Precious Metals Weekly – Gold lower after shutdown

by: Georgette Boele

131002-Precious-Metals-weekly.pdf ()
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  • US shutdown only temporary support to precious metals…
  • …but if the shutdown continues for longer sentiment could turn more risk averse
  • The fast approaching US debt ceiling stalemate could unsettle financial markets
  • Gold prices will unlikely receive support this time around

Precious metals received temporary support from US government shutdown…

With the start of the new fiscal year in the US, the current continuing resolution expired. With no budget in place, all non-essential government services will be forced to stop operating. In contrast, essential services, for instance related to national security and medical care will continue to operate. Financial markets have reacted relatively muted. The US dollar has fallen modestly under pressure. Gold prices have barely profited from the news about the shutdown. In fact, they have fallen under heavy pressure hours following the shutdown. The other precious metals showed a similar market reaction

 

…but if the shutdown continues for longer, a larger impact may be seen

If the shutdown takes longer, financial markets will likely become more nervous about the possible impact on the US economy. In this situation, they will likely become more risk averse. This manifests itself in higher equity market volatility. On the one hand, this volatility has already moved higher. On the other hand, gold has not rallied yet. Instead they have fallen. Negative gold price drivers appear to more than outweigh positive drivers such as such haven flows. If this were this case, the bottom could fall out under gold prices the moment the US fiscal issues are resolved. Precious metals with a larger exposure to the US and global economic cycle could fall under pressure once the markets start to revise downwards its views on the US and global economy. Palladium and silver prices are the most vulnerable in case of such adjustment.

The fast approaching US debt ceiling stalemate could unsettle financial markets

There is no fixed deadline for the US debt ceiling. Somewhere at the end of October this debt ceiling needs to be raised. If this ceiling is not raised in time, the US could default on its debt obligations. In July 2011, we had a similar situation at hand. Then the debt ceiling negotiations between Democrats and Republicans were very though like this time. However, at the eleventh hour a deal was reached. Towards the end of July 2013, US sovereign CDS spreads spiked higher. But the reaction of other financial markets was relatively muted. Gold prices continued to rally and the debt ceiling issue was just an extra argument to buy it. Volatility in the equity market also moved slightly higher as did the JPY. US Treasury yields moved modestly lower. So overall financial markets moved into a modest version of risk aversion.

Gold prices will unlikely receive support this time around

Gold prices have been on the defense in the hours that followed after the US shutdown. In fact it fell below USD 1,300 per ounce. This highlights once more that fundamentals are changing for the worse in case of gold. We believe that it is unlikely that in the current environment gold prices will show a sharp revival. Since April of this year, gold prices have set a lower top below USD 1,525 per ounce. Investors use every rally as an opportunity to sell.