For Gold Investors, a Temporary Solution to U.S. Debt Ceiling is the Gift They Wish Would Stop Giving
To avoid a financial crisis in the United States the government passed legislation to leave the U.S. debt ceiling uncapped for two years avoiding a financial government default. However, the fallout from the U.S. Treasury having to service financial obligations between January when the debt ceiling limit was hit and also having to refill the government coffers will create a unique set of problems.
Gold Price Action
On June 1st gold futures basis the most active August 2023 was priced at $1995.50. The result of a relief rally that occurred when bipartisan legislation went to Congress where it was passed in a vote of 314 to 117. A far cry from today’s $26 decline taking gold futures to $1957 per ounce.
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FOMC Meeting and US Debt
Next week the Federal Reserve will hold the next FOMC meeting in which it is highly anticipated that they initiate the first interest rate hike pause after 10 consecutive FOMC meetings resulted in higher rates. Inflation continues to remain elevated and is moved higher as seen through the last PCE report. Also, the jobs report for May showed that the U.S. economy gained 339,000 new jobs with the unemployment level rising to 3.7%.
Now investors and market participants are bracing for an onslaught of U.S. government bond issuances as the treasury must now refill its coffers.
According to MarketWatch, Investors are bracing for an estimated $1 trillion deluge of Treasury issuance to start flowing later this week and continue in the coming months as part of the latest debt-ceiling resolution.
Reuters reported that “The Treasury General Account has fallen sharply since January when Treasury hit its limit on borrowing. Cash balance targets indicate it will need to rebuild its account quickly now that the borrowing cap has been lifted. It is expected that the treasury will auction off up to $1 trillion this summer which will have a profound and dramatic impact taking yields higher.
According to the Congressional Budget Office interest costs on public debt will reach $645 billion this year and $1.4 trillion in 2033. “Average interest rates on federal debt rise in CBO’s projections, as debt matures and is refinanced. In 2024, the projected average interest rate on debt held by the public is 2.9 percent—0.2 percentage points higher than it was in 2023 and 0.7 percentage points higher than in 2022. That rate generally rises thereafter, albeit more slowly, reaching 3.2 percent in 2033.”
Impact on Gold
The massive sale of U.S. debt will certainly result in prices falling taking yields higher. High yields are kryptonite to gold pricing. Although the debt ceiling crisis has been averted the fallout created will be the gift that gold investors wish would stop giving because high yields pressures gold lower.
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Wishing you as always good trading,
Gary S. Wagner