The shutdown has been on of three US-centric factors that have supposedly been affecting the gold price in the last few weeks, the other two being the debt-ceiling and tapering.
Should a shutdown go ahead on November 15th, how will gold react? Well, as we all know, we’ve been here before.
Back in November 1995 Bill Clinton addressed US citizens:
Today, as of noon, almost half of the federal government employees are idle. The government is partially shutting down because Congress has failed to pass the straightforward legislation necessary to keep the government running without imposing sharp hikes in Medicare premiums and deep cuts in education and the environment.
This didn’t come as a surprise to anyone. In the weeks before gold had jumped up and down, unsure which way it would respond to a US government shutdown.
During the partial shutdown of November 1995, gold barely reacted. Whilst so many commentators say that the shutdown (along with the debt ceiling and tapering) is supporting gold, there is little evidence of this previously. In both 1995 (November 1995 then December-January 1996) shutdowns the price fell in the immediate days prior to the shutdown being announced.
In the December shutdown gold did spike, by around 4%, following the announcement. However it climbed more towards the end of the shutdown period and climbed even more so in the two or so weeks after the shutdown had ended, reaching $415 at the beginning of February.
Today the gold price just appears to be waiting and watching to see what will happen. Unlike in the run up to the September tapering announcement, speculators no longer appear to assume they know what will happen.
We’ve seen a similar response this time around, gold has been hovering in a narrow range for a few weeks but appears to be slowly heading lower. However one does not get the impression that traders and markets care about a reduction in government services. Is gold perhaps bored of all of this political bargaining in the US?
The issue the mainstream media have with gold not running to the moon on the possibility that the US government may shutdown is that they believe it means gold is no longer seen as a safe-haven.
This approach however, to buy gold as a safe-haven during short-term events, is not how the majority of gold investors choose to buy gold. Gold is bought for the long-term and not in a momentary panic that politics might affect government services.
Of course, to say that is to assume that another shutdown would last just a couple of months. Should it go on longer then gold may well climb higher as uncertainty surrounding the US continues.
Will a shutdown even happen?
It’s not unfeasible, the 1995-1996 shutdown was not a one-off. There were 17 shutdowns between 1977 and 1996.
In terms of political popularity, the last government shutdown appeared to do very little damage to Clinton’s rating. Whilst his approval rating fell to exceptionally low levels during the shutdown, it then rose to its highest since being elected. So Obama may not be concerned.
The general consensus amongst political commentators is that a shutdown will not go ahead. After all, as Dr Ron Paul said on Jay Leno’s show, everyone wants something from the government so no-one (not even the Republicans) wants it to be shut down.
Will a shutdown affect other US factors?
Tapering, it seems, is all that gold has been about this year. Of course, that isn’t quite true, but in the short-term it is certainly one of the biggest factors affecting the gold price.
Tapering decisions will be made on economic data, on of which will be GDP. Should a government shutdown, Bloomberg estimate that the US economy’s growth could be reduced ‘by as much as 1.4 percent’ in the fourth quarter.
What about data?
However, it might be more due to the timing of the shutdown rather than the issue of a shutdown itself. At the end of next week, September’s employment figures are due.
With no-one there to process the data there is no way the BLS will be able to report next week’s job numbers. When this happened back in December 1995 – January 1996, Ray Stone tells us that there was a 2-week delay in the December release. This is tunr compromised the January statistics. Key to this delay however was that it allowed more time for the BLS to receive responses to the payroll survey. This is evidenced by the response rate that climbed to 69.1%, having been 56.6% the previous December.
That time it worked in the government’s favour. It is my understanding that the jobs numbers outperformed those in previous releases, thanks to a higher response rate. However today’s economy and employment situation is very different. We suspect that should the BLS receive a greater number of responses, thanks to a government shutdown, the picture painted will be a far less rosier one than we have previously seen.
This is a factor that will be good for gold.
Will it shut-down gold?
In truth, should a shutdown go ahead we do not expect it to last for a prolonged period. Therefore, the shutdown itself is unlikely to have a long-term impact on the price of gold.
However, the debt-ceiling crisis is also looming which will have a bigger impact on the economy as it awaits the outcome. Previous debt-ceiling issues have seen gold perform well, however the question remains, are yellow metal investors just bored of US politicians playing games?
Perhaps we are finally moving away from the US centricity of the past five years and the real factors – demand and supply – will be allowed to come into their own.
