NEW YORK (AP) -- Gold will probably surge, along with the dollar, should U.S. lawmakers fail to reach a deal on reducing the U.S. budget deficit, an analyst has forecast.
Typically, gold and the dollar move in opposite directions. When the dollar falls in value, holders of gold demand more of the currency in exchange for the precious metal. However, that relationship breaks down in times of extreme crisis, says Nicholas Brooks, head of research and investment strategy at ETF Securities in London.
As politicians in Washington haggled over the debt ceiling last summer, investors bought both Treasury securities, pushing up the value of the dollar, and gold. That surge in demand pushed gold prices higher, with the metal climbing to a record close $1,900 an ounce, after Standard & Poor's cut its rating on the U.S. government's debt in August.
"We could see a similar pattern now if people lose faith in the U.S. to responsibly deal with its fiscal balances," said Brooks, speaking at a conference in New York Thursday.
The White House and Congress are currently locked in talks to avoid pushing the U.S. over the "fiscal cliff." The sharp cuts in government spending and tax increases that are scheduled to be implemented in Jan. 1 should no budget agreement be reached, could, economists say, push the U.S. back into recession.
Gold edged up $10.70 Thursday to settle at $1,727.20 an ounce. The metal has gained 10 percent this year, and climbed as high as $1,792 Oct. 4.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.