The SPDR Gold Trust (GLD), gold and silver, and the relative ETFs should soar this week on the pending potential government shutdown and the looming debt ceiling debacle. While the possible government shutdown is more of a nuisance than an economic catalyst, the attention it will bring to the ineptitude of Washington D.C. will raise high concern about the looming debt ceiling deadline. The issue will rightly raise question about the full faith in credit in the United States, and in turn pressure interest rates, treasury securities and equities. Intensifying concern about the U.S. dollar will serve to surge gold and silver prices and the prices of the relative ETFs, especially the widely held and followed SPDR Gold Trust .
The SPDR Gold Trust was up 0.9% on Friday, while the SPDR S&P 500 (SPY) fell 0.5%. You will note in the chart above that while stocks fell, the GLD excelled. In fact, all precious metals relatives, including the iShares Silver Trust (SLV), Market Vectors Gold Miners (GDX) and major gold miner Goldcorp (GG) gained on the day against the grain of stock market decline. I believe this is a sign of things to come for the GLD over the near-term, and see an opportunity for traders to benefit from D.C. dilly-dallying on the debt ceiling issue. Long-term investors would likewise be wise to hedge against the risk of a D.C. directed disaster, should Congress fumble the debt ceiling issue and lead the global investment community and/or rating agencies to question the full faith in credit of the United States.
The Debt Ceiling Catalyst for the GLD
The debt ceiling is important because if it is not raised by October 17, the United States will technically default on its obligations. While a "technical default" should technically be less traumatic than a default due to a real inability to meet obligations, even a technical default should raise alarm at the credit rating agencies and serve as a warning to buyers of U.S. debt. The once infallible U.S. treasury and dollar suddenly become less desirable as reserve currency globally and even lose their luster as the risk-free standard. Whenever the dollar standard comes into question, gold rises, because it served as the predecessor of the dollar for global economies. I would go so far as to say that gold is mankind's default if not inherent reserve currency, and questions about the full faith in credit in the United States serve as a reminder of that.
But this latest question about the dollar and U.S. debt are more than just a short-term blip for gold and silver and the relative securities, including the widely held GLD. Rather, it's the reason for the dilly-dallying that should trouble regular investors in U.S. treasuries and buyers of the dollar. The substantial debt obligations of the United States now amount to nearly $17 trillion, and while the budget deficit is much less now than it was a couple years ago, it is still contributing to a growing debt burden for a nation with burgeoning entitlement programs. If America cannot turn its deficit into a sustainable surplus and reduce its debt, it will soon have trouble paying anything other than the interest expense on its debt. If that were to happen, the nightmare of every elderly American will come true. The benefits they rely on could run dry. Furthermore, guess what happens to the many Americans receiving other support from the Federal government when those programs must be cut. The end result would be a sharp decline in American consumer spending, consolidation of excess retail capacity, closures of retail stores and services providers, and vacancies at commercial, industrial and even residential real estate. The American economy would suffer greatly, and that places the full faith in credit in the United States into serious question.
Gold and the GLD have had a tough year, as investors anticipated the end of Federal Reserve asset purchases and a shifting from extreme dovishness at the Fed to something a little more neutral. Concerns about inflation faded, and so many bets on the GLD and gold and silver and relatives eased. Capital flowed back into equities in a heavy way as well, and also into real estate, and so out of the GLD and relatives. As a result, the GLD dropped 20.4% year-to-date, and its peers have not fared well either, especially on a relative basis against the sharp gains of the SPDR S&P 500 and stocks generally.
SPDR S&P 500
SPDR Gold Trust
iShares Silver Trust
Market Vectors Gold Miners
Still, as you can see in the chart above, there's life again in gold and the GLD. The Federal Reserve backed away from the feared September tapering most thought was coming. Geopolitical unrest in Syria and how the world is dealing with the chemical weapons abuses of the Syrian government, and issues in other places around the world like Egypt and Iran reminded investors about how close we can come to war. It's evident again that gold has a place in portfolios today, and the GLD appears to have a solid base in place.
This week, a significant catalyst for rise comes to the fore. While hoopla about the government shutdown will shake things up for a bit, the great danger is the debt ceiling, and that is about two and a half weeks away. That is plenty of time for legislators to balk and bark about issues, and pose political ploys to use the leverage of the debt ceiling to attempt to get one way or another. In the meantime, the fate of the American people and our economy, if not the global economy hang in the balance. No matter what the valuation, this situation would favor gold, silver and their relative securities, including the widely held tool of many, the SPDR Gold Trust. I would be a buyer of the GLD here for this critical reason. I suggest the security and its peers for those investors seeking capital appreciation and also for those looking for hedge against the downside risk to stocks, bonds and other at-risk asset classes over the near-term.