Game of Chicken
Game of Chicken over Debt Ceiling
While it's not imminent, the August 2 deadline for raising the debt ceiling from its current $14.3 trillion level is fast approaching. The Treasury Department, as well as the Obama administration, has repeatedly warned that a debt default would be damaging to America's global standing. Republicans are seizing this as an opportunity to paint Obama as a spendthrift with no regard for the massive deficits and debts that burden the U.S. There is currently no deal on the table.
Moody's noted last week that it will put the U.S. government's triple A credit rating under review for a possible downgrade unless there is progress toward a deal by mid-July. The U.S. dollar has been under pressure as this dangerous game of brinkmanship rises.
The possibility of a gold price spike is rising the closer the deadline comes without a solution. While the likelihood of a default still remains low, the more time passes without an extension, the more gold will garner inflows as an insurance policy against a default.
Double-Dip Recession?
A flurry of economic reports released last week pointed to a growing possibility that the U.S. could face the prospect a double-dip recession. The Case-Shiller data, released last week, revealed that home prices fell 5.1% in the first quarter - sinking below their 2009 lows. Fresh worries relating to the outlook for consumer spending and over the state of bank balance sheets, which are riddled with mortgage-backed securities, helped spark a spike in risk aversion. The dismal housing data combined with news that manufacturing activity in the U.S. suffered its largest month over month decline since 1984.
The dismal jobs report released last Friday, showing a gain of only 54,000 nonfarm payrolls in May, was the icing on the cake. Stock prices have fallen five consecutive weeks, although the total decline has only been 4.7% as measured by the S&P 500. Gold was one of the few asset classes to move higher last week, gaining 0.6% as investors increased their bets that interest rates would stay near zero for not only 2011, but well into 2012.
The fed funds futures market currently predicts that a rate hike will not occur until September or October of 2012. Bond yields hit six-month lows. Unlike last autumn, inflation is rising, not falling - a fact that should support gold prices.
Garden-Variety Correction
Commodity prices have held up very well during this correction in equity prices. Oil is hovering around $100 per barrel and copper prices are comfortably above $4.00 per pound. As discussed here on numerous occasions, real interest rates in the U.S. continue to move lower. Sinking bond yields and stable to rising inflation have lead investors into gold as a store of value. With cash in the bank losing its purchasing power on a daily basis, the opportunity cost of holding gold is virtually zero. In response, both retail and institutional investors continue to move a greater percentage of their portfolios into the yellow metal.
Despite numerous calls for a collapse in gold, there are very few signs that the current sell-off is anything more than a garden variety correction. Gold continues to make higher lows and higher highs. Its 50-day moving average, which currently stands at $1,496 per ounce, has been solid support over the past six months. Two consecutive closes below the 50-day MA would be a sign that the correction could run deeper.
While it's not imminent, the August 2 deadline for raising the debt ceiling from its current $14.3 trillion level is fast approaching. The Treasury Department, as well as the Obama administration, has repeatedly warned that a debt default would be damaging to America's global standing. Republicans are seizing this as an opportunity to paint Obama as a spendthrift with no regard for the massive deficits and debts that burden the U.S. There is currently no deal on the table.
Moody's noted last week that it will put the U.S. government's triple A credit rating under review for a possible downgrade unless there is progress toward a deal by mid-July. The U.S. dollar has been under pressure as this dangerous game of brinkmanship rises.
The possibility of a gold price spike is rising the closer the deadline comes without a solution. While the likelihood of a default still remains low, the more time passes without an extension, the more gold will garner inflows as an insurance policy against a default.
Double-Dip Recession?
A flurry of economic reports released last week pointed to a growing possibility that the U.S. could face the prospect a double-dip recession. The Case-Shiller data, released last week, revealed that home prices fell 5.1% in the first quarter - sinking below their 2009 lows. Fresh worries relating to the outlook for consumer spending and over the state of bank balance sheets, which are riddled with mortgage-backed securities, helped spark a spike in risk aversion. The dismal housing data combined with news that manufacturing activity in the U.S. suffered its largest month over month decline since 1984.
The dismal jobs report released last Friday, showing a gain of only 54,000 nonfarm payrolls in May, was the icing on the cake. Stock prices have fallen five consecutive weeks, although the total decline has only been 4.7% as measured by the S&P 500. Gold was one of the few asset classes to move higher last week, gaining 0.6% as investors increased their bets that interest rates would stay near zero for not only 2011, but well into 2012.
The fed funds futures market currently predicts that a rate hike will not occur until September or October of 2012. Bond yields hit six-month lows. Unlike last autumn, inflation is rising, not falling - a fact that should support gold prices.
Garden-Variety Correction
Commodity prices have held up very well during this correction in equity prices. Oil is hovering around $100 per barrel and copper prices are comfortably above $4.00 per pound. As discussed here on numerous occasions, real interest rates in the U.S. continue to move lower. Sinking bond yields and stable to rising inflation have lead investors into gold as a store of value. With cash in the bank losing its purchasing power on a daily basis, the opportunity cost of holding gold is virtually zero. In response, both retail and institutional investors continue to move a greater percentage of their portfolios into the yellow metal.
Despite numerous calls for a collapse in gold, there are very few signs that the current sell-off is anything more than a garden variety correction. Gold continues to make higher lows and higher highs. Its 50-day moving average, which currently stands at $1,496 per ounce, has been solid support over the past six months. Two consecutive closes below the 50-day MA would be a sign that the correction could run deeper.
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