"Sense of Calm" Keeps Gold Flat Despite Threat The US "Won't Pay Its Bills"

PRECIOUS METAL prices were unchanged in what dealers called "thin, quiet" Asian and London trade Monday morning, despite increasing fears the US government will fail to meet its obligations in only 10 days' time.

"Congress is playing with fire," Treasury secretary Jack Lew told CNN on Sunday. Because "if the United States government, for the first time in its history, chooses not to pay its bills on time, we will be in default.

"There is no option that prevents [it] if we don't have enough cash to pay our bills."

Analysts were left without two key reports Friday, as the US government shutdown delayed both the monthly Non-Farm Payrolls jobs report, and the weekly Commitment of Traders data from the futures and options market.

Comparing the current moves in gold prices with previous US furloughs, analysts at both Barclays and Goldman Sachs agree this lackluster action "is not surprising" given how gold responded to the 17 previous occasions since 1976.

Falling 1.4% in the week before this current shutdown began, the gold price had averaged a drop of 0.4% going into the 17 previous events, says Barclays.

"Price reaction before, during and even after," says Goldman, "has [always] been muted, even in shutdowns that have extended to three weeks' duration."

But looking further ahead, "Credit markets could freeze, the value of the Dollar could plummet, US interest rates could skyrocket," Lew's Treasury Department warned on Friday, pointing to October 17th as the likely deadline for a new budget plan.

Gold held at $1313 per ounce Monday however, and silver was also unchanged, moving in a 35 cent range around $21.75 per ounce while other industrial commodities slipped even as the US Dollar fell.

Global stock markets entered their third week of declines, but held only 2% beneath mid-September's 5-year high on the MSCI World Index.

"It is clear," says a note from Citigroup analysts, "that investors are not very worried...and do not expect any debt ceiling rupture to last long."

"It is extremely unlikely," reckons ratings agency Moody's CEO Raymond McDaniel, speaking to CNBC, "that the Treasury is not going to continue to pay on those securities.

"[It] feels a lot like we've seen this movie before," McDaniel said, pointing to the 2011 debt ceiling row which saw gold investing hit all-time record-high prices above $1900 per ounce.

"Ironically, because we have had this experience in the recent past [it] gives people more of a sense of calm than perhaps they should have."

"The lackluster performance of gold returns," says Deutsche Bank, "may reflect the relatively sanguine approach of financial markets amidst a US government shutdown and concerns over the budget ceiling.

"Indeed of the several measures of risk we track, there has been little escalation in risk aversion. Unless this changes we would expect gold to remain under pressure."

Over in Asia today, Monday saw world No.1 gold consumer China celebrate another national holiday as its Golden Week drew to a close.

Officials in former world No.1 India meantime released a tonne of gold bullion from Mumbai airport, where it had been trapped by confusion over new anti-import rules aimed at reducing the country's large trade deficit.

Adrian Ash

(c) BullionVault 2013

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