By Maria Kolesnikova and Glenys Sim - Jul 26, 2011 7:05 AM ETTue Jul 26 11:05:43 GMT 2011

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July 26 (Bloomberg) -- John Brynjolfsson, chief investment officer at Armored Wolf LLC, talks about the outlook for financial markets after a political stalemate over raising the U.S. federal debt ceiling intensified. Brynjolfsson speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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July 25 (Bloomberg) -- Thomas Winmill, president of Winmill & Co. and portfolio manager of the Midas Fund, talks about the outlook for gold, silver and platinum prices. He speaks with Carol Massar and Matt Miller on Bloomberg Televison's "Street Smart." (Source: Bloomberg)

Gold may decline in London as some investors sell the metal after its rally to a record yesterday and amid concern prices might fall if U.S. lawmakers agree to raise the nation’s debt ceiling.

Gold’s 14-day relative strength index, a gauge of whether a commodity is overbought, yesterday rose to 69.5 and prices reached $1,624.07 an ounce as lawmakers remained deadlocked on how to tackle the U.S. debt crisis and avert a default before an Aug. 2 deadline. Some analysts who study charts view a reading above 70 as a signal that prices may be set to drop.

“The metal is currently trading close to the overbought region,” UBS AG analyst Edel Tully said in an e-mailed report today. “We expect a correction in the near term.”

Immediate-delivery bullion fell $2.75, or 0.2 percent, to $1,611.40 an ounce by 11:47 a.m. in London. Gold for December delivery was little changed at $1,614 on the Comex in New York.

President Barack Obama said the burgeoning U.S. debt levels threatened to do “serious” damage to the economy and blamed the stalemate on a group of Republicans in the House who insist on budget cuts and no tax increases. House Speaker John Boehnersaid the president had created a “crisis atmosphere”surrounding the debt issue.

Default Concern

“The market is clearly very worried about the small, but undeniable, risk of a U.S. default” and the growing threat of a reduced sovereign credit rating, UBS’s Tully said. “Considering the scale of speculative positions on Comex, the danger of a large pullback stemming from a positive surprise in the U.S. debt ceiling negotiations challenges investor conviction to hold gold.”

Hedge-fund managers and other large speculators increased their net-long position in New York gold futures to the highest level since Dec. 20 in the week ended July 19, according to U.S. Commodity Futures Trading Commission data. Net-long positions, or bets prices will rise, rose 11 percent, from a week earlier.

Gold declined to $1,610 an ounce in the morning “fixing,”used by some mining companies to sell output, from $1,613.50 at yesterday’s afternoon fixing.

“When the issues get resolved the gold price could tumble, so short term I’m bearish,” Tom Winmill, who manages the Midas Fund in New York, said on Bloomberg Television’s “Street Smart” before Obama’s address. “It could go down $100. That’s the fear premium that’s built up.”

Aid for Greece

Concern a fiscal crisis in Europe that started in Greece is spreading to Italy and Spain helped drive a 7.8 percent rally in spot gold in the past month. Euro-area leaders last week announced 159 billion euros ($229 billion) of new aid for Greece in an effort to prevent a sovereign debt default.

“U.S. Congress will agree to raise the debt ceiling in advance of the Aug. 2 deadline, while the latest coordinated bailout package from the European authorities is expected to stave off the possibility of a default in the region by a large European sovereign for the time being,” Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. wrote in a report today. “As such, the upside risks to the gold price are expected to dissipate.”

Gold is set for an 11th year of gains as demand increases amid limited mine supply. More than 200,000 South African gold miners will join coal and diamond mine workers in a strike this week after failing to reach agreement with producers over pay, the country’s National Union of Mineworkers said. Gold miners want a 14 percent pay increase, the union said yesterday.

South Africa accounts for about 10 percent of global gold output, according to Westmore.

Cash silver rose 0.2 percent to $40.42 an ounce. Spot platinum fell 0.3 percent to $1,783.70 an ounce and palladium gained 0.2 percent to $810 an ounce.