Late Wednesday, Congress approved the Senate deal which brought the government shutdown to an end and extended the borrowing limit until February 7th. This brought gold prices soaring over the $1,300 per ounce mark to settle at $1,323 per ounce. This 3.2% increase was the largest single-day gain in weeks. Here is a look at the driving factors behind this change.
Borrowing and Gold
As long as the government is going deeper in debt, gold tends to perform well. Investors need a safe haven to protect their wealth while the government ultimately drives the value of its currency down. A recent article by Market Watch detailed the thoughts of Jeffrey Wright, managing director at H.C. Wainwright LLC.
“In a nutshell, we are back to business as normal where the U.S. government spends way too much money; which we have to borrow on the global market. We have no realistic way to pay it back and even with a ‘shrinking’ rate of deficits, the situation is not sustainable.” He then continued to say, “Gold is the natural vehicle to counterbalance this behavior and is going higher once again.”
Tapering may be Delayed
Another likely reason gold took such a massive jump has to do with the Federal Reserve’s time table to begin tapering the stimulus or ‘quantitative easing’ program. Many experts believe that the recent government shutdown will seriously delay the decision to finally taper the $85 billion a month bond buying program. The catalyst to make this decision has always relied on improving economic data such as unemployment rates and new job creation. With such a large portion of the American public taking this sudden hit to their pocketbooks, it will likely have an adverse effect on any upcoming economic data.
The timing of the shutdown has intersected with another unrelated event, which although not directly tied to the government shutdown, it still could have an effect on gold. It looks as if confirmation hearings for Janet Yellen’s appointment as the new chair of the Federal Reserve could come in November. This leaves the current chairman, Ben Bernanke with very little time left in his tenure. Many experts believe that with such a short time left, it’s unlikely the Fed will make any serious decisions before year-end.
Looking forward, it’s always difficult to determine how the present market factors will affect the future of gold. For now, investors will keep their eyes on the next signpost – this being new economic data which naturally relates to the Fed’s decision to taper the stimulus program.