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US government shutdown brings debt problems into focus, which is positive for gold - Invesco's Kristina Hooper

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(Kitco News) - U.S. 10-year bond yields at fresh 16-year highs as the U.S. dollar near a one-year high continues to keep a lid on the gold market; however, according to one market strategist, the precious metal's downside remains limited as economic uncertainty and rising U.S. debt provide solid support.

In an interview with Kitco News, Kristina Hooper, chief global market strategist at Invesco, said that while she doesn't expect the U.S. economy to slip into a recession, she said that the Federal Reserve's outlook for a soft landing is a little too optimistic. She added that she sees a rough landing for the U.S. economy and a growing deflationary environment that will force the U.S. central bank to cut interest rates sooner than they expect.

"Yes, the economy has been resilient, and the labor market has been tight, but cracks are starting to appear," she said. "I think the idea we will see a soft landing might be wishful thinking."

Along with growing economic uncertainty, Hooper said that growing deficit problems in the U.S. are also creating some support for gold as it will limit the Federal Reserve's monetary policy decisions after it raised interest rates at an unprecedented pace.

She added that after last week's monetary policy decision where the Federal Reserve left interest rates unchanged, it is clear the central bank is done raising interest rates.

While the Federal Reserve may be done raising rates, it has maintained its tightening bias, which has pushed the yield on 10-year notes above 4.5%. At the same time, the U.S. dollar index is solidly above 105 points. These two headwinds have pushed gold prices to session lows; December gold futures last traded at $1.936.30 an ounce, down 0.48% on the day.

Not only does Hooper see solid long-term bullish support for gold, but she said that an impending government shutdown could create some near-term safe-haven demand for the precious metal.

Congress has been unable to pass any funding legislation and it is expected the government will run out of funding for the fiscal year starting Oct. 1. According to some pundits, even if legislation was passed this week, it wouldn't avoid a short shutdown next week.

Although a shutdown wouldn't impact the nation's sovereign debt, it would affect how it could conduct business domestically. Government employees would be furloughed.

Economic risks supporting gold in neutral territory around $1,950

Hooper said the shutdown's economic impact will depend on how long it lasts. However, she added that it does bring further attention to the nation's growing debt issues.

"If we were to go into a shutdown, it is likely to create a crisis of confidence," she said. "Any concerns about the government's ability to handle its growing deficit is a positive for gold."

The comments come as the U.S. national debt as surpassed $33 trillion. At the same time, the national deficit has exceeded $1.5 trillion, increasing 61% from last year's deficit.

Hooper said that despite gold's lackluster price action so far this year, it still has a solid path back to $2,000 an ounce.

"As more investors become concerned about the U.S.' growing debt problems, that becomes a positive catalyst for gold," she said. "more doors and a few windows are opening up, creating new opportunities for gold to gain momentum."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.