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The March Event That Could Push Gold Higher
Ever since the election of Donald Trump, we’ve seen a dramatic shift in the markets. U.S. stocks surged to all-time highs and the U.S. dollar index hit its highest level since March 2003. With the improvement in market sentiment and the greenback’s strength, gold went into a sharp correction, dropping more than 16% from its 2016 high.1
Gold has given back much of the gains it made during the first half of 2016. Many investors are now asking themselves if the bear market for gold has resumed. With the Fed planning to hike interest rates three times in 2017, many think that gold could face some headwinds this year. But, there’s one political event on March 16 that could change everything.
Here’s a hint. A similar event also took place in 2011 and 2013. In 2011, it helped to propel gold to all-time highs. And, in 2013, when gold was in the midst of its bear market, it gave gold a short-term boost. Could something similar happen on March 16?
Another Showdown Could Be Coming In Washington
Loyal readers of the Daily Pfennig® newsletter probably know what I’m talking about: a “debt ceiling showdown.”
For those of you not familiar with that concept, the debt ceiling is the official limit of how much the U.S. government is allowed to borrow. Because our national debt keeps growing every year, Congress has to raise the limit from time to time. They’ve done it dozens of times. Sometimes it’s a non-event for the market, with Congress reaching a deal without much drama. But, other times—and this has been particularly true in recent years—the political parties are unwilling to compromise. Consequently, these negotiations end up creating a lot of turmoil in the markets.
In 2011, for example, the Republican Party and President Obama couldn’t agree on the terms of the deal. Negotiations went on for a while, creating a lot of uncertainty.2 There were talks of the U.S. government defaulting on its debt. Rating agencies even downgraded our debt from the top AAA rating. Eventually, they reached a deal, raising the ceiling just two days before the deadline. Then, two years later, our national debt hit the ceiling again. And, once again, there was another round of tense negotiations in what became known as the debt ceiling crisis of 2013. That time, it resulted in a government shutdown.3 Even though the shutdown was short lived; it highlighted the political dysfunction in Washington.
I’m telling you all this because we may have another debt ceiling debate this year. This could become “the debt ceiling crisis of 2017.” Here’s why…
Bad News For Stocks, But Potentially Good News for Gold
Given the political division we saw during the recent election, one might assume that negotiations regarding the debt ceiling may not be easy. But, since the same political party will now be controlling the House and Senate, negotiations could be less contentious than in the past. Either way, the debt ceiling has become a political weapon in recent years, and we have no reason to believe politicians won’t use it again this time.
Even Treasury Secretary Jack Lew admits this has become a problem. He has said: “What once was a deadline that drove debates on the budget has transformed into a nihilistic platform for some in Congress to promote the very real risk of a default to advance narrow partisan agendas.” 4
One possible scenario is another government shutdown and threats of government default. Under that scenario, we could see a crisis of confidence in the U.S. dollar—at least in the short term. Considering the current sentiment toward stocks is very positive, we could also see a correction in the stock market. And, let’s not forget the Fed. If this debt ceiling debate ends up leading to market uncertainties, the Fed may have to delay its planned rate hikes for 2017.
These could all be positive factors for gold. Remember, in 2011 and 2013, the last two times we had a heated debt ceiling debate, gold tended to perform well. On both of those occasions, it prospered during the turmoil because of its “safe-haven” status. So, pay close attention to this upcoming debt ceiling debate. It could be the trigger that pushes gold higher in 2017.
Although it’s a different political landscape today from 2011 and 2013, and the same political party now controls the Executive and Legislative branches, we are dealing with politics and the risk of a heated debate is always present. Things may go more smoothly than ever with no concerns about raising the debt ceiling, or the Democratic minority and those Republicans who don’t agree with their new boss may bring up the same level of debate we’ve seen in past years. So, the first few months of the new administration should be interesting and readers can rest assured that we will keep a close watch on events.
Until the next Daily Pfennig® edition…
Chris Gaffney, CFA
EverBank World Markets, a division of EverBank