Ed Note: As of Sunday Night July 31st Obama announced a debt ceiling deal that raises the debt ceiling, does not raise taxes and defers most spending cuts into the future. The Deal has yet to be ratified by congress.

As the drama in Washington reaches its climax, what next for gold prices…?

PSYCHOLOGY plays a key role in investment results – particularly in the short term, writes Peter Krauth, contributing editor to Money Morning.

Recent trading patterns clearly demonstrate that most of the recent increase in Gold Prices is due to the debt-ceiling debate in Washington, as well as the European sovereign-debt crisis that continues to lurk in the background.

The bottom line: The debt-ceiling debacle could cause a short-term drop in Gold Prices.

As of late Thursday, gold was trading within 1% of the all-time high of $1,628.05 reached on Wednesday, and was poised to record its first monthly increase in three – all because of the debt-ceiling deadlock and the fear that a US government default would level the global financial markets. Spot gold has surged 7.6% in July.

If you think about it, a number of things just don’t add up. For instance:

The 30-year US Treasury bond is yielding just 4.31% – meaning the rate is virtually unchanged since the start of the year. But with Standard & Poor’s saying there’s a 50% chance it will downgrade the United States’ top-tier AAA credit rating – something once considered bulletproof – you’d expect that yield to be surging as “rational” investors dump US debt. Right?
In fact, a quick glance at yields on the one-month, one-year, two-year, five-year, 10-year, 20-year – and every maturity in between – shows that yields are down from the start of the year, meaning investors are still buying US Treasuries, despite record deficits and the debt-ceiling debacle. If there’s a risk of a downgrade and a default, shouldn’t those same “rational” investors be avoiding all new purchases, even as they dump current holdings?
During his primetime television address last week, President Obama actually told us that interest rates on credit cards and car loans would spike, and that the US economy would suffer a serious disruption if the debt ceiling were not raised.

Sorry, but I don’t buy it.

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