The previous weeks’ government shutdown and nearly missed debt-ceiling deadline surprised some gold market observers. The chaos should have been good for business, as gold traditionally waxes as confidence in the economy wanes.
And likewise, the last-minute congressional agreement late Wednesday night to avert a looming U.S. debt default should normally have triggered a gold price decline as the crisis was averted.
Yet the precious metal has rallied since then, rising to $1,316.50 an ounce — or 4% — over the week from Friday, Oct. 11 to Friday, Oct. 18.
One explanation for these counterintuitive price movements comes from ETF Securities Research (ETFS), whose weekly precious metals commentary, published Monday, notes that besides gold’s reputed safe haven function, the precious metal also has a tendency to move countercyclically with the U.S. dollar.
“Therefore in the run-up to the debt ceiling deadline, as U.S. short term rates increased on fears of possible default and the U.S. dollar strengthened, gold and silver prices declined,” ETFS notes. “In a similar manner, when an agreement to raise the debt ceiling was finally signed, U.S. short-term rates and the U.S. dollar fell, and gold and silver prices rallied.”
The London-based firm, which markets seven different physical precious-metal ETF funds, believes that U.S. dollar and rate expectations will continue to drive short-term moves in gold and silver.
As for the long term, Los Angeles-based precious-metals dealer Leigh Greenberg of Universal Bullion tells ThinkAdvisor that issues of confidence and lack thereof will reassert themselves as the can gets kicked to new government funding and debt ceiling deadlines in January and February.
“Congress simply tabled the decisions and put off decision making to a time when both sides can be reinforced, have more armaments…so to speak,” he says. “[Senate Minority Leader] Mitch McConnell says ‘We’re going to make this work;’ [Sen.] Ted Cruz says “Maybe not.’”
Greenberg says the world is rapidly losing confidence in the U.S., including the biggest foreign holders of U.S. debt, the Chinese, whose official press agency Xinhua commented amidst the recent crisis that it was “time for the befuddled world to start considering building a de-Americanized world.”