Gold slumps as Fed confirms its resolute stance on lowering inflation

In the span of just under two weeks, from Thursday, May 4 to Wednesday, May 17 we have seen gold drop substantially and concurrently the dollar gained substantially.

Gold traded to a high of $2085 on March 4 and today traded to a low of $1978 resulting in a drop of $107 in just under two weeks. This is a net decline of 5.26% per ounce. When we look at the dollar index it traded to a low of 100.53 on Thursday, March 4 and today traded to a high of 102.96. This means that the U.S. dollar when compared to a basket of eight other international currencies gained roughly 2.42% for the same period.

Comparing the percentage decline of gold to the percentage advance of the dollar index it is clear that dollar strength has been a major component to the fall in gold pricing. However, the decline in gold is not isolated to just dollar strength, additional selling pressure by market participants was also a major contributor.

It seems that the root cause of dollar strength as well as the substantial percentage decline in gold can be directly attributed to recent comments coming from Federal Reserve officials. In essence, Fed comments have reinforced the resolve and commitment to keep interest rates elevated and this is illustrated in the December 2022 “dot plot” showing that they would keep their benchmark interest rate (Fed fund rate) elevated throughout 2023. More importantly, they have expressed that a rate cut this year remains highly unlikely.

The Federal Reserve continues to use its primary tool to reduce inflation which is to raise interest rates which cause an economic contraction. An economic contraction works to lower the price of goods and services. Simply put the Federal Reserve works with the principle of supply and demand economics. Higher prices for goods and services will reduce demand.

Recent comments by the Federal Reserve have confirmed their commitment. According to MarketWatch, Underscoring the Fed’s resolve to curb inflation, Chicago Fed President Austan Goolsbee had said on Tuesday it was “far too premature to be talking about rate cuts,” while Cleveland Fed President Loretta Mester said “rates were not yet at a point where it could hold steady.”

As of 5:55 PM EDT Gold futures basis the most active June contract is currently fixed at $1985.70 after factoring in today’s decline of $7.30 Or 0.37%. The U.S. dollar is currently trading at 102.73.

Gary S. Wagner

For Kitco News

Time to Buy Gold and Silver

David

Gold, silver prices down on demand worries, bearish outside markets

Gold and silver prices are solidly lower near midday Tuesday. Weaker economic data coming out of China has prompted increased concerns about consumer and commercial demand for precious metals. Meantime, bearish outside market forces on this day are working against the metals markets—firmer U.S. dollar index, weaker crude oil and rising U.S. Treasury yields. June gold hit a two-week low today and was last down $20.20 at $2,002.40. July silver hit a six-week low today and was last down $0.441 at $23.845.

Risk appetite is not robust today but that is not helping out the safe-haven metals bulls at this point. U.S. stocks are mostly weaker after Home Depot reported a downbeat outlook for the retail consumer. U.S. House Speaker Kevin McCarthy said debt-ceiling negotiations have seen no progress. Congressional leaders and President Biden were set to meet at the White House today. The U.S. government could run out of money as soon as June 1. Said Ed Moya of OANDA: "Wall Street is bracing for something bad to happen, but no one has an idea on what will be that catalyst. It could be a debt-ceiling impasse, persistent banking fears, or a much weaker consumer as sticky inflation becomes more noticeable."

Meantime, U.S. retail sales rose 0.4%, an improvement from the 1.0 drop seen in the prior month, but less than the 0.8% consensus estimate.

China, the world's second-largest economy, got a generally downbeat data dump Tuesday. Industrial production rose 5.6%, year-on-year, in April–short of market expectations for a 10.1% growth rate. Industrial production rose 3.9%, year-on-year in March. Fixed asset investment was also lower than expected at 4.7%, year-on-year, compared to expectations of up 5.2%. Chinese electricity output fell in March by 8.2%, year-on-year. Aluminum output weakened in March and steel output has been declining. Gas output for March also declined as did coal mine production.

Gold price at risk of dropping to $1,900 as rally runs out of steam, markets pricing in Fed rate cuts too early, says ABN AMRO

Meantime, Comex copper futures prices are trending lower and just hit a 5.5-month low. The red industrial metal has been called "Dr. Copper" for decades. It's an important building component in global construction and thus can help forecast world demand in that major industry. Copper's present price downtrend and multi-month low are indicating an anemic global economy at present. That's also bearish element for gold and silver, from a demand perspective.

The key outside markets today see the U.S. dollar index firmer and near the daily high. Nymex crude oil prices are slightly lower and trading around $71.00 a barrel. Meantime, the benchmark 10-year U.S. Treasury note yield is presently fetching around 3.5%.

Technically, June gold futures prices hit a two-week low today. Bulls still have the firm overall near-term technical advantage. Prices are still in a 2.5-month-old uptrend on the daily bar chart. Bulls' next upside price objective is to produce a close above solid resistance at the record high of $2,085.40. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,980.90. First resistance is seen at today's high of $2,022.70 and then at this week's high of $2,027.50. First support is seen at $2,000.00 and then at $1,980.90. Wyckoff's Market Rating: 7.0

July silver futures prices hit a six-week low today. The silver bulls and bears are on a level overall near-term technical playing field but the bulls are fading. Silver bulls' next upside price objective is closing prices above solid technical resistance at the April and May high of $26.435. The next downside price objective for the bears is closing prices below solid support at $23.00. First resistance is seen at this week's high of $24.395 and then at $24.735. Next support is seen at $23.50 and then at $23.25. Wyckoff's Market Rating: 5.0.

July N.Y. copper closed down 780 points at 367.30 cents today. Prices closed nearer the session low and hit a 5.5-month low today. The copper bears have the overall near-term technical advantage. Prices are in a four-week-old downtrend on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 400.00 cents. The next downside price objective for the bears is closing prices below solid technical support at 350.00 cents. First resistance is seen at today's high of 375.45 cents and then at this week's high of 377.90 cents. First support is seen at today's low of 365.70 cents and then at 360.00 cents. Wyckoff's Market Rating: 3.0.

Jim Wyckoff

For Kitco News

Time to Buy Gold and Silver

David

Debt ceiling negotiations will resume on Tuesday which supports gold prices

A second debt limit meeting between President Joe Biden and Senate majority leader McCarthy and other top congressional leaders will be held tomorrow, Tuesday, May 16. The divide between both sides was too wide for any progress to result from their first meeting. Staff on both sides negotiated through back channels to find common ground and potential compromises over the weekend.

The probability that tomorrow’s talks will yield any progress is remote, and the number of days remaining before June 1st is dwindling. Add to that the president's schedule this month, traveling to Japan from May 19 – 21, and Australia 22 – 24.

President Biden said, “I remain optimistic because I am a congenital optimist, and I think we’ll be able to do it.” on Sunday. However, McCarthy still is steadfast in that he wants to attach spending reductions to a debt ceiling increase. While President Biden still insists that he will not negotiate over the debt limit, calling on Congress to pass a clean increase before addressing budget reductions.

According to the Financial Post today, “In her second letter to Congress in two weeks, Treasury Secretary Janet Yellen confirmed that the agency will be unlikely to meet all U.S. government payment obligations by early June, triggering the first-ever U.S. default. The debt ceiling could become binding by June 1, she said.”

A US debt default would greatly hinder the ability of the Federal Reserve to set short-term interest rates. Reuters today reported that “A default on U.S. Treasury debt would be a leap into the unknown for the Federal Reserve's ability to conduct monetary policy to achieve its job and inflation goals. That's because U.S. government bonds are the key to how the central bank sets its short-term interest rate target. Anything that gums up the Treasuries market could scramble those mechanics.”

The debt ceiling crisis and potential default continue to be highly supportive of gold prices keeping gold above $2000 an ounce. As of 5:14 PM EDT, gold futures basis the most active June contract are currently fixed at $2020.40 after factoring in today’s fractional gains of $1.60. The U.S. dollar index is fixed at 102.27, after factoring in a decline today of 0.23%.

Gary S. Wagner

Time to Buy Gold and Silver

David

More than a quarter of Americans now view gold as the best long-term investment

Gold is holding above $2,000 an ounce, but it's not making any new significant gains. And silver is down more than 6% in the last five days.

Weaker economic data has reignited recession fears, keeping gold and silver on the sidelines because of lower demand expectations.

Here's a look at Kitco's top three stories of the week:

3. Palantir sells all of its gold-bar holdings worth $50 million

2. Confidence in Fed Chair falls to lowest on record as Jerome Powell attempts to balance inflation fight with banking crisis uncertainty – Gallup poll

Americans' approval of gold as best long-term investment doubles from last year, says Gallup survey

1. Gold price should be at $2,200 right now, U.S. dollar is overvalued by 20%, says BCA Research

Anna Golubova

For Kitco News

Time to Buy Gold and Silver

David

Gold price troubled by U.S. dollar’s moves as Fed’s rate expectations diverge

Gold price troubled by U.S. dollar's moves as Fed's rate expectations diverge

After hitting a high of $2,055 an ounce this week, a move higher in the U.S. dollar weighed on the gold market, forcing the metal to end the week lower. Analysts point to divergence in Federal Reserve interest rate expectations as additional noise in the trading environment.

"This week was all about the dollar, which has had a significant rally, taking away some of gold's appeal," OANDA senior market analyst Edward Moya told Kitco News.

There is also a widening gap between market expectations and what the Fed's dot plot says, TD Securities global head of commodity strategy Bart Melek said. "Even if the Fed is more dovish than it is now, there is a risk that the market might have to come closer to where the dots are. That's what gold is pricing in here," Melek told Kitco News.

A conflicting narrative is developing between the Fed signaling a pause in June and some Fed officials calling for more rate hikes.

Fed Governor Michelle Bowman said Friday that more policy tightening might be needed. "Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy to lower inflation over time," Bowman said. "I also expect that our policy rate will need to remain sufficiently restrictive for some time to bring inflation down and create conditions that will support a sustainably strong labor market."

Markets will have a hard time feeling confident that the Fed is done raising rates when Fed officials are saying these types of comments. "Bowman's comments caught my attention," Moya noted. "And if core inflation is still above 5% in the middle or end of summer, you should not be surprised if we get a much more hawkish Fed."

What this means for gold is that its path to record highs will be more complex than some would like to believe.

"I'm still bullish but not as aggressively. I am hesitant when people bet against the dollar, should not be surprised for the move higher to last a little longer. It could be troubling for gold. But the macro backdrop is great. We are still looking at a recession in the second half of this year or early 2024," Moya said.

Key events analysts are watching next week include more macro data, such as retail sales, the debt ceiling debate as the June 1 deadline nears, and the banking sector contagion risks.

"There are still too many risks that will lead investors to need more safe haven assets. There is too much geopolitical stress, and the debt ceiling debate is at an impasse. That X-date might get pushed out by a few weeks," Moya noted.

That additional market stress is coming, and credit conditions are tightening. "This is bad news for the economy," Moya said.

The recent macro data points to stubborn inflation, with the headline annual number falling below 5% in April, but the Fed's preferred core figure still at 5.5%.

The Fed rate hike expectations might remain in limbo until the new Fed dot plot is released at the June meeting, said Melek.

"Gold can go sub $2,000. There is strong support at around $1,965. We still expect $2,100, but that won't be sustained until the later part of the year when it becomes more certain that the Fed will ease," he noted.

From a technical point of view, the rally in gold is feeling some topside exhaustion, said Forex.com senior technical strategist Michael Boutros. The next key level to watch is $1,995. "If we break below that, expect a larger correction," Boutros said.

However, as long as $1,926 an ounce holds, the trade in gold is still constructive. "Fundamentals continue to support gold or at least give a floor to this," the strategist added.

Next week's data

Monday: NY Empire State manufacturing index

Tuesday: U.S. retail sales, industrial production

Wednesday: U.S. housing starts, building permits

Thursday: U.S. jobless claims, Philadelphia Fed manufacturing index, existing home sales,

Friday: Fed Chair Powell speaks (conversation with Chair Jerome Powell and Ben Bernanke, former Chair of the Board of Governors of the Federal Reserve System at the Thomas Laubach Research Conference)

Anna Golubova

For Kitco News

Time to Buy Gold and Silver

David

Biden and McCarthy locked in disagreement postponing negotiations

The Washington standoff over raising the debt ceiling has raised economic concerns on a global basis. A nonpartisan congressional report cited a "significant risk” of a historic default within the first two weeks of June. A report by the U.S. Congressional Budget Office confirmed statements by Treasury Secretary Janet Yellen warning that a government default could come as early as June 1.

The debt limit meeting between President Joe Biden and top lawmakers which was scheduled for today has been postponed. The meeting has been rescheduled for early next week. The divide between both sides remains too large for any genuine progress to result from the meeting today. Rather staff on both sides will continue to negotiate through back channels to find common ground, as well as compromises that both the Democrats and Republicans are willing to consider.

According to Republican representative Daniel Webster, "Spending levels are the key… Spending cuts are a place where we are stuck. Not with all of them, but with a list of them.” President Biden's 2024 budget request relies on tax increases to reduce deficits while proposing to increase discretionary spending by 5% next year. That creates a $200 billion differential with House Republicans who believe an 8% budget cut is necessary while increasing the defense budget.

Concern over the potential for a U.S. default is global. At a meeting of the Group of Seven (G7) David Malpass President of the World Bank said that the "looming risk of a default, which would be the first in U.S. history, was adding to problems facing the slowing global economy”.

Although gold had fractional declines this week prices have been heavily supported by fears that no agreement will be reached by June 1 when the government will no longer be able to pay all its obligations.

As of 5:00 PM EDT Gold futures basis the most active June contract is currently fixed at $2015.60 after factoring in today's decline of $4.90 or 0.24%. Gold had a fractional decline when compared to last Friday's close as well as compared to Monday's open and current pricing. The most prominent factor taking gold lower this week was dollar strength. The U.S. dollar index opened at approximately 101 and is currently trading at its highest value this week of 102.5 a net gain of 1 ½% taking the dollar index to 102.54.

Gary Wagner

Contributing to kitco.com

Time to Buy Gold and Silver

David

Gold, silver hit by heightened recession worries

Gold prices are lower and silver prices sharply lower in midday U.S. dealings Thursday. Some fresh banking jitters and weaker U.S. economic data today have rekindled concerns about an economic recession being on the horizon. Gold and silver market bulls are somewhat frustrated their metals are not performing better due to safe-haven demand amid the keener marketplace uncertainty. However, at least on this day it appears metals traders are more focused on the bearish weaker consumer and commercial demand implications a U.S. and/or global recession would have on metals markets. June gold was last down $17.10 at $2,020.10 and July silver was down $1.283 at $24.37.

Today’s producer price index report for April came in at up 0.2%, versus expectations for up 0.3% from March, and compares to a drop of 0.5% in the March report, month-on-month. Gold prices initially were given a modest boost after the tamer PPI print.

However, the weekly U.S. jobless claims report showed claims jumped higher than expected in the latest week, at up 264,000 versus the forecast rise of 245,000. That report, combined with PacWest bank shares dropping sharply after reports that deposits dropped 9.5% last week, unsettled the marketplace and reignited recession fears. The U.S. dollar index and U.S. Treasuries saw better demand today, on safe-haven bids. Still, it’s my bias that gold and silver will see better safe-haven demand if the banking turmoil heats up in the near term.

Global stock markets were mostly firmer overnight. U.S. stock indexes are mixed at midday. Traders and investors are still monitoring the U.S. debt-limit-extension rhetoric coming from lawmakers. President Biden meets with congressional leaders again Friday, after little progress was made in a meeting earlier this week. U.S. Treasury Secretary Yellen said it’s doubtful the Biden administration could avoid a government default without Congress agreeing on a plan to deal with the debt matter.

The Bank of England met Thursday on its monetary policy, with the BOE raising its main interest rate by 0.25%, as expected.

The key outside markets today see the U.S. dollar index solidly higher. Nymex crude oil prices are lower and trading around $71.50 a barrel. Meantime, the benchmark 10-year U.S. Treasury note yield is presently fetching 3.3%–down following the PPI and jobless claims data.

Technically, June gold futures bulls still have the solid overall near-term technical advantage. Prices are in a 2.5-month-old uptrend on the daily bar chart. Bulls’ next upside price objective is to produce a close above solid resistance at the record high of $2,085.40. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,980.00. First resistance is seen at today’s high of $2,047.60 and then at this week’s high of $2,056.00. First support is seen at $2,007.00 and then at $2,000.00. Wyckoff's Market Rating: 7.5.

July silver futures prices hit a five-week low today and bulls have faded. A price uptrend on the daily chart has been negated. The silver bulls do still have the overall near-term technical advantage. Silver bulls' next upside price objective is closing prices above solid technical resistance at the April and May high of $26.435. The next downside price objective for the bears is closing prices below solid support at $23.00. First resistance is seen at $24.735 and then at $25.00. Next support is seen at $24.00 and then at $23.75. Wyckoff's Market Rating: 6.5.

July N.Y. copper closed down 1,490 points at 369.20 cents today. Prices closed near the session low and hit a 5.5-month low today. The copper bears have the overall near-term technical advantage and gained more power today. Prices are in a four-week-old downtrend on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 400.00 cents. The next downside price objective for the bears is closing prices below solid technical support at 350.00 cents. First resistance is seen at 375.00 cents and then at 380.00 cents. First support is seen at 365.00 cents and then at 360.00 cents. Wyckoff's Market Rating: 3.0.

Jim Wyckoff

For Kitco News

Time to Buy Gold and Silver

David

Gold, silver sell off on profit taking; US PPI now in focus

Gold and silver prices are lower at midday Wednesday and have erased the modest gains seen in the immediate aftermath of a U.S. inflation report that was close to market expectations. Profit taking from the speculative futures traders is featured in both markets. June gold was last down $11.00 at $2,031.90 and July silver was down $0.343 at $25.555.

The U.S. data point of the week saw the April consumer price index come in at up 0.4% from March and up 4.9%, year-on-year. The CPI was expected to come in at up 0.4% from March and up 5.0%, year-on-year. CPI in March was up 5.0%, year-on-year. The April core CPI (excluding food and energy) was up 0.4% from March and up 5.5%, year-on-year, versus the forecast of up 5.5% and compares to up 5.6% in the March report. In the immediate aftermath of the CPI report the marketplace breathed a sigh of relief the inflation numbers did not come in hotter than expected. However, after digesting the data, overall, traders and investors reckoned the CPI data is a wash and probably does not alter the Federal Reserve's trajectory of its monetary policy. The marketplace is now focused on Thursday morning's U.S. producer price index report.

Global stock markets were mixed to weaker overnight. U.S. stock indexes are mixed at midday.

President Biden on Tuesday afternoon met with House Speaker Kevin McCarthy and other congressional leaders to discuss raising or suspending the U.S. debt ceiling. No agreement was reached but the lawmakers and the president will meet again Friday. U.S. Treasury Secretary Janet Yellen recently said the U.S. government could run out of money by June 1 if the debt ceiling is not raised. As the month of May winds down and if no U.S. debt extension is agreed upon, general marketplace anxiety will ratchet up.

In other news, China is expanding its gold reserves and may be abandoning the U.S. dollar. Nigel Green of deVere Group says such may be occurring after news that China's gold reserves increased by 8.09 tons in April. Total gold stockpiles in China reached 2,076 tons after that nation added 120 tons in the five months through March. "Historically, China has been a major buyer of U.S. Treasuries, but this has seen a marked cooling off as Beijing swaps them out in favor of gold."

Gold is well supported at $2,000 but don't look for record highs before Q2 2024 – Commerzbank

Green said this strategic move will limit China's dependence on the U.S. dollar, as trade and political relations with the U.S. deteriorate. "Buying gold rather than dollars may also signal moves by China that it is eventually seeking to replace the U.S. dollar as the world's reserve currency. Building stocks of the precious metal and allowing the Chinese yuan to be traded freely would weaken the U.S. dollar's dominance as the global reserve currency."

The key outside markets today see the U.S. dollar index slightly lower. Nymex crude oil prices are weaker and trading around $73.00 a barrel. Meantime, the benchmark 10-year U.S. Treasury note yield is presently fetching 3.462% and dipped a bit after the CPI report.

Technically, June gold futures bulls still have the solid overall near-term technical advantage. Prices are in a 2.5-month-old uptrend on the daily bar chart. Bulls' next upside price objective is to produce a close above solid resistance at the record high of $2,085.40. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,980.00. First resistance is seen at today's high of $2,056.00 and then at $2,063.40. First support is seen at this week's low of $2,022.00 and then at $2,007.00. Wyckoff's Market Rating: 7.5

July silver futures prices were scoring a bearish "outside day" down. The silver bulls have the solid overall near-term technical advantage. Silver bulls' next upside price objective is closing prices above solid technical resistance at $27.00. The next downside price objective for the bears is closing prices below solid support at $24.00. First resistance is seen at $26.00 and then at the April high of $26.435. Next support is seen at today's low of $25.455 and then at $25.25. Wyckoff's Market Rating: 7.5.

July N.Y. copper closed down 710 points at 383.05 cents today. Prices closed near the session low. The copper bears have the overall near-term technical advantage. Prices are in a three-week-old downtrend on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 408.00 cents. The next downside price objective for the bears is closing prices below solid technical support at the January low of 372.45 cents. First resistance is seen at 390.00 cents and then at this week's high of 395.95 cents. First support is seen at the April low of 381.65 cents and then at 380.00 cents. Wyckoff's Market Rating: 4.0.

Jim Wyckoff

For Kitco News

Time to Buy Gold and Silver

David

Gold, silver traders tread water ahead of U.S. debt talks, CPI

Comex gold and silver futures prices are not straying too far from unchanged levels at midday Tuesday. Precious metals traders are very tentative ahead of important government and economic developments in the U.S. that will soon come into play for the marketplace. June gold was last up $0.80 at $2,034.00 and July silver was down $0.059 at $25.775.

President Biden later today meets with House Speaker Kevin McCarthy and other congressional leaders to discuss raising or suspending the U.S. debt ceiling. U.S. Treasury Secretary Janet Yellen told lawmakers last week the U.S. could default on its debt as early as June 1 if Congress does not raise or suspend the debt limit before that time. No progress at today’s meeting would likely cause at least a bit of marketplace anxiety.

The U.S. data point of the week is Wednesday morning’s April consumer price index report, which is expected to come in at up 5.0%, year-on-year, which would be the same as reported in the March CPI. The April core CPI is forecast up 5.5% versus up 5.6% in the March report. A Federal Reserve banking lender survey released Monday showed bankers have curtailed loans to customers, which is likely to help tame inflation.

Gold's recent push near all-time highs was just a test run as Citigroup's Morse sees prices hitting $2,400

Global stock markets were mixed overnight. U.S. stock indexes are weaker at midday. Trading has turned choppy and sideways in the stock indexes.

The key outside markets today see the U.S. dollar index higher. Nymex crude oil prices are lower and trading around $72.00 a barrel. Meantime, the benchmark 10-year U.S. Treasury note yield is presently fetching 3.52%.

Technically, June gold futures bulls have the solid overall near-term technical advantage. Prices are in a 2.5-month-old uptrend on the daily bar chart. Bulls’ next upside price objective is to produce a close above solid resistance at the record high of $2,085.40. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,980.00. First resistance is seen at $2,050.00 and then at $2,063.40. First support is seen at this week’s low of $2,022.00 and then at last Friday’s low of $2,007.00. Wyckoff's Market Rating: 8.0

July silver futures bulls have the solid overall near-term technical advantage. Silver bulls' next upside price objective is closing prices above solid technical resistance at $27.00. The next downside price objective for the bears is closing prices below solid support at $24.00. First resistance is seen at $26.00 and then at the April high of $26.435. Next support is seen at today’s low of $25.57 and then at $25.25. Wyckoff's Market Rating: 8.0.

July N.Y. copper closed down 345 points at 389.50 cents today. Prices closed nearer the session low. The copper bears have the overall near-term technical advantage. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 408.00 cents. The next downside price objective for the bears is closing prices below solid technical support at the January low of 372.45 cents. First resistance is seen at this week’s high of 395.95 cents and then at last week’s high of 400.50 cents. First support is seen at this week’s low of 387.65 cents and then at the April low of 381.65 cents. Wyckoff's Market Rating: 4.0.

Jim Wyckoff

For Kitco News

Time to Buy Gold and Silver

David

Gold price settles above $2,020 as Yellen warns of ‘constitutional crisis’ if debt cap not raised

With the chance of a U.S. default in a matter of weeks, U.S. Treasury Secretary Janet Yellen warned that if the debt ceiling is not lifted, it could trigger a "constitutional crisis."

"It's Congress's job to do this. If they fail to do it, we will have an economic and financial catastrophe that will be of our own making," Yellen told ABC on Sunday. "And we should not get to the point where we need to consider whether the president can go on issuing debt. This would be a constitutional crisis."

The debt cap negotiations should not be done "with a gun to the head of the American people," Yellen added.

The latest message comes ahead of U.S. President Joe Biden's Tuesday meeting with Republican House Speaker Kevin McCarthy, Republican Senate Minority Leader Mitch McConnell and top congressional Democrats to discuss the debt issue.

"The meeting between President Biden and Republican leaders on Tuesday to discuss the U.S. debt ceiling will be closely watched. We think that political talks will go on for some time before an agreement to raise the debt ceiling is finally reached, which could weigh on risk appetite," Capital Economics commodity economists said.

Negotiations are currently at an impasse after the Republican-led House of Representatives passed a bill in April that would raise the debt ceiling conditional on extensive spending cuts, which Biden is against.

The federal government reached the cap on borrowing back in January. Since then, the Treasury has employed "extraordinary measures" to pay the bills.

Last week, Yellen told Congress that the U.S. could run out of money by June 1. "After reviewing recent federal tax receipts, our best estimate is that we will be unable to continue to satisfy all of the government's obligations by early June, and potentially as early as June 1, if Congress does not raise or suspend the debt limit before that time," Yellen wrote in a letter to House Speaker Kevin McCarthy.

Uncertainty over the debt ceiling has been one of gold's drivers during the past month. "Gold and silver prices rose, which can only be explained by safe-haven demand in a week when another U.S. bank failed and concerns mounted about the approach of the U.S. debt ceiling," economists at Capital Economics said. "We suspect that the gold price will remain elevated while concerns about the banking sector and debt ceiling persist."

On Monday, gold hit a daily high of $2,037.10 an ounce, with June Comex gold futures last trading at $2,028.00, up 0.16% on the day.

"Gold looks like it wants to make another run towards record territory. Too many recessionary risks are on the table for gold to see a significant pullback," OANDA senior market analyst Edward Moya said.

Analysts expect negotiations over the debt ceiling to get right down to the wire but ultimately avoid a default. In the meantime, volatility remains the name of the game, said ABN AMRO senior U.S. economist Bill Diviney.

"Financial markets are likely to become increasingly sensitive to developments over the coming weeks as the U.S. Treasury runs down its cash buffers," Diviney said Monday. "Similar to the 2011 debt ceiling impasse, the government is divided along partisan lines, with Democrats controlling the presidency and the Senate, and Republicans controlling the House."

To learn more about how gold behaved during the 2011 debt ceiling crisis, click here.

A default scenario, something that most analysts are ruling out, will have profound negative implications for the U.S. economy.

"A technical default – one that involves the government missing coupon payments and therefore triggering credit default swaps – is highly unlikely. Should the Treasury run out of cash, we expect it to prioritise bond coupon payments over other financial commitments, even if that means swingeing cuts to spending and a partial government shutdown," Diviney said. "However, the longer this were to go on for, the negative impact on financial markets and on the economy would become increasingly non-linear."

One major negative effect would be bond yields falling, with demand for safe havens offsetting higher risk premium effects, Diviney added. "This happened during the 2011 debt ceiling impasse when S&P downgraded the U.S. sovereign from AAA to AA+," he said.

Anna Golubova

For Kitco News

Time to Buy Gold and Silver

David