Will Gold Be the Key Actor in U.S. Debt Ceiling Drama?
Another divided Congress and another debt ceiling drama… how will gold perform in this show?
And here we are again… in the middle of another debt ceiling drama. On Thursday, January 19, 2023, the U.S. government hit its $31.4 trillion borrowing limit. But don’t worry, it doesn’t imply the country’s default. At least not immediately. According to Treasury Secretary Janet Yellen, Treasury has begun extraordinary measures that could postpone the default until early June.
It sounds scary, but it’s actually business as usual. Like the annual play in the kindergarten. The crowd gathers and waits anxiously to see whether the government will fund and continue its operations or it will default on its obligations and halt the whole enterprise. After long debates, many scary analyses, emotional rhetoric, and dramatic plot twists, Congress finally lifts the debt limit, averting again the sovereign debt crisis. Hurray, yells the public, and gets excited by other issues. As we can read on the Treasury’s webpage, “since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit”. This time shouldn’t be different.
But What If?
But what if this time is different? Congress is heavily polarized. Not only between Democrats and Republicans but also within the parties. It’s enough to point out that the House of Representatives didn’t elect Kevin McCarthy as speaker until the dramatic 15th vote. The chamber experienced the longest leaderless period in a century as Republicans couldn’t reach an agreement.
Another issue is that the timing of any debt-related drama would be unfortunate. The U.S. economy is already losing momentum, and most economists expect a recession somewhere this year. Any additional worries wouldn’t help the fragile economy which is already suffering from inflation and the aggressive Fed’s tightening cycle. Thus, it’s possible that the debt crisis could increase the safe-haven demand for gold, especially since the greenback has already been weakening.
Implications for Gold
What does it all imply for the gold (and silver) market in 2023? Well, the recent acts of the debt ceiling drama and the government shutdowns failed to provide a sustained boost in gold prices. The country was probably the closest to defaulting on its debt in 2013 when the Republican Party refused to raise the debt ceiling to fund Obama’s planned spending. It led to a government shutdown, but the crisis only led to a short-term rise in gold prices. Similarly, during the longest government shutdown in U.S. history which occurred in 2018-19, the price of the yellow metal rose just 20 dollars, despite all the panic in the media. Thus, the government shutdown turned out to be almost a non-event for the gold market.
Hence, if I were a gold bull, I wouldn’t count on the current debt ceiling drama. As I wrote elsewhere,
the lack of meaningless gold’s reaction is quite understandable. The government shutdown is not such a big deal, as government still provides essential services. And the shutdown will eventually be resolved. Come on, do you really think that the US economy will collapse because the Smithsonian museums, Yellowstone Park and the National Zoo are closed? Hence, unless there is protracted shutdown, a civil war or something along these lines, any potential impact of the government shutdown on gold should be limited and short-term.
Having said this, it’s important to remember that gold is already in an upward trend, as the chart below shows (courtesy of goldpriceforecast.com). It means that the farce around the debt could provide an additional short-term tailwind for gold, as it happened in 2011 when the S&P downgraded the US rating from AAA to AA+.
And who knows? Maybe – given how much Washington is divided right now and how high the inflation and the public debt already are – this time will really be different? What do you think? Please share your opinions on this.
Arkadiusz Sieron, PhD