Unless you’ve been living under a rock the past couple of weeks, you’re aware of the upcoming debt ceiling crisis, which is coming to a head tomorrow. Treasury Secretary Jacob Lew has indicated that the “extraordinary measures” taken by the Treasury to continue to fund the U.S. government will be exhausted on Thursday, October 17th. If Congress is unable to reach an agreement with respect to increasing the debt ceiling by tomorrow, the government will remain in a partial shutdown and runs the risk of a default. The uncertainty surrounding the resolution of the matter has created chaos in the markets; especially in the stock and precious metals markets, where we have seen wild fluctuations over the past few days. While all markets will be affected to some extent depending on what transpires tomorrow, we thought that we would take a minute to explore the potential impact on the precious metals market; namely gold and silver.
Debt Ceiling is Raised
If the House and Senate are able to reach an agreement on a bill to raise the debt ceiling, which must also be approved by the White House, the resolution of the matter will likely settle the equity markets. We’ve already seen a glimpse as to what may occur based on the direction of the markets when it appeared as though a resolution was imminent. We saw stocks begin to soar and the gold and silver markets sell off. Since gold and silver, in part, serve as a hedge or a safe haven in the event of economic crisis or uncertainty, investors that have been investing in the metals for this purpose may exit their positions. Of course, raising the debt ceiling will likely have a long term negative impact on the economy and the value of the dollar. Furthermore, the Federal Reserve will likely need to maintain or increase their quantitative easing efforts to keep interest rates low; especially with all of the new bonds that will need to be auctioned off. These efforts all bode well for the gold and silver markets in the long term even if the immediate response puts downward pressure on the market.
Debt Ceiling Isn’t Raised
Most pundits are under the impression that there will be a resolution of the debt ceiling issue; even if it merely involves a short term continuing resolution while Congress continues its attempts to reach a compromise. However, it’s certainly possible that the debt ceiling won’t be raised; at least in the short term. If this occurs, we can expect to see a sharp selloff in the equities market and a spike in the price of gold and silver. To compound the issue, Fitch has recently threatened to downgrade the creditworthiness of the United States if it doesn’t resolve the debt ceiling crisis. If this occurs, we expect that the dollar will weaken versus other major currencies, which will further benefit the gold and silver markets, as the dollar and the precious metals market typically move in opposite directions. Interest rates will also likely increase if the U.S. is seen as a default risk. The Federal Reserve may attempt to counteract rising interest rates by increasing their quantitative easing efforts, which will further drive down the value of the dollar. Presumably the political pressure will mount to the point where Congress is forced to pass a bill to raise the debt ceiling even if both sides of the aisle need to make major concessions.
In summary, the debt ceiling crisis has captured the attention of most Americans and is currently playing havoc on the markets. We’ve outlined above the most likely scenarios in the event the debt ceiling is raised and the potential consequences if it isn’t. We’ve also highlighted the potential ramifications on the gold and silver markets and believe that the price of gold and silver will likely benefit regardless of the decision; even if we experience a short term pullback in the precious metals markets.