Gold prices are holding gains early on Monday as equities opened sharply lower and investors appear to be in a “Risk-off” type of mood to kick off the week. The partial U.S. Government shutdown is now on day seven, and there still does not appear to be any end in sight. As we discussed last week, we have to wonder at what point investors will decide they have had enough. We feel we could be getting closer to that point by the hour at this point.
Investors also have the looming debt ceiling showdown to look forward to, and without any meaningful compromise between out political leaders as of this point, the situation could become very messy to say the least. The credit rating of the United States is hanging in the balance right now, and the potential for a downgrade is very real. A downgrade would not just cause U.S. borrowing costs to rise, but could also severely dent investor and market confidence.
Stories are already circulating about the potential consequences of a U.S. default, and the outcome does not sound very pretty. Although we feel this is extremely unlikely, it must be considered. Panic selling in markets could drive perceived safe-haven assets such as gold sharply higher should the current situation deteriorate.
Aside from watching for any developments on the current shutdown, investors will be closely scrutinizing the FOMC minutes due out on Wednesday. At the last FOMC meeting, the Fed caught investors and markets off-guard when it elected not to begin tapering its bond buying operations. Some say this is because Janet Yellen will be the next head of the Fed, and some say that the Fed is simply too worried about job growth or lack of it to begin cutting back its stimulus.
Whatever the case may be, many investors seem to feel that the Fed has lost some credibility. People will be paying very close attention to these minutes for clues on when the Fed may taper now and by how much. The minutes could potentially be the biggest market mover of the week.
Gold prices today are currently testing their 20 day EMA at $1328.60. Although prices are now above the 9 day EMA, a breakout above the 20 day would cause more short covering and entice more fresh buyers to enter the market. The key 50 day EMA is resting just above these levels at $1338.60 and a break above could also drive buying in gold.
We feel that gold could see a nice push if the shutdown drags on. A flight to quality and dollar weakness could send a rush of buying in the precious metals complex as investors look for places to put cash to work. In addition, an improving technical posture could also support gold prices here in the near term.
