How will gold respond if debt deadline is breached?

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How will gold respond if debt deadline is breached?
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With the deadline for extending the U.S. debt ceiling less than 24 hours away and no deal in sight, what would a failure to raise the Treasury Department's $16.7 trillion borrowing limit mean for gold (CEC:Commodities Exchange Centre: @GC.2) prices?

While prices would spike higher in the short-term if the deadline on October 17 is breached, analysts don't expect a prolonged rally in the safe-haven metal.

"I don't think you will get a major rally in gold prices, perhaps $20-$30. The market is of the opinion that the Treasury isn't going to run out of money until November 1, so October 17 is the soft deadline," said Victor Thianpiriya, commodities analyst at ANZ .

(Read more: The gold market's big question: Deal or no deal? )

While the Treasury would lose its ability to borrow after October 17, it would still have cash on hand to pay its bills until November 1.

"Once we get to that point [November 1], if it still looks like the Treasury is going to default on obligations, then I wouldn't be surprised if gold got a safe-haven bid," said Thianpiriya, assigning a low probability to such a scenario.

Gold prices held steady on Wednesday, hovering around a three-month low of $1,280 an ounce. The precious metal has performed poorly despite growing risks in the world's largest economy, falling around 3.5 percent since the U.S. government shutdown began on October 1.

(Read more: Own steel stocks, not gold: Gartman )

Exchange traded fund (ETF) selling has resumed in the recent weeks, with holdings in SPDR Gold Trust, the world's largest gold-backed ETF, falling another 1.8 tonnes on Monday to 4-1/2 year lows. A broad stabilization in the global economy, combined with a lack of inflationary pressures, has reduced demand for assets like gold.

Daniel Morgan, global commodities analyst at UBS (Swiss Exchange: UBSN-CH) says upside in the yellow metal would be short-lived, noting a resolution is likely to emerge in a timely manner if the October 17 deadline is breached.

"If the deadline is crossed, it could send gold prices higher, but that would be combined with other financial market moves that would exert a lot of pressure on policymakers to find a solution," Morgan said. "I wouldn't be looking to buy gold on the basis of this short-term debt ceiling issue," he added.

(Read more: After sudden plunge, gold traders cry conspiracy )

Once the debt ceiling crisis is resolved, market attention will return to the timeline for a tapering of the Federal Reserve's monetary stimulus, which will exert fresh downward pressure on the metal, Morgan said.

Under a scenario that the debt cap is not lifted on time, Ric Spooner, chief market analyst for CMC Markets notes that the extent of safe-haven demand for gold will be influenced by statements by lawmakers.

"If we see a failure to get over the wire by tomorrow, accompanied by hard line statements, that would be more concerning," said Spooner.

- CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H



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