The Prozac Gold Market and the Government Shutdown
Why aren’t we seeing more volatility in the metals markets? A couple of months ago, Cyprus (Russia’s anointed “Switzerland-lite”), proved that first world banking systems aren’t completely against confiscation or “one-time taxes.” It’s also been reported that Russia and China are “stacking” metals to strengthen their own currencies and perhaps to make a play at some form of alternate reserve currency basket. The U.S. “petrol dollar” is also being threatened by Russia as the U.S. and Russia fight for who gets to control potential future Syrian pipelines. FInally, the U.S. government is currently shut down.
In the case of the shutdown, it’s not an extremely difficult logic train to see that the U.S. dollar is headed for disaster: Wall Street is at the mercy of the Fed...which is at the mercy of the Treasury Department ...which is at the mercy of the kindergarten Congress...which is has shut down most of the government and is full of people who are not capable of compromise. All of this serves as the backdrop to metals markets that appear to be in suspended animation compared to the looming level of instability in the financial world. So the question is, why is the gold/dollar relationship so stable?
The buildup for the shutdown was well documented and seemed to have little effect on the metals market. In fact, it appeared to have the inverse expected reaction.
9/20/13: With a looming government shutdown possibly 11 days away, the Republican House passed legislation in the House against the Affordable Health Care Act that kept the government open until mid-December.
Gold’s reaction: Gold closed at roughly $1327 on the 20th and the following Monday dropped to roughly $1323.50 when then market opened, a negative 0.23% change.
9/24/13: Ted Cruz, a Texas conservative Senator, filibustered in the Senate for 21 hours to maintain the path to end Obamacare and continue with the threat of government shutdown efforts if the legislation didn’t pass.
Gold’s reaction: Gold closed at roughly $1325 on the 24th and the following day rose to roughly $1332.50, a positive change of 0.56%
9/25/13: Secretary of the Treasury Jack Lew wrote a letter to Congress, specifically to John Boehner, Speaker of the House, echoing the President’s thoughts that the U.S. has to pay for its commitments and that Lew really sees that the U.S. dollar’s credit rating is in trouble.
Gold’s reaction: Gold closed at roughly $1332.50 on the 25th and the following day dropped to roughly $1326.00, a negative change of 0.49%
9/27/13: The predominantly Democratic Senate voted 79-19 to end the conservative House’s efforts to thwart of the Affordable Healthcare Act.
Gold’s reaction: Gold closed at roughly $1336.00 (see next entry)
9/29/13: The bill moved back to the House and a little after midnight on Sunday morning, the House changed its focus and voted to delay implementation of the Affordable Health Care Act by a year.
Gold’s reaction: None. Markets were closed. On the following Monday, the 30th, Gold dropped to roughly $1330.00, a negative change of 0.45%
9/30/13: The Senate removed the House provisions postponing “Obamacare.” The bill went back to the House. The House approved a new bill to shut down the health care act in a close vote (228-201), that changed the bill to delay the requirement that individuals purchase health insurance, for a year and would require members of Congress and their staffs to pay the full cost of health insurance, without the government’s paying part of the cost. The Senate voted 54-46 to get rid of the House provisions. The bill returned to the House. At midnight, the White House Budget Office Director states that negotiations weren’t going anywhere and that affected government entities needed to prepare to shutdown.
Gold’s reaction: Gold closed at roughly $1330.00 on the 30th and the following day dropped to roughly $1287.50, a negative change of 3.2% (See Reuters report)
10/1/13: Reuters reported that 35 minutes after gold markets opened, an unusually large sell order was received. The order droped the price of gold and tripped stop losses set at $1300 and triggered a day during which 20% of the market’s gold changed hands in a single trading day
Treasury Secretary Jack Lew wrote another letter to Congress, this time stating that for the last six months the Treasury has been engaged in extraordinary measures to keep the government afloat and that it will now have to go into the final known extraordinary measures to cover U.S. obligations and will most likely not be able to meet them. I.e., things are really bad.
Gold’s reaction: Gold closed at $1287.50 on the 1st and the following day rose to $1316.30, a positive change of 2.2% (the correction doesn’t even really cover what happened from the tripping of many $1300 stop-loss markers)
10/2/13: Each side spends the day pointing fingers, bickering and firmly telling the media that it’s the other person/party’s fault, while the government remains shut down.
Gold’s reaction: Gold closed at $1316.30 on the 2nd and the following day rose to $1316.70, a positive change of 0.03%
10/3/13: Government remains shut down.
Gold’s reaction: Gold closed at $1316.70 on the 3rd and the following day by 2:00PM the market had dropped to $1311.30, a negative change of 0.41%
The net gold reaction over the last fourteen days? The entire drama of shutting down different sectors of the government and heralding what looks like inevitable defaults by the U.S. dollar affected the price of gold by roughly 0.92% down in the face of disaster (It didn't even move it in the expected direction!).
Regardless of who in Washington you feel is to blame for this most recent whack to the confidence in the U.S. dollar, the U.S. economy really has had a rough go at it for the last five years, and this government shutdown isn’t helping. Our war stimulus program is now winding down. Our Q.E. to infinity program also seems like it might not work for the duration. With Russia and China doing a splendid job of positioning themselves as “the next game in town,” everything adds up to what seems like a pretty good time to be expecting a Bad Day. As I look at the metals market over the last three weeks, it appears to be driven by a Winnie the Pooh level of fire under it as far as its vertical motion is concerned. In my head, I can hear Pooh at this very moment with his signature “Oh Bother....” and deep sigh, versus fast-paced dumping of dollars into precious metals.
I am not an oracle, but it does seem like we are definitely testing the limits of sanity in precious metals market drivers while keeping the metals markets themselves on a steady diet of Prozac. I wonder how long this coma will endure before the giant will wake.
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