2023-02-10 20:02:01

Will gold usher in a crazy explosion?

The high-risk stalemate over raising the US debt ceiling is causing more political farce. But what does all this mean for gold?

This volatile issue is often described as a "political stage" and has limited impact on many assets, including gold. However, as this issue becomes more and more important, and the two parties are unable to reach a bipartisan agreement on raising the US de facto credit card limit in time, the unimaginable US debt default situation is beginning to bring pressure to the market.

At the end of January, the United States had reached the borrowing limit of $31.4 trillion, and the United States Treasury Department began to take "extraordinary measures", including suspending the investment of some government accounts to pay all the bills of the country.

Will gold usher in a crazy explosion?

If the debt ceiling is not raised by June, the federal government may run out of funds. Therefore, President Biden of the United States, Treasury Secretary Yellen, Chairman of the Federal Reserve Powell and others are increasingly speaking on this issue.

Yellen again called on Congress on Monday to raise the debt ceiling of the United States. She said that if she did not do so, it would cause "an economic and financial disaster".

Powell said on Tuesday that if the debt ceiling cannot be raised in time, investors should not expect the Federal Reserve to protect the US economy. He also ruled out the idea of issuing trillion-dollar coins and stressed that there was only one way to solve the problem: "Congress raised the debt ceiling in time. This must happen. If not, no one would think that the Federal Reserve can protect the US economy."

In his State of the Union address on Tuesday, Biden also called on Republicans to unite to raise the debt ceiling. He said: "Some of my Republican friends want to take the economy hostage unless I agree with their economic plan."

In order to solve this problem as soon as possible, the Speaker of the United States House of Representatives, Republican McCarthy, and President Biden held a meeting last week. The two agreed to meet again, but the deadlock continued. Republicans in Congress said they hoped to raise the debt ceiling by reducing federal spending.

Analysts warned that the path to raising the debt ceiling might be unstable. Ray Farris, chief economist of Credit Suisse, said that the Republican "Freedom Caucus" congressmen asked for concessions in spending, which may be the main obstacle.

Farris said in a report: "It is unlikely to solve the problem in the short term." "The current conditions make the process of raising the debt ceiling difficult, and the market pressure is also increasing... The market has begun to price the default risk, but it may need further pricing."

What happened in 2011?

Will gold usher in a crazy explosion?

The last debt ceiling debate had a significant impact on the market in August 2011, when the Republicans and Democrats failed to reach an agreement and finally raised the ceiling a few hours before the deadline.

As a result, as the US dollar sold off, the stock market fell, and the credit spread widened, the risk assets had a negative reaction. In addition, Standard&Poor's finally lowered the long-term credit rating of the United States from AAA to AA.

Negotiations on raising the debt ceiling have just begun. This time, we cannot rule out the possibility of similar situations. As politicians fight against this, analysts expect market volatility to intensify, especially as the June deadline approaches.

JPMorgan Chase said: "The impact may be catastrophic (through the potential global recession) and destructive to investors (for example, through the rising borrowing costs of government bonds)." "If we take history as a guide, we expect that policymakers will eventually find a compromise, and the impact is temporary."

How did gold perform at that time?

When trying to analyze the impact of the crisis on gold, it is helpful to review the performance of gold before and after August 2011. In August and September 2011, the price of gold rose all the way, breaking through US $1900 for the first time and hitting a record high of US $1910 at that time.

However, the final settlement of the debt ceiling marked the peak of gold price. The next time the gold price breaks through $1900 is in July 2020.

Michael Boutros, senior technical strategist at Forex.com, said that a similar pattern might occur this time. The gold price would rise near June. Once the debt ceiling was raised, the price would peak, at least in the short term.

He said: "If our credit rating is downgraded, or we (close to) default, or there is an extreme situation, gold will be bought. But once this happens, to get a solution, we must be careful of a larger gold sell-off - some bulls quickly close their positions. From the perspective of time, the settlement of the debt ceiling may actually be a recent high, which may keep the price for a period of time."

[P] 。 Sean Lusk, co-director of Walsh Trading Company, told Kitco News that the lessons learned from 2011 could be "buy rumors and sell facts".

"Printing more things of lower value at any time will have a direct impact on the dollar. Considering the uncertainty of those years, the gold price once rose above $1900 before it began to fall," Lusk said. "What I see is the price trend in 2011, when the gold price rose in the first half of the year and then began to fall."

Lusk added that interest rate cuts and the depreciation of the US dollar also accompanied the rise of gold prices in 2011.

Boutros added that in the short term, gold prices may further consolidate before the next sharp rise.

"If we refer to the price trend in 2011, there are some similarities in the nature of this outbreak. But even if we cover the price in parallel, it also means that there will be several weeks and months of consolidation before the next action," he pointed out. "A major level I expect is $1807. This support must be maintained in the next few weeks. If we can maintain and stabilize above this level, you can look to a higher level."

Gold is one of the assets that JPMorgan Chase proposes to hold during this period. "The possibility of chaos in the debt ceiling is just another stimulus factor, prompting global investors to rebalance the US over-allocation among different asset classes. Consider currencies and precious metals, such as yen, Swiss franc and gold," JPMorgan said in a report last month.

Will gold usher in a crazy explosion?

In this period of instability, gold is the asset that many people turn to because it is outside the financial system.

"Whenever government spending increases, gold will become more attractive because it is a neutral asset. It is not as affected by government policies as the dollar," Everett Millman, a precious metal expert at Gainesville Coins, told Kitco News.

In short, given that the debt ceiling problem is mainly a show and grandstanding, the impact on gold will be temporary.

Millman said: "They always raise the debt ceiling eventually." "But the example in 2011 is an interesting analogy, because when people worry about the instability of the financial system, the debt ceiling may change from an insignificant issue to make people more worried about the stability of the government and the stability of the financial system."

Gold has always been a safe way to store wealth. "This is a reasonable choice to trust the government to manage the financial system," Millman added. "I would not be surprised if traders and investors who have not paid attention to precious metals have increased their interest in gold."