Gold surges 3% as Dagong rating agency downgrades U.S. credit rating

Gold surged back to positive territory on Thursday after the Chinese rating agency Dagong cut its U.S. credit rating from A to A- and maintained a negative outlook. The metal traded lower throughout the day on waning safe haven demand after U.S. lawmakers reached an agreement to reopen the partially shut federal government and extend the nations borrowing authority.

On the Comex division of the New York Mercantile Exchange, gold futures for December settlement rose by 1.67% to $1 303.70 per troy ounce at 8:58 GMT. Prices jumped by more than 3% to a session high of $1 320.40 an ounce, the strongest level since October 9, while days low stood at $1 273.80 an ounce. The precious metal rose by 0.5% on Wednesday and extended its weekly advance to 2.5% on Thursday.

Gold was shot up above the $1 300 mark on Thursday after the dollar slumped as the Chinese rating agency Dagong downgraded its U.S. credit rating to A- from A and maintained its negative outlook. Despite the agency hardly being followed outside of China, the downgrade triggered an instant fall in the U.S. dollar as other credit agencies also pointed out recently that the U.S. creditworthiness is not as good as it once was. Fitch Ratings warned earlier in the week that the U.S. AAA sovereign rating could be lowered and put it on negative watch. In August 2011, Standard & Poors lowered its U.S. rating to AA+ after prolonged debt limit discussions, such as the recently ended, almost shut the government.

The U.S. dollar index, which measures the greenbacks performance against six major counterparts, fell by 0.75% to 79.97 at 8:59 GMT. Prices fell to a session low of 79.96 minutes after the downgrade, the lowest since October 17, while days high stood at 80.65. The December contract was almost unchanged on Wednesday and extended its weekly decline to over 0.6% on Thursday.

The precious metal lost positions prior to the Dagong downgrade on dissipating safe haven demand after U.S. lawmakers reached an accord to raise the nation’s debt ceiling and end a 16-day government shutdown. The agreement was however just a temporary measure and was seen as kicking the can down the road. The bill provided government funding until January 15 and extended the nation’s borrowing authority through February 7. The Democrat-controlled Senate passed the measure with 81 votes in favor against 18, followed by a 285-144 vote in the Republican-controlled House of Representatives three hours later. There was no resolution to lawmakers’ long-term divides on fiscal policy and no major policy changes sought earlier by Republicans were achieved.

Victor Thianpiriya, an analyst at Australia & New Zealand Banking Group Ltd., said for Bloomberg: “The market’s going to tread cautiously because all the U.S. government’s done is kick the can down the road. ETF redemptions are continuing, so there are more reasons to sell,” he referred to the outflows from exchange-traded funds backed by bullion.

Assets in the SPDR Gold Trust, the biggest bullion-backed ETP, fell to 885.53 tons on October 16 after remaining unchanged for two days at 889.13 tons, data on the web site showed. This was the lowest level since February 2009.

Despite the debt deal however, market analysts expect that the Federal Reserve will refrain from trimming its monetary easing program this year as the protracted government shutdown is expected to have hurt economic growth in the fourth quarter due to extensive lost output. The Federal Open Market Committee will meet again on October 29-30 when policy makers will reassess the U.S. economic recovery and their stance. Laurence D. Fink, BlackRock Inc. Chief Executive Officer, said for CNBC that the Federal Reserve may not scale back its quantitative easing program before June next year.