On Thursday, the U.S. Treasury postponed a scheduled two-year note auction due to debt-ceiling constraints. What does it imply for the U.S. economy and the gold market?
The U.S. federal government may run out of money again, as it will hit a legal debt limit around November 3, earlier than expected. According to Treasury Secretary Jack Lew, the federal government would be left with just $30 billion in cash at that point, straining its ability to pay obligations. Actually, the U.S. Treasury has already canceled a sale of two-year debt due to fears that Congress will not raise the $18.1 trillion debt ceiling in time.
What are the possible consequences of reaching a debt ceiling? Well, it depends how quickly the political impasse is resolved. If there is a protracted stalemate, we can witness a government shutdown and default on some payments, which would undermine the credibility of the U.S. government. In such a scenario the greenback should decline, while the price of gold should increase. Historically, gold gained after a partial government shutdown in October 2013. However, investors could get used to this “debt ceiling” issue. On the other hand, if the problem is solved relatively quickly and the debt limit is raised at the last minute or shortly after the deadline, the impact on markets of political wrangling in Congress over the debt limit would be limited. However, after a near miss in 2011, the Standard & Poor’s credit rating agency downgraded the United States' credit rating from AAA to AA+.
The take-home message is that concerns about the U.S. debt ceiling and government shutdown are back. It is definitely too early to assess the impact on the gold market, since it depends on the significance and duration of the political stalemate. However, reaching the debt ceiling could potentially undermine the confidence in the U.S. federal government and, thus, its currency, which would be positive for the price of gold.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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