounds of quantitative easing helped drive the gold price to new record highs, and QE3 speculation has escalated with the recent trend of weak economic data – highlighted most recently by Friday’s disappointing GDP report.