Gold has been regarded as a safe-haven harbor against inflation, deflation, currency devaluation and times of fear and anxiety when traders flee from the stock market, treasuries and other assets. The Gold market will typically have an inverse relationship to the US Dollar in which the dollar can pressure the Gold as the US experiences advances in the recovery. On the other hand, as the dollar is pressured from severe deficits and potential default leading to a possible downgrade, the scenario changes drastically. Often, we will see strong buying patterns by the central banks to increase their Gold reserves. This is no fluke. The central banks use the Gold reserves as an essential safe-haven reserve. The central banks may even be noted for putting a floor in for the Gold prices. When the global economies worsen, we see more demand for Gold.
The US leadership seems to be playing hacky sack with the US economy and the future of the US. We have no progress on the budget and cannot proceed to work on raising the debt ceiling until either the Democrats or Republicans concede to the conditions of the other side. US President Barack Obama reiterated that he will not negotiate with the Republicans. Some analysts may regard it as a bit of a wash as the quantitative easing may offset some of the detrimental effects of the shutdown. If there is a change of agenda, then perhaps the market may weaken quickly. US House Speaker John Boehner has declared that he would not allow a default, which is really the bigger issue. Now Boehner is holding even more firmly to his conditions regarding Obamacare. Obama has cancelled his trip to Asia due to the budget stalemate. The President wanted the House Speaker to allow a vote on the stopgap spending bill without any conditions attached. October 17th is the deadline where the $16.7 trillion debt ceiling will be depleted if the debt ceiling is not raised. The bills may not get paid from October 22nd through the 31st.
If the US were to succumb to default, there would potentially be higher interest rates, less foreign investors looking for US instruments and a possible regression into recession. The damage to the image of the US may universally drop the nation in the outlook of the world economies. US Treasury Secretary Jack Lew declares that he has no other means or extraordinary measures to avert a crisis. The US could sustain a downgrade by the credit rating agencies, and the US Dollar may lose its value and weaken. The credibility of the US government is at risk. The shutdown means more to the US than a healthcare law as we draw toward a potential default. This could completely erase the moves toward recovery and potentially cost this country much more in quantitative easing as the labor arena is still weak. The tapering may be delayed. About 800,000 federal employees are temporarily laid off until an agreement is reached on the government budget concerns. It may cost the US government about $300 million a day in output alone. Some traders may regard this as a buying opportunity. The bigger picture may add a bit more caution to the marketplace in that after a resolve is reached, we then address the debt ceiling. A failure to increase the debt ceiling by the deadline may lead to a credit downgrade.
In August 2011, the US government was again stuck in a similar disagreement when one of the credit rating agencies (Standard & Poor’s) downgraded the US from the AAA status. This sent the Stock market into a downturn. The US Dollar is still the premier currency that many other currencies are pegged to. The credit rating of the US dictates the borrowing power and how attractive the products are to foreign buyers, such as the Treasuries. China has even beckoned the US to please protect the Chinese investments.
Obamacare seems to be the root of these differences. The Obamacare program is thought to actually have some employers holding off on hiring full-time employees as the consequences of the plan may be costly. Part-time workers have come into vogue instead of full-time workers. The program, while a lofty idea, may have cracks where families that are in desperate need (the working poor) may not qualify and yet a fraudulent person may be able to benefit from the program. The management of the program and the honor system leaves one to ponder if scams may be devised to benefit from the health care laws. A shutdown could impact the GDP by 1.4%. If this does become resolved, the debt ceiling dispute over raising the $16.7 trillion debt ceiling is looming. The Fed will not shutdown as it is self-funded. It is likely to be resolved shortly, but should it drag on, the effects could impact the indices quite negatively. It could essentially override any recovery to date. The shutdown could delay the Treasury buying program. The National Parks and Museums may continue to be closed. The longer the shutdown, the more we risk sinking back toward a recession.
Democrats and Republicans are playing the blame game for the dispute while globally, the world economy is at risk. International Monetary Fund (IMF) President Christine Lagarde urges the US to mark this as urgent. The Affordable Care Act, or Obamacare, is at the core of the dispute. The Health Insurance program will make it so that almost every US citizen must have it or be fined next year. The funding of this new law seems to be the controversial point. There are government–run exchanges set-up in each state where each citizen may sign-up for health coverage with tax credits. October has been a troublesome month for trading the Stock indices in the past, as we remember Black Friday of October 29, 1929, Black Monday of October 19, 1987, Friday the 13th of 1989, and the Mini Crash of 1997.
While as of late, the Gold has succumbed to lower trading ranges and massive exodus from the ETF Gold funds, it may come largely into the equation should the US sustain a potential default and/or downgrade. Gold is an emotional market that gathers momentum once triggered. When the currencies may become devalued or when perhaps the global economy suffers a possible downturn, Gold may become the currency of choice. It still is and may continue to be the currency surviving the test of time.
The steps may possibly be:
- The government shutdown continues.
- The default occurs and the US cannot pay its bills. The debt ceiling is not raised by October 17th.
- The credit rating agency or agencies downgrade the US.
- The US Dollar falls dramatically.
- The Fed may initiate further quantitative easing. The tapering cannot even be in the equation at this point.
- The US attempts another recovery. Taxes increase. US government must introduce new spending cuts.
- The void opens potentially for the US Dollar to lose its premier status. Globally, many countries stand to lose investment assets.
This is the scenario that nurtures the Gold market! While a resolve is sought, we cannot help but ponder the possibilities.
Weekly Gold Chart showing the August 2011 downgrade!
Gold may maintain its trading ranges for periods of time where demand may slacken. Any world event such as conflict, economic downturns and inflation may create a sudden movement in the Gold market. We remain optimistically cautious!
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