The government shutdown, which is currently six days in, has had some interesting and unexpected consequences on the stock market and precious metals market. On 10/1, the stock market continued its upward trend without skipping a beat, while the precious metals market got hammered. Investors were caught off guard, as uncertainty typically doesn’t bode well for stocks, while gold and silver historically have seen some of its strongest returns in the midst of uncertainty. While gold and silver as of this writing have since bounced back to its pre-shutdown levels, it’s clear that the showdown in Washington D.C. has had very little impact on the gold and silver markets. Below are a few reasons why we believe that the government shutdown has had minimal impact on the gold and silver markets.
Crying Wolf
We believe that the American public is starting to catch on to the fact that a government shutdown is not as tragic as our politicians would have us believe. In fact, government shutdowns are more common than most people may realize. In fact, there have been 17 government shutdowns since 1976, with the most recent occurring just a short 17 years ago during Clinton’s presidency. With the exception of some minor inconveniences, such as national parks being closed, most individuals haven’t experienced any direct consequences as a result of the shutdown. The likely reason is that reductions in government spending have primarily been in the form of furloughing of non-essential government employees. Below is a chart courtesy of www.zerohedge.com, which highlights the percentage of employees furloughed from various agencies/departments:
New Normal
Multi-billion and trillion dollar deficits have been so common place in recent years that U.S. citizens have become immune to such bloated figures. It was Dick Cheney who famously stated during the Reagan Administration that “deficits don’t matter!” To the average citizen, that appears to be the case. After all, core inflation (excluding housing and oil) remains relatively subdued and tax increases have been inconsequential. Additionally, when the Federal Reserve has a printing press at their disposal, there’s no amount of debt that the nation can’t handle. At the moment, the Federal Reserve is buying $85 billion a month in mortgage backed and long term bonds, which have kept long term bond rates at close to record lows. In fact, the Federal Reserve is currently the largest buyer of U.S. debt, monetizing well over 50% new treasury bonds being issued.
Lack of a Catalyst
The lack of any major catalyst has helped to keep gold and silver priced subdued. During the financial collapse in 2008, most major banks were teetering on the edge of bankruptcy, the stock market was spiraling out of control, Lehman Brothers, one of the world’s largest brokerage houses, closed their doors, and many companies were slashing their workforce in droves. All of the uncertainty that we experienced helped to bolster gold and silver prices, as precious metals are considered to be a safe haven in times of crisis. While GDP continues to merely sputter along and hiring appears to have slowed, there appear to be no major catalysts on the horizon that would dramatically impact the value of gold and silver.
What to Look For
Now that we’ve explained why gold and silver prices haven’t surged in response to the recent government shutdown, we’ll share with you a few potential situations that may give rise to a spike in the gold and silver markets. The Federal Reserve’s current monetary base is $3.6 trillion, which has quadrupled over the past few years. If you see the Fed’s monetary base increase in a parabolic-type move from its current levels, it may be trying to avert a financial disaster, for which you need to be prepared.
Don’t pay much attention to the headline unemployment rate. Rather, you should monitor the U6 rate, which can be found on the Bureau of Labor Statistics’ (BLS) website at the following link. This rate takes into consideration part time workers, the marginally employed and individuals who have quit working due to frustration with the employment situation. A rise in the U6 rate is a sign that the economy is likely contracting.
Another statistic to pay attention to is the consumer price index, which measures the current inflation rate. Historical and current inflation rates can also be found on BLS’ website here.
While economists and the financial media pay close attention to the Gross Domestic Product (GDP), this information may not be as important as the previously mentioned statistics, as GDP includes government spending, which can account for a large portion of the GDP. When the government isn’t in shutdown mode, GDP information can typically be found at the Bureau of Economic Analysis’ website.
Summary
In summary, we believe that gold and silver prices haven’t seen a strong move to the upside following the announcement of the government shutdown because individuals have seen very little to no impact to the economy as a result of the shutdown. Additionally, high government spending, which is to blame for our current situation, is considered by many to be the new norm, and as such, debt ceiling issues are becoming more commonplace and less impactful. Lastly, at the moment, there doesn’t appear to be a catalyst on the horizon that may cause gold and silver prices to spike. However, it would behoove you to be cognizant of the several factors that we mentioned above that could have a significant impact on gold and silver prices.
