Gold price trades below $1,950 ahead of Congress debt ceiling vote and June Fed decision

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(Kitco News) With market expectations leaning towards another rate hike in June and the debt ceiling deal ready for a Congress vote, gold is taking a breather just below $1,950 an ounce.

After an eventful weekend, spot gold was steady and flat on the day, last trading at $1,946.50 an ounce.

U.S. President Joe Biden and House Speaker Kevin McCarthy finalized the debt ceiling deal on Sunday. The new agreement, which suspends the $31.4 trillion debt ceiling until January 1, 2025, is ready to move to Congress for a vote.

"This is a deal that's good news for ... the American people," Biden told reporters. "It takes the threat of catastrophic default off the table, protects our hard-earned and historic economic recovery."

The next hurdle is for the agreement to pass through a narrowly divided Congress before June 5, when U.S. Treasury Secretary Janet Yellen said the country would run out of money to pay its bills.

"Based on the most recent available data, we now estimate that Treasury will have insufficient resources to satisfy the government's obligations if Congress has not raised or suspended the debt limit by June 5," Yellen said in a letter addressed to McCarthy.

Biden urged both the House and Senate to pass the new debt ceiling deal. Republicans have control of the House by 222 to 213, while Democrats control the Senate by 51 to 49.

Some members of the Republican hardline Freedom Caucus said they would try to block the deal in a House vote expected Wednesday. "We're going to try," Representative Chip Roy, a Freedom Caucus member, said in a tweet.

The debt ceiling issue is not over until Congress passes the deal, said ANZ head of global economics Brian Martin.

"Any Senate lawmaker can force procedural votes, holding up the bill for days," Martin wrote in a note Monday. "McCarthy and Biden sounded an optimistic tone; others less so. Despite all the uncertainty, economic activity is continuing to hold up well, and U.S. domestic demand started Q2 briskly. We think that if a debt ceiling agreement is reached, the Fed will need to tighten further."

Also, raising the debt ceiling does not solve the issue in the long term, noted MKS PAMP head of metals strategy Nicky Shiels.

"By January 2025, the debt will increase from $31.4tn to $36tn, but to get there, there are no major spending reforms with tiny $50bn in cuts, and they clawed back some unspent COVID money," Shiels said Monday. "Put another way, it's like if you owe $314K (U.S.' $31.4tn debt) and get approved for 1.5yrs of unlimited credit line extension by agreeing to reduce your spending by just $500 ($50bn in gov spending cuts). Not a win for hard money types."

Looking some years ahead, this is bullish for gold, with the U.S. debt projected to hit $50 trillion by 2050, Shiels added. "[It] may happen much sooner now, especially if a major economic recession ensues). In the longer-term, the U.S. has not solved its debt problem, and levels are skyrocketing, creating an underlying structural tailwind for gold buying (especially via CB gold purchases as they ramp up de-dollarization policies)," she said in a note.

Aside from the debt ceiling issues, gold is focused on the upcoming Federal Reserve rate decision.

"Gold fell last week amid signs of resilience in the U.S. economy. Inflation also remains stubbornly high. This could see the Fed maintain its tighter monetary policy," said ANZ senior commodity strategist Daniel Hynes.

For the June 13-13 meeting, markets are pricing in a 60% chance of another 25-basis-point hike versus a 40% chance of a pause, according to the CME FedWatch Tool.

"The prospect of the Fed hiking in June will get further close attention, where we contrast how U.S. data stacks up relative to the data flow in other economic heavyweights," said Pepperstone's head of research Chris Weston.

The next key data release is Friday's nonfarm payrolls, with market consensus calls expecting 180,000 positions added in May after April's 253,000. "The NFP report is the marquee event risk of the week, where the outcome could influence the pause/hike debate for the June FOMC," Weston noted.