Gold holds $1,300 and more as Treasury warns of "catastrophic" default - Wealth Managers

"If the U.S. government closure moves into next week, gold will rise"

Gold rose slightly Thursday on weak ISM services-sector data, holding above $1,315, while stocks were battered yet again as the U.S. government shutdown continues and the U.S. Treasury warned of the potential for a "catastrophic" default.

The Treasury Department warned Thursday that a failure to raise the debt ceiling could lead to a financial crisis and recession even more damaging than the financial crisis of 2008. A failure of the U.S. to pay its obligations if the debt limit is not raised "would be unprecedented and has the potential to be catastrophic," it said. "Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."
Demand to rise in India, China next week
"If the U.S. government closure moves into next week, gold will rise," said Chintan Karnani of Insignia Consultants. "Since gold is below the 100-day moving average of $1,353, the overall trend is bearish to rangebound between $1,270-$1,356." However, "Indian gold demand will rise from Saturday when the festive season starts," he predicted.  

Another reason for gold's rangebound performance is China, where trading has been quiet because of its Golden Weekholiday, Commerzbank analysts said. Next week may prove better for gold, "particularly since import figures from Hong Kong should confirm continuing interest in purchases by the Chinese."
Is shutdown just "theatrics"?
So why isn't gold breaking out now as the shutdown goes nowhere nearer to resolution? Ira Epstein of The Linn Group offered this explanation: "The only reason I come up with is that the 'smart money' believes we're looking at theatrics. Yes, if things plays out too long the end result can early turn into a crisis, one in which gold should rally, but the market doesn't think we're at that point yet. It seems to me the markets think we're probably getting closer to the beginning compromise talks."

Still, the shutdown is hurting the economy. "Every day that the government is shut, it is eating into GDP," R.J. O'Brienbroker Phil Strieble said. Indeed, the shutdown, including the layoff of 800,000 workers, could shave 0.25% to 0.5% off of fourth-quarter GDP if it lasts two wees, Goldman Sachseconomists said. The same amount could be added to the first quarter, as government activity resumes.
Fed now less likely to taper for now
The gridlock continues to be good for gold and bad for the dollar, as the Federal Reserve will be forced to keep quantitative easing rolling at full speed. "If the fiscal issue drags on, the Fed is likely to be less willing to reduce stimulus in the economy. The dollar will suffer if that is the case," saidJames Kwok of Amundi.

Atlanta Fed chief Dennis Lockhart confirmed that notion in remarks Thursday. A prolonged shutdown would make a reduction of the pace of asset purchases unlikely in October, given the shutdown's damage to fourth-quarter GDP.
Dollar "to continue to grind lower"
Investors still want to be in gold, not all in on the dollar. "Clearly the dollar is not really playing that much of a safe-haven role through this latest episode," said Vassili Serebriakov at BNP Paribas. "The longer uncertainty drags out, the more of an economic impact it has and the more I think market participants will see implications for Fed policy, pushing back tapering. It should continue hurting the dollar, and I think it's going to continue to grind lower."
BK Asset Management exec Boris Schlossberg added: "There's little reason to want to own the dollar at this point, given all the political risk and uncertainty around it until Washington comes to some kind of resolution. What's happening now is we have a financial crisis that could turn into a constitutional crisis. The conflagration of the two points is starting to get the markets on edge. They really thought this was going to be resolved through negotiation."
Marc Chandler, chief currency strategist at Brown Brothers Harriman, said the uncertainty is keeping some investors sidelined across many asset classes. "Many want to wait until we get past the debt ceiling. ... For the most part, they're not really committing a lot of resources until the situation clarifies," he said. "It could be scary going into it (the debt ceiling) because the two crises are going to blend into each other."
In other gold news:
Royal Mint sales soar: The U.K.'s Royal Mint increased gold sales by 12% in July from a year earlier, following a slump in prices to a 34-month low in June. The mint sold 10,069 ounces in July, compared with 8,955 ounces a year earlier.  
Malaysia launches gold contract: Malaysia's first gold futures contract will start trading on Oct. 7 to meet investor demand, according to the head of the country's derivatives exchange. "The small contract size means retail customers, big or small, can be involved and traders who want to do hedging can just do multiples," said Chong Kim Seng, chief executive officer of Bursa Malaysia Derivatives. "The issues that's facing the U.S., the government shutdown and the tapering policy, have an impact on the U.S. dollar and interest rates, so it's important that people consider gold as part of their portfolio." 

More information can be found online at http://www.goldbullionadvisors.com