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(Kitco News) - The gold market is holding critical support above $1,980 an ounce but is not seeing any major bullish momentum as markets continue to digest the late-day news that Fitch Ratings has downgraded the United States of America's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'AA+' from 'AAA.'
While the nation's long-term debt outlook was downgraded, the rating agency said its Rating Watch Negative was removed and a Stable Outlook assigned; Fitch also noted that the Country Ceiling was affirmed at 'AAA.'
"The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA-rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions," Fitch said in a press release.
Heading into the Asian trading session, gold prices are seeing some modest gains after a lackluster start during the first trading day of August. December gold futures last traded at $1,986.40 an ounce, up 0.34% on the day.
Fitch also noted the U.S. government's months-long standoff that pushed the nation to the brink of a debt ceiling crisis as one of the reasons for the latest downgrade.
"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population," Fitch said.
Fitch said it sees the U.S. general government deficit rising to 6.3% of GDP in 2023, up from 3.7% in 2022. The deficit is expected to grow by 6.6% and 6.9% of GDP in 2024 and 2025, respectively.
Although the gold market is not seeing much reaction to the downgrade, many analysts have said it could take time for investors to digest the full impact of the announcement.
Adam Button, the chief currency strategist at Forexlive.com, said the last time the U.S.' credit rating was downgraded, it sparked a rally that led to then-all-time highs above $1,900 an ounce.
In a recent interview with Kitco News, John LaForge, head of real asset strategy for Wells Fargo Investment Institute, said that he expects growing debt in the U.S. to be a major bullish factor for gold that could support higher prices for at least the next three years.
Economists at Capital Economics said that Fitch's downgrade could have limited market impact as it comes at a time when the U.S. economy remains reasonably resilient.
"It's a little strange to be downgrading the US at a time when the economy now appears poised to pull off the seemingly impossible trick of bringing inflation back to target without triggering a recession. Admittedly, even though the economy is operating above potential and the unemployment rate is below 4%, the Federal deficit remains on track to be close to 6% of GDP in the current fiscal year," the analysts said in a note to clients.
The U.K.-based research firm said that the Federal Reserve's goal to bring inflation back down to its 2% target remains the biggest factor driving the U.S. economy.
"A lot depends on what happens to interest rates, however. If we're right and inflation continues to ease, the Fed will be cutting rates again by next year, bringing the Federal government's borrowing costs down. But if we're wrong and the Fed is forced to keep the nominal interest rate above the rate of nominal GDP growth for an extended period, then the debt dynamics could quickly become unsustainable," the analysts said.
