CAUGHT SHORT: Gold price spikes $40 higher in huge volumes

The gold price jumped more than 3% on Thursday, scaling the $1,300 an ounce level following a US debt deal that is likely to delay any reduction in economic stimulus by the Federal Reserve.

In early afternoon trade on the Comex market in New York December gold futures changed hands at $1,321.50 up $39 from yesterday's close and near its highs for the day of $1,323.80.

By 1pm EST the number of December gold contracts traded had exceeded 180,000, already 10% more than average daily volumes on the exchange.

The "compacted nature" of gold's rise was an indication of technical short covering according to CME, the operator of the Comex market.

Gold's status as a safe haven appeared to be tarnished during the protracted Washington standoff over the government shutdown and raising the debt ceiling with the metal hardly moving throughout the two-week saga.

But the deal reached between Democrats and Republicans is essentially just delaying any concrete steps to tackle the US deficit and debt problems and sets up a showdown again early next year.

US politicians agreed on a plan signed by President Obama to fund the federal government through January 15 and lift the debt ceiling for government borrowing to continue till February 7.

As a consequence any tapering of the Fed's stimulus program which pumps $85 billion of easy money a month into financial markets is likely to be postponed beyond this new timeframe.

The bank’s quantitative easing program, which has flooded markets with more than $3.7 trillion, weakens the dollar, increases the risk of inflation and in turn boost the value of gold.

"The U.S. debt deal is seen (as) positive for gold by market participants, for good reason, since the whole mess is just being postponed by 3-4 months, which makes a reduction of Fed asset purchases rather unlikely for the time being," Commerzbank analyst Carsten Fritsch told Reuters.

CME in its early morning report argues "the question for the gold trade is whether or not gold can feed consistently higher off ideas of no tapering [of the Fed's QE program] and somewhat anemic growth and the answer to that question might be largely dictated by the action in the Dollar under that type of scenario."

Another underlying factor that is positive for gold is the appointment of Janet Yellen to take over from current Fed chairman Ben Bernanke in January.

Yellen is considered one of the strongest supporters of the Fed's economic stimulus and a prime architect of the QE program.

From a standing start in December 2008, the Fed's balance sheet is set to top $4 trillion by the end of the year.

The gold price has increased close to 60% since QE1 when the ruling price was $837 an ounce.

Image of open outcry commodities trading at the Chicago Board of Trade in 1988 by Greg Wass