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We’re Close To Hitting Debt Ceiling But Gold Doesn’t Care

By Sunshine Profits (Arkadiusz Sieron)CommoditiesSep 30, 2021 12:29PM ET
www.investing.com/analysis/were-close-to-hitting-debt-ceiling-but-gold-doesnt-care-200603619
We’re Close To Hitting Debt Ceiling But Gold Doesn’t Care
By Sunshine Profits (Arkadiusz Sieron)   |  Sep 30, 2021 12:29PM ET
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Another fiscal year, another governmental fight to raise the debt limit. A failure spells a crisis, but gold turns a blind eye and continues its fall.

So, America has a new tradition! The government shutdown is coming. A new fiscal year starts tomorrow, and if Congress fails to agree on a budget by the end of today, the government will shut down.

What does it mean for the U.S. economy?

According to Treasury Secretary Janet Yellen, the failure to lift the debt ceiling could be a catastrophe:

If the debt ceiling is not raised, there would be a financial crisis, a calamity. It would undermine confidence in the dollar as a reserve currency (…) It would be a wound of enormous proportions (…) It is imperative that Congress swiftly addresses the debt limit. If it does not, America would default for the first time in history. The full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession.

She also clarified in a separate letter sent to Congress that the Treasury could run out of money by Oct. 18, 2021:

We now estimate that Treasury is likely to exhaust its extraordinary measures if Congress has not acted to raise or suspend the debt limit by Oct. 18. At that point, we expect Treasury would be left with very limited resources that would be depleted quickly. It is uncertain whether we could continue to meet all the nation’s commitments after that date.

Her rhetoric was rather gloomy. As a result, the risk aversion softened, while stock prices dropped. So, gold prices had to increase, right? Well, not exactly. As the chart below shows, the price of the yellow metal continued its downward trend that accelerated in September, partially caused by more hawkish expectations for the tapering timeline and future path of the federal funds rate.

Gold Prices in 2021.
Gold Prices in 2021.

So, what is happening in the gold market?

I would point out three crucial factors right now. First, the U.S. dollar has appreciated recently. Yes, despite worries about the debt ceiling, the greenback has strengthened. It shows that there is simply no alternative. Another issue is that people have seen this movie before, and they know how it ends. At some point, Congress will pass a new debt limit and return to its spending spree.

Second, the bond yields have increased. For example, the nominal yields on 10-year Treasuries jumped from about 1.3% last week to almost 1.5% on Monday (September 27, 2021), as the chart below shows. The recent dot-plot revealed that the FOMC members want to raise the federal funds rate earlier than previously thought, which has been transmitted into the yield curve, creating downward pressure on gold. Higher interest rates imply higher opportunity costs of holding bullion.

10-Year Treasury Yields.
10-Year Treasury Yields.

Third, the market sentiment still seems to be negative toward gold. It’s partially justified by the macroeconomic environment ⁠— namely, the rapid recovery from the pandemic recession. As the global economy is improving, the central banks are about to tighten their monetary policy.

Implications For Gold

What does it all imply for the gold market?

Well, the environment of a strengthening dollar and rising bond yields is negative for the yellow metal. Higher interests make bonds more attractive relative to gold. The worries about the debt ceiling will likely be short-lived and won’t provide gold with a needed lifeline. The current downward trend in gold shows that the market simply doesn’t care about the government shutdown. The only hope is an inflationary crisis, but (so far) worries about inflation have been entailing higher interest rates rather than strong demand for gold as an inflation hedge.

We’re Close To Hitting Debt Ceiling But Gold Doesn’t Care
 

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We’re Close To Hitting Debt Ceiling But Gold Doesn’t Care

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Comments (5)
Doug Favell
Doug Favell Sep 30, 2021 11:53PM ET
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Sometime in the next 18-24 months, gold will go parabolic to the upside. Remember thst I said this.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 30, 2021 11:42PM ET
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Constipated Dr. Jerome Bubble is just beginning to deliver big lumpy chunky droppings in stocks. You have to be patient for gold to go up. Dr. Jerome Bubble is contemplating heavier vaccine against constipation. Then the reopen of chunky lumpy droppings will start
Russ L J
RrrussT1 Sep 30, 2021 11:42PM ET
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Please, Dr M B, I LOVE your metaphor and lay here trying to form a question for you. The 'Bubble" you speak of if that of Dr. Jerome Bubble's fantastical feat of providing "Mountains of Money' at near-zero interest rates, continues to 'massage' Stock-Markets to ATH (All-time HIGHS) daily. "Oh look, Another All-Time-High!" The combination of what amounts to Endless Free Money and Corporations willing to "Buy Back Stocks Forever" cannot continue forever! Recent relief of Market Constipation leads to 'Market Diarrhea' showing a constant 'Natural Market Correction' as Stock-Prices-Fall. It is well-described as Chunky-Lumpy Constipation. Can Astra Zenica Biontec make Dr. Jerome Bubble "Keep the Constipation expanding!" Correction is NOT wanted! Thank you God! (Wink wink, Nod nod..)
Jeff Paper
Jeff Paper Sep 30, 2021 7:56PM ET
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All they want to do is get an advance so they can inceease their spending habits.
Todd Holaday
Todd Holaday Sep 30, 2021 3:29PM ET
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“Yellen’s rhetoric was rather gloomy”. Lol, nice understatement. Its all such nonsense. Imagine if you could spend personally until you have no more than vote to increase your line of credit and had a person you fired if u didnt like him who set the interest rate on the line. Farcical.
Taj Muhammad
Taj Muhammad Sep 30, 2021 2:48PM ET
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Nice article
 
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