On Tuesday, President Trump threatened to shut down the government. What does it imply for the gold market?
Speaking at rally in Phoenix, Arizona, on Tuesday night, President Donald Trump threatened to shut down the government in order to secure funding to build the wall along the border with Mexico. “If we have to close down our government, we’re building that wall”, he said. “One way or the other, we’re going to get that wall”, Trump added.
As a reminder, the government will shut down if the President does not sign a funding deal into law by September 30, 2017. Hence, a budget without funding for the border wall could by vetoed by Trump. However, Republicans want to reduce the fiscal deficit and public debt, so they may be reluctant to spend billions on a wall, especially given that they have to figure out to finance tax cuts. We do not believe in the government shutdown, but such a risk exists and worries about debt ceiling may trigger some volatility in the financial markets, spurring a safe-haven demand for gold. The U.S. stocks closed lower on Wednesday, as investors digested a threat from Trump. However, most of the traders do not pay any attention to the President’s remarks anymore.
Similarly, some analysts argue that the uncertainty about North Korea will support the gold prices, especially that South Korea and the U.S. are conducting an annual military exercises right now, which could provoke some aggressive response from the Kim regime. Indeed, North Korea warned that drills could lead to a “uncontrollable phase of a nuclear war.” However, history shows that incidents related to the Korean Peninsula cause only short-term and limited effects on the gold market.
To sum up, gold may be supported by another crisis over North Korea and the fears about the U.S. government shutdown in the short-term. However, that impact should be only temporary – in the long run gold prices will be rather driven by the macroeconomic factors, including central banks’ forward guidance. Stay tuned!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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