(Kitco News) - Gold has enough factors working in its favor at the moment that analysts say it would likely suffer no more than a temporary correction if one of the props—the U.S. debt-ceiling impasse—was resolved.

The yellow metal moved above $1,600 an ounce for the first time ever Monday, even though summer is normally a seasonally slow period for gold, and extended its nominal record high Tuesday. Gold for August delivery traded as high as $1,610.70 an ounce on the Comex division of the New York Mercantile Exchange, a record for a most-active contract.

“It seems as though the stars have lined up for the gold market,” said Mike Zarembski, senior commodities analyst with optionsXpress.

Worries about sovereign debt-contagion continue in Europe ahead of yet another summit of European finance leaders on Thursday. In the U.S., there is still political gridlock in efforts to reach a budget agreement that raises the debt ceiling and avoids a potential default early next month. There is also some conjecture about a third round of quantitative easing in the U.S. if economic conditions remain weak, although Federal Reserve Chairman Ben Bernanke commented last week that policy-makers are not ready to act at this time.

“Obviously, there has been another surge in investor demand into the metal,” said Dave Meger, director of metals trading with Vision Financial Markets. “You can tell that by looking at the ETFs.”

“I think we’ll see this move continue, or prices remain stable and slowly grind their way higher, as long as we don’t see any significant change in those fundamentals.”

Analysts with Barclays Capital reported that gold held by physically backed exchange-traded products rose by 15 metric tons Friday and then another 14.2 tons Monday, taking them to a record 2,170.90.

Debt-Ceiling Deal Could Prompt Temporary Correction

George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, said some “cautionary selling” has helped cap the upside for now, just in case there is a break-through in the U.S. debt-ceiling talks or meaningful developments in the meeting of European finance officials. As of 11:41 a.m. EDT, August gold was $1.20 higher at $1,603.60 and had oscillated on either side of unchanged for the day.

President Obama has set said a debt deal is needed by July 22 to allow time to prepare and pass legislation through Congress ahead of Aug. 2, when the Treasury has said the government will hit its borrowing limit.

Expectations are that Republicans and Democrats eventually will strike some kind of debt-ceiling agreement to avoid default, although it may not happen until the last moment due to the political posturing. If so, a correction lower is likely in gold, analysts said.

“It would be taking one of the pegs, or legs, from the fundamental support to the market,” Meger said.

Still, analysts said, any retreat likely would not reverse the longer-term bull trend. For starters, the U.S. would be avoiding a default in the near term, but the size of the deficit would remain a worry.

“Let’s say they come to some kind of compromise in their negotiations and we do raise the debt ceiling,” Meger said. “The problem has subsided, but it has not gone away.”

Further, Gero said, European debt issues persist, as well as some of the geopolitical tensions in the Middle East. “So those factors would continue to provide support.”

Zarembski suggested gold could retrace to the $1,550 area as some of the “weak longs” are forced to exit. This refers to relatively recent entries into the market who soon would find themselves in losing positions if the market reversed against them.

There certainly are plenty of recent longs, as the net long position of non-commercials (or large speculators) on Comex increased by 26% between July 5 and 12 to 236,193 lots for futures and options combined. August gold has gained nearly $100 since, having closed at $1,512.70 an ounce on July 5.

Still, Zarembski said, any pullback may well end up as a buying opportunity, as has been the tendency for some time now. “I don’t think we’ve hit the top here,” he said. There have been numerous instances in which the market corrected or moved sideways, forcing out some of the “late-comers to the party,” before prices ultimately moved onto new highs, Zarembski said.

“I think that pattern is going to continue throughout the summer and probably into the fall,” he said. Zarembski added that $1,650 to $1,700 gold by the end of the year “is not out of the question.”

Investor and newsletter writer Dennis Gartman, who favors holding gold in non-U.S. dollar terms, has already pared his long position amid the recent ebullience, anticipating a correction and leaving him the “ammunition,” or freed-up capital, to re-enter the market. He has consistently described himself as still bullish.

“Eventually there will be a massive crack in gold and silver,” he said in The Gartman Letter. “There always is and there always shall be. We have the ‘ammunition’ to act when the firing starts; that is, we’ll have the ability to buy gold when it breaks….A correction of serious consequence is coming. We are prepared for it.”

By Allen Sykora of Kitco News; asykora@kitco.com

Don’t Miss a Word! Read Kitco News on the Go with Kcast Gold Live for iPad! Get it now!

<<Back to more Kitco exclusive news