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Debt Ceiling and Budget Battles to Underpin Gold Prices

The gold market has no shortage of issues following Sunday evening’s “flash crash” that saw prices drop sharply at the open.

A mysterious $4 billion sell order – suspiciously placed during the most illiquid time of the day – caused a waterfall $100 decline in gold prices while silver dropped in tandem by over $1.30 per ounce.

Debt Ceiling

Among the major issues investors are eyeing this month is the debate over the federal debt ceiling and federal budget.

Treasury Secretary Janet Yellen has just asked Congress to jack up the debt ceiling again, just as the U.S. Senate passed Biden’s $1 trillion Green New Infrastructure Deal.

A raise or suspension of the debt limit would not itself increase government spending or authorize additional spending.

The move would simply allow the Treasury Department to borrow money to pay for Congressionally authorized expenditures and avoid the risk of default.

With the national debt already over $28.4 trillion, the Treasury Department would otherwise run out of its "extraordinary measures" deployed to remain under the current debt ceiling sometime next month.

Of course, a debt default by the United States would have significant effects on the lives of all Americans. A default would raise borrowing costs substantially and put the economy into recession while setting the stage for more defaults across the globe.

If the U.S. government has trouble finding buyers for its bonds, the Federal Reserve always stands ready to create new currency and mop up the excess bonds. That process undermines the dollar’s value.

Devaluation of the Federal Reserve Note is a less honest – and less obvious – form of default, but it is a default nonetheless. It’s a default on the dollar’s purchasing power.

At the same time, a massive decline in the value of the dollar could not only erode disposable incomes in the U.S. but could also eat away at real investment returns in financial assets.

Meanwhile, Senate Democrats passed Biden’s $3.5 trillion budget plan early this morning.

Although the proposed spending is a staggering amount, its proponents suggest that it will be paid for through increased tax revenues, long-term economic growth, and health care savings.

Yeah right.

The reality is that “pay for” provisions are largely accounting gimmicks that will fail to avert the need for additional borrowing.

Both the budget and debt ceiling battles are likely to become drivers for market action in gold in the weeks and months ahead. Despite gold’s recent weakness, these topics should help put a floor under the market.

Any increase in partisan rhetoric concerning the debt ceiling or budget could set the stage for a longer-term appreciation in gold and other hard assets.

The mere threat of a U.S. default could not only sink the dollar and stock markets, but it could also send the price of gold sharply higher as investors seek out alternative asset classes.

No matter how this plays out, gold and silver appear to have good upside potential with little downside price risk from current levels. This could make right now a great time to make an investment in the precious metals.


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