Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24
Bitcoin Trend Forecast, Crypto's Exit Strategy - 31st May 24
Zimbabwe Officials Already Looking to Inflate New Gold-Backed Currency - 31st May 24
India Silver Imports Have Already Topped 2023 Total - 31st May 24
Gold Has Done Its Job – Isn’t That Enough? - 31st May 24
Gold Stocks Catching Up - 31st May 24
Time to take the RED Pill - 28th May 24
US Economy Slowing Slipping into Recession, But Not There Yet - 28th May 24
Gold vs. Silver – Very Important Medium-term Signal - 28th May 24
Is Gold Price Heading to $2,275 - 2,280? - 28th May 24
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How a Debt-ceili​ng deal could spark a short-term drop in Gold prices

Commodities / Gold and Silver 2011 Aug 01, 2011 - 07:27 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticlePeter Krauth writes: I'm an avowed gold bull, and I truly believe that gold investors will end up benefiting from the biggest bull market of our time.

But we have to be honest: Investor psychology plays a crucial role in shorter-term investment results. And recent trading patterns clearly demonstrate that most of the recent increase in the price of gold is due to the debt-ceiling debate in Washington, as well as the European sovereign-debt crisis that continues to lurk in the background.

The bottom line: The debt-ceiling debacle could cause a short-term drop in gold prices.

Congressional leaders as of early Sunday afternoon had yet to reach a debt-ceiling deal, but said they were close to an agreement that they hoped would prevent default.

As of late Thursday, gold was trading within 1% of the all-time high of $1,628.05 reached on Wednesday, and was poised to record its first monthly increase in three - all because of the debt-ceiling deadlock and the fear that a U.S. government default would level the global financial markets. Spot gold has surged 7.6% in July.

If you think about it, a number of things just don't add up. For instance:

•The 30-year U.S. Treasury bond is yielding just 4.31% - meaning the rate is virtually unchanged since the start of the year. But with Standard & Poor's saying there's a 50% chance it will downgrade the United States' top-tier AAA credit rating - something once considered bulletproof - you'd expect that yield to be surging as "rational" investors dump U.S. debt. Right?
•In fact, a quick glance at yields on the one-month, one-year, two-year, five-year, 10-year, 20-year - and every maturity in between - shows that yields are down from the start of the year, meaning investors are still buying U.S. Treasuries, despite record deficits and the fast-approaching debt-ceiling deadline. If there's a risk of a downgrade and a default, shouldn't those same "rational" investors be avoiding all new purchases, even as they dump current holdings?

So what will we see if tomorrow's (Tuesday's) deadline comes and goes, and no deal is reached down on Capitol Hill?

.For instance:

•Does the government stop making payments to vendors, retirees, and others in order to conserve cash flow?
•Does it default on payments to bondholders?
•Does government activity seize up altogether?
•Does gold shoot up to an all-time high of $1,800 an ounce?
•Is it "TEOTWAWKI" (the end of the world as we know it)?

Ignore the Fear Mongers
Well, the usual suspects - U.S. President Barack Obama, Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke - would sure like you to think so.

During his primetime television address last week, President Obama actually told us that interest rates on credit cards and car loans would spike, and that the U.S. economy would suffer a serious disruption.

Sorry, but I don't buy it.

And neither does Jan Ericsson, assistant professor of finance at Montreal's McGill University.
According to Ericsson, whose latest research has focused on bond-market default risk, U.S. interest rates may increase by 50 whole basis points, or half a percentage point - hardly the financial-market Armageddon that the fear-mongering gloom-and-doom crowd claims is fait accompli.

In actuality, the U.S. Treasury holds more than $1 trillion in marketable securities - more than $100 billion of which is in cash. If no deal is reached by the deadline, instead of just defaulting on payments, there's no reason the government can't just use this cash, or liquidate assets, and buy some time until an agreement is actually reached and the debt ceiling raised.

In fact, the government can probably hold out for a couple of weeks, says a recent Bloomberg News story. Playing the fear card just raises the odds the current administration will get what it wants sooner - a much higher debt limit to facilitate even more spending.

I can even envision the U.S. Treasury selling off some of its gold, helping to push gold prices down and suppressing any concerns that inflation-fueling money printing is out of control.

I submit that, even if U.S. Treasuries lose their coveted AAA rating, government-bond yields may still go down.

Justified or not, this "shock" could temporarily hurt stock markets and any other "risk-on" assets.
And that could lead investors to buy yet more bonds from the largest and most liquid debt market on the planet, helping to keep yields near their historical lows.

In fact, weakness in "risk assets" coupled with a surge in demand for safe-haven Treasuries could strengthen the U.S. dollar in the short term, making Washington's puppet masters look like geniuses in the process.

But the real question is this: What will all this maneuvering mean for gold prices?

The answer is pretty clear.

A Short-Term Drop in Gold Prices
Much of the recent run-up in gold prices is due to the debt-ceiling debate. In other words, gold has already priced in worries about a non-resolution to the debate potentially leading to a delay in raising the debt ceiling.

That's why I conclude that - whether or not the debt ceiling is raised by Tuesday - there's a pretty fair chance we'll see a short-term drop in gold prices. If that happens, it'll be due to a sense of relief that the economy most investors still embrace as the world's most stable isn't facing an imminent collapse. In fact, don't be surprised to see those investors sell gold - and use the proceeds to pile into U.S. Treasuries.

The bottom line is this: Whether it's this week or next month, Washington is going to raise the federal debt ceiling, leading to still more borrowing and spending, and an ever-expanding money supply. Over the long haul - as we've told you again and again here in Money Morning - this ever-growing debt load will be highly bullish for gold prices.

So how should you play this? My advice is to just keep your eye squarely on gold.

Any short-term drop in gold prices caused by the debt-ceiling debacle should be temporary -- and a buying opportunity for the savvy investor.

It's up to you to seize it.

Source :

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in