Puerto Rico And Gold

The Puerto Rican debt crisis is worsening. What does it mean for the gold market?

Last year, Puerto Rico defaulted for the first time in its history. We wrote then that its public debt was unsustainable and because the territory could not declare bankruptcy, the island’s debt crisis would be returning to the spotlight from time to time. Indeed, Puerto Rico is again in the center of attention, as it missed a $422 million bond payment to its debtors last week. Puerto Rico Governor Alejandro García Padilla said in a speech Sunday night: “Faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice. I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”

The missed payment is not the first default, but it is significant because of its size and because the bonds were issued by the Government Development Bank, a relatively respected financial entity. Moreover, another $2 billion is due in July and this payment is unlikely to be made, at the moment. The default on this debt would trigger important consequences as about $800 million of the bonds due in July are general-obligation bonds which are guaranteed by the island’s constitution. However, investors should be aware that America’s Greece passed in April a debt moratorium law that allows the Governor to suspend payments on bonds through January 2017.

The escalation of Puerto Rico’s fiscal crisis should be positive for the gold market, especially that there is no reasonable solution on the horizon. The talks with creditors are complicated while the U.S. Congress postponed this week the introduction of the Puerto Rico bill (which would create a federal oversight board, but would probably not provide a bailout or debt restructuring). However, gold investors should not expect a huge impact of the Puerto Rico crisis on the price of gold, as the risk of contagion from Puerto Rico’s debt market to other financial markets is limited.

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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.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor