Gold Fails to Shine Amid Budget Impasse
NEW YORK (Oct 9) While the U.S. shutdown nightmare has turned into harsh reality, gold started last week in the red as traders worried that the fiscal standoff would be short lived. While the yellow metal found support in mid-week trading from a weak U.S. dollar, it closed the week lower as uncertainties surrounding the debt ceiling loomed even larger.
The Week That Was
Gold ended Monday’s trading session lower as traders continued to brood over a possible U.S. government shutdown. Concerns surrounding the issue made investors wary about the demand for the metal, which is widely recognized as an inflation hedge. On top of that, renewed speculation about the possibility of a Fed stimulus tapering put downside pressure on gold.
Bullion suffered a heavy beating on Tuesday as the long-anticipated U.S. government shutdown finally took place but investors followed fretting that it would be a momentary disruption, thereby tarnishing the metal’s safe-haven appeal. A potential federal spending cut in light of the shutdown also sparked deflationary fears and weighed on gold prices.
These factors coupled with technical selling pressure saw gold end the day at nearly two-month low. The sell-off left many scratching their head in bewilderment as the shutdown did not drive safe-haven bids for the metal.
The partial U.S. shutdown, which put 800,000 federal workers on furlough, came after 17 years as lawmakers on Capitol Hill failed to pass a spending bill following an intense bickering over President Obama’s health care law (dubbed The Affordable Care Act, or "Obamacare") aimed at extending insurance to millions without coverage. Republicans refused to pass the budget without provisions that would stop/delay Obamacare.
Gold prices firmed higher the next day as uncertainties surrounding the debt ceiling lured traders back to the metal. Moreover, a lower-than-expected private-sector job report drove up the metal’s prices as the greenback slumped against a basket of rival currencies. ADP data showed that private-sector payrolls rose 166,000 last month, below economists’ expectations of 180,000.
The ongoing tussle between Republicans and Democrats over the health care bill is expected to throttle talks to raise the country’s $16.7 trillion borrowing limit. The U.S. will hit debt ceiling by Oct 17 unless Congress passes a bill to extend the borrowing limit. A failure to act by that deadline will see the Treasury run out of cash to pay bills, placing the nation at a risk of debt default and possible downgrade of credit rating, which would have detrimental effects on the U.S. and global economies.
Bullion fell on Thursday as traders mulled that the government closure will not last long but recouped some of the losses on weak economic reports, including disappointing service sector data. Despite being a safe-haven asset, the prevailing uncertain environment took some shine off gold’s appeal as investment.
The metal extended its losses to close Friday in red as the U.S. dollar bounced back from an eight-month low logged a day earlier. The U.S. Labor Department delayed jobs report for the last month, scheduled for release on Friday, as the shutdown entered its fourth day. Absence of Chinese buyers given a week-long national holiday hurt gold demand during the last week.
Gold prices (for December delivery) on the New York Mercantile Exchange’s Comex division sagged 2.2% for the last week to close at $1,309.90 per troy ounce last Friday. Silver also ended the week lower with a roughly 0.4% fall to $21.75 per ounce.
Both metals continued their bear market run with prices trending roughly 26% and 37% below their 52-week highs, respectively. Gold has lost about 23% of its value this year mostly on tapering woes. Shares of major gold miners including Barrick Gold (ABX), Goldcorp (GG), Newmont (NEM) ) and Kinross (KGC) moved in sync with the metal’s prices and closed the last week lower.
The AMEX Gold Bugs Index shed 3.8% last week while both the Philadelphia Gold and Silver Index and NYSE Arca Gold Miners Index slipped 3.6%. The benchmark S&P500, on the other hand, ended the week flat.
