What Does Gold Do During A Government Shutdown?
(Kitco News)- The risks of a government shutdown continue to rise asCongress’ deadline quickly approaches; however, gold bulls might bedisappointed if they are expecting to see higher prices as a result of ongoing politicalturmoil on Capitol Hill.
Washington has until Friday to come up with an agreement tofund the government. But, with a growing number of politicians are pushing backagainst the idea of kicking the problem down road for another month, there isan increasing possibility that the government will shut down.
Analysts say that this is more of a political issue thatwon’t impact economic conditions, which could create further profit taking ingold after prices recently traded at a four-month high.
“There are other factors in play for the gold market thanjust the government shutdown,” said Bill Baruch, president of Blue LineFutures. “Right now, gold is technically overbought and the U.S. dollar istechnically oversold, so we could see the pendulum swing back, even if thegovernment does shut down.”
History would also support the idea of weaker gold pricesduring a government shutdown. During the last three shutdowns, gold has lostground.
On Oct. 4, 1990, the day before the first closure in recenthistory, gold prices were trading at $392.30 an ounce. On the last day of theclosure, Oct. 9, gold prices were at $389.70 an ounce. The selling pressurescontinued until Oct. 16, when the market fell to $362 an ounce before findingsome renewed momentum.
In 1995 there were two government closures. On Nov. 10, goldprices were trading at $390.50 an ounce and after a nine-day period weretrading modestly lower at $387.10 an ounce.
The second closure in 1995 was a lot better for gold. OnDec. 14, the day before the closure, gold was trading at $385.75 an ounce. Bythe end of the shutdown, Jan. 6, 1996, prices had rallied to $396.50 an ounce.Gold continued to rally and ended January at $405.60 an ounce.
Looking back at the technical charts, analysts have saidthat the rally in gold was probably due to favorable seasonal factors, asJanuary is traditionally a strong month for the precious metal.
Finally, most recently, during the last government shutdown onSept. 27, 2013, gold prices fell from $1,338.40 an ounce to $1,273 an ounce byOct. 15. When the shutdown ended two days later, ; gold modestly recovered ?, to $1,322.70 an ounce.
Gold prices continued to push higher and ended October at$1,349.30.
Back to 2018, sentiment in the gold market is a little moredispassionate Ahead of a potential shutdown, with many expecting gold prices toconsolidate after a strong performance in the past month.
“As long as gold holds $1,300, the market remains in abullish uptrend. I think that is all that matters right now,” said ColinCieszynski, chief market strategist the Fundamental Technician.
Cieszynski added that gold might not see much traction froma new government shutdown because the market has been decentralized with thethreat. This is the third time since October that the government has been onthe brink.
“I think markets are exhausted as the government just kicksthe can down the road,” he said. “The reality is that a government shutdownisn’t a significant deal because it will eventually be resolved. The economywill not collapse because of a shutdown.”
George Gero, managing director at RBC Wealth Management,also sees further consolidation in gold in the near-term regardless of whetherthere will be a ?, government shutdown ornot.
“To get another rally in gold we will need to see a majorheadline and I don’t think a shutdown will do it,” he said. “As one trader toldme the other day: ‘We’ve seen this movie before.’”
Government Will StillProvide Essential Services During A Shutdown
Market analysts are dismissing the impact of a potentialgovernment shutdown, saying that the economy will continue to perform as thereis no threat of a breakdown in society.
Political pundits have noted that while the government couldbe technically shutdown, not all federally funded programs and services will behalted. Any agencies and programs that are deemed “essential services” willcontinue to operate.
The military, is considered an essential service, so troopswill still have to report for duty; however they might not get paid while thegovernment is closed. The government will continue to provide social securityand the U.S. postal service will continue to deliver mail as these are alsoboth considered essential services.
However, national parks, museums, and national zoos will beclosed as these are nonessential services. Employees in nonessential governmentdepartments will be placed on furlough until the government reopens.
One of the reasons market analysts aren’t concerned that agovernment shutdown will impact markets is because there are expectations thatthe issues will eventually get resolved. However, some analysts say that aprotracted shutdown could eventually hurt the U.S. dollar and boost gold priceshigher.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.