The US debt ceiling farce continues. Economists at Commerzbank analyze the implications for Gold price.
Gold to decline if the US debt ceiling conflict were to be resolved
“In view of the ongoing dispute over the US debt ceiling, the Gold price will probably hold its own above the $2,000 mark for the time being, living up to its reputation as a safe haven.”
“Any debt default by Washington, even if only temporary, would doubtless have serious negative repercussions for the US economy, which makes it more likely that monetary policy will be loosened – to a greater extent than is already priced in on the market – and make Gold more attractive in relative terms as a non-interest-bearing investment.”
“According to Treasury Secretary Janet Yellen, the deadline is 1 June. If the parties fail to reach agreement by then, the treasury risks running out of money on that day. Equally, the precious metal can be expected to decline if the conflict were to be resolved.”
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An increasingly heated dispute over plans to raise the US debt ceiling is likely to provide support for gold prices, according to Germany’s Commerzbank.
The US Congress is at odds, with both Democrats and Republicans disagreeing on how to increase the government’s borrowing limit. Failure to agree could lead to a default, which would be economically devastating.
In the light of this dispute, Commerzbank said: “We assume that the dispute over raising the US debt ceiling will contribute to the fact that gold and the US dollar will become more closely intertwined in the weeks ahead”.
This is because investors traditionally turn to gold during times of economic uncertainty, particularly when the US dollar is weakening.
The bank suggested that in this situation, more traditionally conservative investors might take advantage and invest in gold as a “safe haven”. It said: “It can be assumed that gold will benefit in the coming weeks from a further rise in investor demand”.
In terms of the gold-dollar relationship, the bank feels that gold prices expressed in US dollars could rise to approximately $1,424 over the next three months. The current spot price is approximately $1,390 so the forecasts points to a nearly 3% rise.
The bank’s outlook is broadly in line with most gold analysts who expect to see a rally in gold prices now that US earnings season is at an end.
As such, gold looks likely to retain its strength in the weeks ahead as both sides battle for a resolution to the debt dispute. Depending on how the situation develops, gold could remain relatively firm despite any seasonal slowdowns.
