* Fear of U.S. default, ratings downgrade underpin gold
* Congress pursues rival budget plans, support unlikely
* Option volatility spikes, correction seen possible
* Coming up: U.S. July consumer confidence Tuesday (Recasts, adds comments, updates market activity)
By Frank Tang
NEW YORK, July 25 (Reuters) - Gold rose to record highs above $1,620 an ounce on Monday, as a stalemate in budget talks in Washington prompted investors to buy the metal as a safe haven against the looming risks of a U.S. ratings downgrade or default.
Bullion has gained nearly 8 percent in July, hitting five all-time highs in the past nine sessions, as U.S. lawmakers were locked in a standoff over dueling debt plans that offered little prospect for compromise, increasing the threat of a ratings downgrade and default that could sow chaos in global markets.
Gold option volatility spiked almost 9 percent, its biggest gain in a week, amid frantic negotiations to raise the $14.3 trillion debt ceiling ahead of an Aug. 2 deadline. A fund manager said bullion prices could pull back sharply if the deal to cut the long-term U.S. deficit is perceived as highly deflationary.
"You can see gold up another $200 to $1,800 by the end of the year just based on renewed fear of devaluation of currencies," said Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital, which oversees $13 billion in assets.
Spot gold
U.S. August gold futures
The CBOE Gold ETF Volatility Index <.GVZ>, often referred
to as the "Gold VIX" and is based on SPDR Gold Trust
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Debt deadlock drives trades: http://r.reuters.com/hyq72s
Coverage on U.S. budget talks: [ID:nUSBUDGET]
Take a Look on gold at record high [ID:nL6E7ID1SS]
Gold correlation with dollar: http://r.reuters.com/ryx52s
Inflation adjusted gold price: http://r.reuters.com/pun62s
Gold in different currencies: http://r.reuters.com/wun62s
Interactive gold timeline: http://link.reuters.com/sut72s
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Bullion is up over 7 percent in July, on track for its biggest monthly gain since April on concerns over euro zone debt levels as well as the U.S. budget talks.
DoubleLine's Sherman said that gold could pull back sharply if the final U.S. budget deal involves heavy spending cuts and tax increases, or both.
"If you get a balancing of the budget or working toward that direction, that's extremely deflationary for the U.S. economy. Under that scenario, I would think that you would not want to be holding gold," Sherman said.
US LAWMAKERS SPLIT AS DEADLINE LOOMS
A sharply divided U.S. Congress pursued rival budget plans on Monday that appeared unlikely to win broad support ahead of an Aug. 2 deadline when the $14.3 trillion limit on America's borrowing capacity is exhausted. [ID:nN1E76N0CA]
An unprecedented debt default in the world's largest economy would likely send shock waves through global markets.
Rating agency Standard & Poor's last week reiterated that there was a 50-50 chance the U.S. AAA credit rating could be cut within three months. [ID:nN1E76K0P1]
While most investors believe a deal will be done, nervousness about a ratings downgrade is pressuring the dollar, hurting long-dated U.S. Treasuries and benefiting gold.
"There are ultimately two options -- you either have monetization of debt, or you have a move towards fiscal consolidation, and a move towards fiscal sustainability. Until we get the latter, the market will assume the former. That is just a great bid for the gold market," said Natixis analyst Nic Brown.
Also underpinning gold is Moody's decision to cut Greece's credit rating further into junk territory. Moody's said it was almost certain to slap a default tag on Greek debt as a result of a new EU rescue package. [ID:nL3E7IP0P2]
Among other precious metals, silver
LAST/ NET PCT YTD
CLOSE CHG CHG CHG
US gold