Gold's Best 3 Months

Gold is quickly catching up in erasing the damage from late spring-early summer as it completes 2 consecutive monthly rises and is the 2^nd best performing commodity so far this quarter, up 14%  (after silver's 20%).

Rising yields are generally considered a negative for gold as they render investors an implicit rate of return, which is lacked by gold. If on the other hand, yields are propped by inflationary expectations then the case for the yellow metal gold sets in. But we are farm from those days. Not only interest rates remain near 40-year lows, but there is no certainty that the Federal Reserve will not be forced to step up asset purchases 6 months from now.

Resurfacing Debt Ceiling

This week's reminder from US Treasury Secretary Lew that US government borrowing will hit its limit in mid-October should further rally gold bugs as it not only sets the stage for another round of budgetary brinkmanship but also limit the Fed from scaling down its stimulus. The US government would be left with about $50 billion in cash reserves to pay for emergency bills. These emergency funds are expected to last into November, during which the government would have no borrowing authority, but only with cash on hand for short-term obligations.  As the government is faced with a new round of spending cuts to replace this year's sequester cuts, markets will expect the Fed to be more cautious and asset purchases to be extended, but not necessarily increased.

Gold is seen targeting the top of its 10-month trend line, nearing $1480 as long as the $1360 support holds. Seasonality may also help. Over the last 10 years, September, October and November have proven to be the best three months for the metal. Anticipating the combination of debt ceiling negotiations and timid measures from the Fed to taper purchases, the rebound in gold is here to stay for now.