It’s unclear at this point what is going to happen in the U.S. Capitol–will the Senate find compromise on the House budget bill? Will the debt limit be raised? Will the standoff continue?–and investors of all stripes are watching closely.
Gold prices have been a roller coaster for the past week, spiking after news the Federal Reserve would not begin the taper. Now stocks are slipping again as the market scrambles to figure out what the coming month holds.
Budget Disputes
Despite more than 42 failed attempts to dismantle or defund the Affordable Care Act, House Republicans view their budget bill, which would strip funding from the ACA, as their last chance to stop the healthcare law before it is implemented.
But the odds of the Democratically controlled Senate approving the bill or of the president approving a bill that defunds his pet project, are low, putting the U.S. Government on a path to a possible shutdown if no budget plan is put forward by the deadline of October 1.
If the government were shut down, it is expected that all non-critical government offices, museums and parks would close, with workers furloughed without pay. Political leaders and their immediate staffs (the President, Senators and House Representatives) would be considered critical and remain at work. The Postal Service would continue operation, but federal courts might experience a slowdown or halt. However, as Social Security payments are considered mandatory, recipients would still receive benefits, though with a worker shortage there may be delays.
These issues combined are expected to send the stock market and the economy as a whole into a tumble, with Fed Chairman Ben Bernanke saying “a government shut down, or perhaps even more so, a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy.”
Nearing the Debt Limit
A second concern is the debt limit, which currently stands at $16.7 trillion. This limit will expire in mid-October. The debt limit is the maximum legal amount the government can owe, and is managed by the Treasury department. It doesn’t actually stop debt from growing, however, but prevents the Treasury department from paying debts–in other words, the debt won’t be lessened if the debt limit does not go up, but America’s abilities to pay the debt will be hampered.
When the debt limit was nearly reached in 2011, the delay caused stocks to fall and the United States’ credit rating was marked down for the first time in history.
The combination of these two political and financial problems means that October is sure to continue to be shaky until politicians hash things out.
Precious Metals
What will the impact of all this congressional drama be on precious metals? It’s hard to know for sure, but it’s likely gold and silver would climb in reaction to either a budget delay or government shutdown as nervous investors fled the dollar and turbulent stocks. The last time the government threatened a shutdown over the debt limit, gold and precious metals soared while traditional stocks and the dollar fell. It’s reasonable to expect more of the same.
Gold picked up its greatest one-day gain since 2009 after the Fed announced the taper would be delayed, only to fall back the next day as Fed regulators clarified that the taper is still in the works for next month. These kinds of swings are likely as investors watch and wait for results from Washington.
What is your investment strategy for a roller coaster market?
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