Gold market: Even US debt accord won't slow rally for long

Gold's record-setting rally could slow down if Congress raises the U.S. debt ceiling, as expected.

But any selling on that news would likely be temporary, as there are plenty of other concerns to support gold at this level, as well as an increase in speculative buyers.

Gold on the Comex jumped above $1,600 an ounce for the first time Monday, a psychologically important level that may also provide motivation for those looking to sell gold jewelry and coins.

"I'm just a cautious bull. When we get a break through on the debt ceiling issue, I would expect a pullback," said Jim Steel, chief commodities analyst at HSBC.

"I'm not saying the rally is going to end. We're really very fixed on the debt negotiations, the debt ceiling talks, events in Greece, inflation in China, food prices. There are a lot of things that argue for the market to go higher, and I think it will go higher, but you also have to mention that it is a market and it has a lot of things balancing it," he said.

His target for the gold market this year is an average $1,525, and he thinks the current price has a ways to go—towards $1,650 or even higher.

New worries about contagion in Europe have kept the sovereign debt problems at the forefront for investors, as they also watch the political jockeying in Washington toward a resolution on the debt ceiling ahead of the Aug. 2 deadline.

Stocks tanked Monday on worries about Europe and its banks, and the negative sentiment spilled over to U.S. financial shares. Investors also sold oil,copper, and agricultural commodities, but they bought Treasurys and the precious metals—gold and silver.

Gold is also at record levels in euros and sterling.

Barclays analyst Suki Cooper said one key to watch is investor sentiment, and right now it's very positive.

"Speculative positions have seen their largest weekly increase since September, 2009," said Cooper.

The Commodities Futures Trading Commission reported that large funds, including hedge funds, in the week ending Tuesday increased their net long positions by 25 percent.

"The macro environment certainly looks like it's going to be supportive of prices in the near term," she said, also noting there could be a pull back if the debt ceiling limit is raised.

Markets have become more anxious about the idea that the U.S. could default should Congress not end its bickering over budget cuts and taxes, clearing the way for a vote to lift the debt ceiling. Rating agencies have warned they would downgrade the U.S. triple-A rating, if the ceiling is not raised.

Gold's very move above $1,600 could help restrain the rally because it could affect demand.

"What we would be concerned about at that level is how would the jewelry market react, particularly abroad," Steel said. "What we're seeing now is a slowing of physical demand based on price, in China and India, in emerging markets in general, and we're also seeing some increase in scrap metal that's been refined and put back in the system."

Cooper agrees that sales of jewelry and coins by households and others could start to impact prices. She had expected a surge of selling at $1,500, but that did not materialize so now she is watching the psychological $1,600 level.

"I think it's going to be the scrap supply that really sets the tone," she said.