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Analysts say there is still plenty of safe-haven support for gold as U.S. Congress resolves debt ceiling risks
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(Kitco News) - Investors should not expect gold's safe-haven appeal to weaken anytime soon, even as the U.S. once again narrowly averts another economic crisis after the House of Representatives passed eleventh-hour legislation to increase the debt ceiling.
The debt ceiling passed the House late Wednesday evening with a 75% majority vote. The Senate is expected to vote on the bill Friday, and President Joe Biden would sign it before the U.S. Treasury Department's June 5 deadline.
According to some analysts, the last-minute deal averting a major economic crisis could weaken gold's safe-haven allure; however, other analysts note more significant issues are still at play.
Currency analysts at Brown Brothers Harriman said that the deal removes a headwind for the U.S. dollar, which would, in turn, weigh on gold.
"We believe passage of the deal will leave the door open for a 25 bp hike at the June 13-14 FOMC meeting. With banking sector stresses fading, a potential default was really the only thing that could have prevented a hike this month," the analysts said.
For now, price action indicates that the precious metal is looking past the soon-to-be-resolved debt ceiling debate; gold prices are again testing resistance at $2,000 an ounce. August gold futures last traded at $1,997.40 an ounce, up 0.77% on the day.
Jim Wyckoff, senior technical analyst at Kitco.com, said that he sees the debt-limit extension as neutral for gold.
"Right now, gold is rallying on notions the Fed will not raise interest rates in June, but will instead pause and maybe raise later in the summer," he said.
Naeem Aslam, chief investment officer at Zaye Capital Markets, said that he expects gold investors are looking past the debt ceiling debate and are now focused on the Federal Reserve's next monetary policy meeting.
"The data point which is more important for gold prices is the U.S. labor market which continues to print strong numbers, which gives the Fed more confidence to hike rates further this month. Of course, the Fed hiking the rates even more isn't fully priced into the markets yet and traders should keep that in mind," he said.
Nitesh Shah, head of commodity research at WisdomTree, said that gold hasn't seen much reaction to the debt ceiling debate mostly because investors were expecting politicians to come to a resolution. He added that the near-term price action has been a "tempest in a teacup."
"This is a story we have seen before and while there are risks of a mistake because of brinkmanship, markets were always expecting a resolution," he said.
The question now, he added, is what comes next. Looking past any near-term volatility, Shah said that gold could do well as the Treasury Department unleashes a flood of debt to meet their payment obligations.
Although yields could rise as financial markets are inundated with new bond issuances -- which at first glance would be negative for gold -- Shah saw that investors need to look at the bigger picture.
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U.S. debt ceiling debate highlights U.S. fiscal imbalances and supports gold's push to $3,000 - CrossBorder Capital |
He added that yields could potentially rise because the U.S. government needs to meet its debt obligations.
"Typically, gold has performed well in periods of government largess," he said. "We would expect to see some dollar debasement as the debt rises to meet this government largess."
Shah added that while one geopolitical risk has been narrowly avoided, there are still plenty of reasons to hold gold as an insurance policy. He said that an impending recession remains a genuine threat.
However, economists at Capital Economics said that fears of a bond market turmoil are overdone.
"It's true that in order to reverse the extraordinary measures it has taken and to rebuild its cash deposited at the Fed, the Treasury will need to issue up to $600bn in additional debt over the next few months. As it did after previous debt ceiling stand-offs were averted…" the analysts said. "…The Treasury will presumably issue cash management bills (CMBs), with maturities of up to four months. Those bills can be issued at short notice without amending the regular auction calendar."
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