Gold And The Debt Ceiling: 2011 Redux?

debt app The shenanigans going on in the US Congress over whether or not to raise the debt ceiling must strike a familiar chord among resource investors.

Recall that in 2011, it was the same crisis that led to ratings agency S&P downgrading US bonds that August. Gold bullion prices rose $300 per ounce to new record highs above $1,900.

The question now is, could it happen again? The answer is theoretically, yes, but probably unlikely. Consider that in 2011, gold was travelling on a pretty-much uninterrupted upleg that began mid-2008 and crested in August, 2011. In 2013, gold is in a bear market, having lost about 17 percent of its value year to date; unlike in 2011, this year there is talk of tapering quantitative easing, which would be very bearish for the precious metal.

The immediate effect on gold does not appear to be promising. The government shutdown that began Tuesday was good for stock markets but bad for the yellow metal. As Reuters reported, equities had fallen prior the shutdown, and many investors saw it as a buying opportunity. Gold, on the other hand, fell almost $40, crashing through the $1,300 resistance level to a two-month low of $1,289.90 an ounce.

It seems counterintuitive that gold should fall during what appears to be a very negative event for the US economy - a hiatus of government services and the even more catastrophic event of a default if Congress fails to increase the debt ceiling. Reuters explained the drop as likely caused by either a troubled fund selling its position in gold, or by traders who had earlier bought bullion as a hedge against the US budget crisis, only to sell it on the expectation the crisis will be resolved quickly. Oil, copper and silver also lost value on Tuesday.

As to what could happen next with gold, most analysts agree that the October 17 deadline is the one to watch.