US Government Shuts Down. Will Gold Go Up?

Federal government shutdown drags into its fourth week. Will it boost gold prices?

US Government Shuts Down, Again

Could
you imagine life without a government? Now, you can. The federal
government has been shut down since December 22nd, 2018. The government
shutdown does not, of course, imply that the whole government is closed.
Only non-essential discretionary federal programs and agencies close.
They include NASA, IRS, Department of Commerce, Department of Education,
Department of Labor, Food and Drug Administration, etc.

The
partial shutdown occurred because President Donald Trump and the United
States did not agree on the appropriation of funds for the 2019 fiscal
year. The bone of contention is Trump’s call for more than $5 billion
for a U.S.-Mexico border wall. Democrats, who now control the House of
Representatives, have rejected Trump’s demand, claiming that there are
more effective ways of enhancing border security than building a wall
costing more than $25 billion. They also point out that Trump promised
during his campaign that Mexico would pay for the wall (however, its
government has refused, what a surprise).

The shutdown of the US
government is not something new. For example, it happened in January
2018 for three days, 2013 for 16 days in, or in 1995-1996 for 21 days. The current shutdown is the longest in the US history, lasting 25 days already.

Government Shutdown and US Economy

What
the government shutdown imply for the US economy and the gold market?
Well, it resulted in a lack of funding for nine executive departments,
affecting about one-fourth of government activities with around 800,000
employees. Almost half of them have been furloughed, i.e. sent home
without pay, while the rest of them have to work without a paycheck.
More importantly, the shutdown also affects the pace of economic growth,
as the government spending is a component of GDP.
Indeed, the shutdown in 2013 reduced the GDP by 0.4 percent in the
fourth quarter of 2013. On that basis, the J.P. Morgan economists have
cut their first-quarter growth forecast by a quarter point to 2 percent.
Gold should enjoy the economic slowdown.

And, according to the S&P Global Ratings,
the shutdown imply a decrease in sales for contractors to the
government, delays in federal loans, and reduced consumer spending and
lost productivity by furloughed workers. Hence, the company estimate
costs of shutdown at $1.2 billion for every week the government is
closed. We are a bit skeptical, but if true, the cost of the shutdown will exceed soon the $5 billion Trump has demanded for the wall. Is that not funny?

Implications for Gold

So
far, we have not seen any impressive rally in gold amid the US
government shutdown. We mean that, of course, gold shined in January,
but it still cannot cross the level of $1,300, as the chart below
shows. 

_{Chart 1: Gold prices from January 13 to January 15, 2019.}

One
can convincingly argue that the longer this shutdown lasts, the more
collateral damage the economy will suffer, and the brighter gold will
shine. However, this is not what history suggests. For example, the government shutdown in 2013 did not provide a boost for gold prices.
Similarly, in January 2018, gold prices declined between January 20th
and 23rd, and went up only when the shutdown ended, as one can see in
the chart below.

_{Chart 2: Gold prices during government shutdown in January 20-23, 2018}

Actually, the lack of meaningless gold’s reaction is quite understandable. The government shutdown is not a big deal,
as government still provides essential services. And the shutdown will
eventually be resolved. Come on, do you really think that the US economy
will collapse because the Smithsonian museums and the National Zoo are
closed? Hence, any potential impact on gold should be limited and short-term.
Unless, of course, there is a protracted shutdown… Anyway, the nearest
days may be quite hot for the gold market, as today there is a vote in
British Parliament on May’s deal. 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.

Thank you.

Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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