Gold's Strength Following Government Shutdowns

(Kitco News) - As the United States faces the threat of a federal government shutdown for the second time in two months beginning Nov. 17, investors may be tempted to flee to gold as a safe haven asset. But the yellow metal’s track record in the runup to other potential shutdowns, and its performance even when shutdowns actually occur, should give them pause.

First, the ostensible case in favor of gold: There’s no question that a partial shutdown of government services and spending is negative for the overall economy. If federal government employees are furloughed or laid off, it will certainly hurt consumer spending just as the country enters holiday shopping season, with Black Friday on Nov. 24 and Cyber Monday on Nov. 27. This worsening of the employment situation and weakening of the spending outlook ought to be supportive of gold prices.

Past shutdowns have also significantly hurt overall economic growth. The U.S. Bureau of Economic Analysis estimated that the 2013 federal government shutdown, which lasted 16 days and resulted in the furloughing of 800,000 federal employees, reduced fourth quarter GDP growth by 0.3 percent. In Feb. 2018, S&P Global Ratings Economics estimated ahead of another looming U.S. government shutdown that it would cut 0.2 percentage points off quarterly GDP growth for every week the government was closed. Again, broad economic weakness that materially impacts growth should boost gold prices.

But this has not proven to be the case. Over the last three federal government shutdowns, gold prices have either stagnated or declined outright, while equities actually rallied.

In 2013, when the federal government shut down from Oct. 1 to 17, gold prices bounced around somewhat, but were essentially flat.

Then, in early 2018, gold prices actually declined during the brief Jan. 20 - 23 shutdown.

Even during the most recent federal government shutdown of 2018-2019, which at 35 days ended up being the longest shutdown in U.S. history, and which allowed for multiple daily and weekly news cycles hammering home the economic threat it posted to the nation, gold prices rose a paltry $20, a decent one-day bump by fall 2023 standards.

Meanwhile, the stock market actually seems to relish these shutdowns. A recent analysis from Forbes Advisor shows that if anything, the federal government ceasing its nonessential functions is a net positive for equities.

“In fact, the S&P 500 gained 10.3% during the last government shutdown that ended in January 2019,” the article notes.

And this was by no means an isolated phenomenon. “Going back to 1976, the average U.S. government shutdown has lasted just 9.5 days, and the S&P 500 has gained an average of 0.3% during the shutdowns.”

John Lynch, chief investment officer for Comerica Wealth Management, told Forbes that investors’ indifference to government shutdowns extends beyond the stock market to include bonds, the greenback, and gold.

“Our analysis of other asset classes yielded similarly mixed results, as performance of the U.S. dollar, bonds and gold did not show a meaningful correlation to a government shutdown,” Lynch said. “Market interest rates nudged higher, likely due to debt limit concerns, which supported the U.S. dollar and weighed slightly on the prices for commodities and gold.”

If the above charts indicate anything, it’s that the real precious metals rally comes after the political stalemate is finally broken and the shutdown ends. In all three cases, gold saw sharper and more sustained gains once the federal government resumed regular operations than it did during the supposed turmoil.

Spot gold is seeing a rally late Monday morning, rising from $1,934.92 just before 10:30 am EST to its current daily high of $1,945.40 at the time of writing.

Originally published by: Ernest Hoffman on Kitco News