Gold to hold steady in face of U.S. government shutdown

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Expect steadiness and sobriety to characterize the movement of gold in the market, regardless of the shocks that the ongoing government shutdown will unleash on the U.S. economy. This forecast by analysts about the precious metal can appear as a blunt doubled-edged sword to investors who are placing their bets on their favorite financial haven. On one hand, they will be free from any repercussions coming from the global stock market’s economic fallout. At the same time, however, any anticipation of a surge in gold prices, caused by the current political partisan conflict that has paralyzed Washington, D.C., should be regarded as over-optimistic or premature.

As of January 16, Wednesday, the price of gold was virtually at a standstill. U.S. gold futures remained at a rock-steady $1,288.50 per ounce, while spot gold’s increase to $1,288.50 per ounce was virtually unnoticeable.

In the foreseeable future, the government shutdown, the longest in its history at 26 days and counting, will not make the gold market bullish. In an interview with Kitco, Fundamental Technician chief market strategist Colin Cieszynski says that the standoff between the Democrat-dominated Congress and President Donald Trump over federal spending is not a “significant deal” when it comes to gold. Regardless of how long it lasts, the shutdown will inevitably resolve, and the precious metal continues to remain stable.

Investors might have been banking on the low interest rates being maintained by the U.S. Federal Bank until the crisis resolves itself. At the heart of it is the wall that Trump has promised to build over the U.S.-Mexico boundary to halt the flow of illegal immigrants. The Congressional Democrats are opposed to releasing the $5.8 billion that the president has requested in order to build the wall. As a countermeasure, Trump has made it clear that he will veto any bill from the party unless they approve his request for funds. The result is a standoff and no one has blinked yet.

Weak dollar, precious gold

Still, the casualties are beginning to mount. Monies meant to support organizations like the Environmental Protection Agency and the Internal Revenue Service have ceased temporarily. The same has happened to various departments such as Agriculture, Commerce, Homeland Security, Housing and Urban Development,  Interior, Justice, State, and Treasury. Payment to contractors have stopped. About 800,000 government employees have either been furloughed or are working without pay. The only agencies that Congress is sustaining are the U.S. Armed Forces, and the Education, Health, Labor, and Veterans’ Affair departments.

The Trump administration’s own economists have warned that the continuation of the shutdown will lead to an economic contraction. One precedent, which happened in September 2013 under the government of President Barack Obama, ultimately cost the nation 200,000 jobs and a $24 billion loss. That standstill lasted for two weeks; the current one is about to near a month.

As the dollar weakens, a new and possibly frenetic gold rush was inevitably expected.

Interestingly, however, the aforementioned precedent has also shown that government shutdowns do not necessarily lead to a gold resurgence.  During that time, the price of gold dropped from $1,338.40 per ounce to $1,273 per ounce and then bounced back to a slight recovery at $1,322.70 per ounce after the shutdown was over.

In the Kitco interview, RBC Wealth Management managing director George Gero maintains that the current political climate is not enough to spike a rally in gold prices.  He says, “…We will need to see a major headline and I don’t think a shutdown will do it.”