Gold bounces higher as debt ceiling threatens Lehman-like catastrophe - Wealth Managers

All major stock indexes stumble and VIX "fear gauge" hits 3-month peak

Gold jumped to levels unseen since the government shutdown began Oct. 1, hitting $1,327 and settling 1% higher Monday as the budgetary gridlock runs on a collision course with the Oct. 17 debt-ceiling deadline.

The yellow metal was enjoying a return to its safe-haven status as all major stock indexes fell, with the S&P 500closing at a four-week low and the Dow Jones losing 136 points. Meanwhile, the market's "fear gauge," the VIX, surged the most in more than three months to top 19%.

"It's a very dangerous game of chicken going on and no resolution in sight, although that can change quickly," said Art Hogan at Lazard Capital Markets. "This is the logical reaction: You should avoid any risk in the middle of the process."

And that's where gold comes in. "The debt ceiling is approaching, government [still] shut down, and [investors] see stocks getting slammed. There's a big flight to safety on gold and silver," noted Phil Streible at RJO Futures. "That was the big talk this morning."

"The longer the shutdown, the longer the issue of debt ceiling crisis, gold will likely be increasingly supported," addedCarlos Sanchez, director of commodities and asset management at CPM Group.
What are some other analysts saying?
"Gold is getting some bids because of the uncertainty," saidFrank McGhee at Integrated Brokerage Services. "It will be a very big deal if the U.S. defaults."

"The partial federal government shutdown is more a distraction at this stage," said Jeffrey Wright of H.C. Wainwright LLC. "But the debt ceiling, which will be reached in approximately 10 days, is a real barrier and could damage the U.S. economy quickly — lending credence to the 'safe-haven' demand for gold in the short run."

"You're seeing some fear supporting gold now," said Bill Baruch of iiTrader. "If we extend this and actually default on the debt, gold will be a safe haven." 
Gold staunchly holding $1,300 so far
"Face it," added iiTrader founder Rich Ilczyszyn. "Washington will take its standoff down to the wire. And the shutdown and debt ceiling debate should end up being a golden opportunity. … Through Friday's session and into Monday, gold has found support at $1,304.10 to $1,306, as it failed to chew through this level to press new lows. With Washington still in deadlock, a weaker equity market has helped support gold. Fear is keeping gold above the $1,300 level."

Gold's relative grip on the $1,300 level is a sign of underlying strength, argued Gene Arensberg, editor of the Got Gold Report. "That should be a warning to gold bears."

And Peter Spina and Julian Phillips of GoldForecaster toldMarketWatch that the Chinese yuan's growing convertibility and the threat of rising interest rates on a shaky recovery bode well for gold. "The future holds more uncertainty — it holds instability, long-term. In such a climate gold will be attractive as a 'safe haven' globally," they said. "We can see little to no good reason why the gold price should fall. We can see every good reason why it should rise."
China "naturally concerned" about debt ceiling
Speaking of China, which is the largest creditor of the U.S., one of its officials weighed in with concern on the growing standoff in Washington. China is "naturally concerned about developments in the U.S. fiscal cliff," vice finance ministerZhu Guangyao said, asking that "the U.S. earnestly take steps to resolve" the issue.

China and the U.S. are "inseparable" because Beijing is a huge investor in U.S. debt instruments. "The executive branch of the U.S. government has to take decisive and credible steps to avoid a default on its Treasury bonds," he said. "It is important for the U.S. economy as well as the global economy. ... We hope the United States fully understands the lessons of history," he said, referring to the 2011 deadlock in which the U.S. lost its top credit rating with Standard & Poor's and gold subsequently soared to its all-time record above $1,920. 
Default = "financial apocalypse"
A potential U.S. default on its debt could even dwarf the spark that ignited the financial crisis: the Lehman Bros.bankruptcy. Bloomberg reported:  
"Anyone who remembers the collapse of Lehman Bros. Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.

"Failure by the world's largest borrower to pay its debt -- unprecedented in modern history -- will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse." 
Staving off default "no longer a zero-percent probability"
What did some of them tell Bloomberg? "If we miss an interest payment, that would blow Lehman out of the water," said Tim Bitsberger, a former Treasury official under President George W. Bush. "Lehman was an isolated company, and now we are talking about the U.S. government."

"It would be insane to default, but it's no longer a zero-percent probability," said Simon Johnson, an MITeconomist.

"People have typically turned to Treasuries as a safe haven, but what will happen when they realize it's not safe anymore," said Jim Grant, founder of Grant's Interest Rate Observer. "Financial markets are all confidence-based. If that confidence is shaken, you have disaster."
Since Lehman, "it's safety, safety, safety"
That's why so many everyday investors are fleeing to cash:
"An Associated Press analysis of households in the 10 biggest economies shows that families continue to spend cautiously and have pulled hundreds of billions of dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer puny interest payments, often too low to keep up with inflation.

"'It doesn't take very much to destroy confidence, but it takes an awful lot to build it back,' says Ian Bright, senior economist at ING, a global bank based in Amsterdam. 'The attitude toward risk is permanently reset.'

"A flight to safety on such a global scale is unprecedented since the end of World War II.

"The implications are huge: Shunning debt and spending less can be good for one family's finances. When hundreds of millions do it together, it can starve the global economy.

"Some of the retrenchment is not surprising: High unemployment in many countries means fewer people with paychecks to spend. But even people with good jobs and little fear of losing them remain cautious.

"'Lehman changed everything,' says Arne Holzhausen, a senior economist at global insurer Allianz, based in Munich. 'It's safety, safety, safety.'"
Social Security benefits at risk?
And according to one report, even Social Security might not be safe from the Washington circus -- and that's no laughing matter:
The federal government shutdown hasn't affected Social Security benefits. But it'll be a different story if the government doesn't raise the debt ceiling, according to theSocial Security Administration. The Wall Street Journal'sDamian Paletta reports today that the administration has begun warning consumers who call in to ask about the effects of the shutdown that if Congress and the White House don't reach an agreement to increase the government's borrowing limit, it can't guarantee that benefits will be paid in full.
"Gold is the anti-central bank"With a potential debt default endangering the U.S. dollar's supremacy as the world's reserve currency, gold remains a key asset with which to hedge against loss of that status, as well as the ravages of inflation from the Federal Reserve's unprecedented money-printing stimulus programs.
Asia Confidential newsletter co-founder James Grubernoted at Forbes:
"Gold has two things going for it. First, if you think that debt contraction is probable in future as I do, that brings risks to the world's financial system. After all, the still thinly capitalised banks own much of the debt which will need to be restructured/written down. Therefore, it's be wise to own assets which sit outside the financial system. That's where gold comes into play.

"Secondly, the current policies of the world's central banks may be preventing the contraction in debt which needs to occur to cleanse the financial system. In my view, central bank moves to reflate the credit bubble are likely to lead to a larger credit bust down the track. In many ways, gold is the anti-central bank. The less faith that you have in central banks, the more gold that you should own. ... Physical gold is my preferred way to play this theme."

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