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Gold Rises for a Ninth Day as Dollar Index Falls; Oil Advances

By Jeff Sutherland & Nikolaj Gammeltoft - 2011-07-15T21:40:28Z

Gold climbed for a ninth straight day amid concern the U.S. is getting closer to losing its top credit rating. Oil rallied, extending a third consecutive weekly advance, and the Standard & Poor’s 500 Index rose amid gains in energy and technology shares.

Gold futures added 0.3 percent to $1,593.80 an ounce at 4 p.m. in New York and have risen 7.5 percent since July 1. The Dollar Index slumped 0.2 percent as eight banks failed European Union stress tests. Crude jumped 1.6 percent to $97.24 a barrel. The S&P 500 added 0.6 percent, leaving it with a 2.1 percent drop for the week.

U.S. House Republicans plan a vote next week on a measure to cut spending, cap expenditures and condition a $2.4 trillion increase in the debt ceiling on passage of a constitutional amendment to balance the budget. While the plan may pass in the Republican-led House, it won’t in the Democratic-controlled Senate, said Representative Steny Hoyer of Maryland, the House’s No. 2 Democrat. The vote offers no immediate resolution to talks aimed at reaching a deal by an Aug. 2 deadline.

“We got a lot of politicking going on in Washington, and investors are hoping they get the debt issue resolved,” Dan McMahon, director of equity trading at Raymond James Financial Inc. in New York, said in a telephone interview. “They need to figure it out soon because as we get closer to the deadline, the uncertainty will turn into pessimism and that will unhinge these markets.”

Adding urgency to the debt-ceiling dispute, S&P’s Ratings Services announced yesterday it may lower the U.S. top-level credit rating, saying there is an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling. Moody’s Investors Service placed the nation’s credit rating under review for a downgrade on July 13.

’Big, Big Problem’

U.S. lawmakers “don’t get” the long-term implications of deficit reduction, Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said on Bloomberg Television’s “Surveillance Midday” during an interview with Tom Keene. “The U.S. basically has a $60 trillion net present value liability burden, and that constitutes Medicare, Medicaid and Social Security in combination,” Gross said. “It certainly exceeds those liabilities in Greece or Portugal or Spain. Ultimately the U.S. has a big, big problem.”

The S&P 500 rallied 93 percent from its low in March 2009 through yesterday as the Federal Reserve used large-scale asset purchases to buoy the economy and companies posted earnings that beat analysts’ estimates. Stocks pared gains today after the Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 63.8 in July from 71.5 the prior month. The gauge was projected to rise to 72.2, according to the median forecast of economists surveyed by Bloomberg News.

Gold Gains

Gold increased 0.3 percent for its ninth straight advance, the longest rally since November 2009, as the debt woes in the U.S. and Europe boosted the appeal of the precious metal as a haven. The metal gained 3.4 percent this week.

Yields on benchmark 10-year Treasury notes fell for a second consecutive week as investors sought a refuge in U.S. government debt. The yield dropped 5 basis points to 2.91 percent. It touched 2.81 percent on July 12, the lowest since Dec. 1.

Crude oil advanced as much as 2.1 percent, settling at $97.24 a barrel, up 1.6 percent. For the week, prices gained 1.1 percent and have climbed 27 percent in the past year.

The euro gained 0.1 percent against the dollar, to $1.4151. It recorded its second weekly decline, for a total two-week drop of 2.6 percent, after regulators said the eight banks that failed EU stress tests had a combined capital shortfall of 2.5 billion euros ($3.5 billion).

Insufficient Reserves

The European banks were found to have insufficient reserves to maintain a core tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said. As many as 16 more lenders will need to bolster capital after scraping through, the European Banking Authority said. All banks examined in Italy, Germany, France, the U.K. and Ireland passed. Five banks in Spain and two from Greece failed the tests, while the eighth was in Austria.

The results of the stress test came out after the markets closed in Europe. Earlier, the Stoxx Europe 600 Index lost 0.3 percent, after declining as much as 0.8 percent earlier. The index dropped 2.5 percent for the week, the most since March.

The yield on the Spanish 10-year bond rose 21 basis points, while the Italian 10-year bond yield advanced 13 basis points. The Greek two-year yield surged as much as 279 basis points, or 2.79 percentage points, and last traded 185 basis points higher.

Corporate Earnings

Corporate earnings in the U.S. continued to top analyst estimates. Google Inc. (GOOG), owner of the Internet’s most popular search engine, rallied 13 percent after saying quarterly sales were $6.92 billion, 5.3 percent above analyst estimates. Citigroup Inc. (C), the third biggest U.S. bank, lost 1.6 percent even as profit rose 25 percent, beating forecasts.

Of the 13 S&P 500 companies that have posted results so far this earnings season, 11 have beaten forecasts for per-share profit.

“Corporate earnings look good so far,” Purchase, New York-based Kevin Shacknofsky, who helps manage about $7 billion for Alpine Mutual Funds, said in a telephone interview. “The European stress test looks like a non-event.”

Energy stocks were the biggest risers among 10 groups in the S&P Index, gaining 2.3 percent. BHP Billiton Ltd. (BHP), the world’s largest mining company, agreed to buy Houston-based Petrohawk Energy Corp. (HK) for about $12.1 billion in cash. Petrohawk shares surged 62 percent.

Clorox Co. (CLX) rose 8.9 percent as billionaire investor Carl Icahn offered to buy the bleach maker for about $10.2 billion in a move designed to flush out other potential bidders.

To contact the reporters on this story: Jeff Sutherland in New York at jsutherlan13@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

Enlarge image

Dollar Falls as S&P Warns of U.S. Rating Downgrade

Seokyong Lee/Bloomberg

U.S. dollar banknotes in various denominations.

U.S. dollar banknotes in various denominations. Photographer: Seokyong Lee/Bloomberg

Janney Montgomery's Luschini on U.S. Markets, Fed, July 15