"Gold prices fell about a week before the Dec. 16, 1995, shutdown began but had jumped above $400 by end of January 1996," Saefong noted. "And the gains continued, with prices trading near $415 by Feb. 2."
"There was a flight to safety. Gold prices rallied almost 4% as stocks sank almost the same amount," said Richard Gotterer, managing director and senior financial advisor atWescott Financial Advisory Group, adding that those percentage moves were "pretty significant" at that time.
"My expectations are for a contentious government over the next few weeks. This is going to make for interesting headlines," he said. "Gold should have strong support in that type of environment."
Shutdown would slam U.S. GDP
"A shutdown of the U.S. government would reduce fourth-quarter economic growth by as much as 1.4 percentage points depending on its length, economists say, as government workers from park rangers to telephone receptionists are furloughed," Bloomberg reported.
Mark Zandi of Moody's Analytics Inc. estimates a three- to-four week shutdown would cut growth by 1.4 points. Zandi projects a 2.5% annualized pace of fourth-quarter growth without a shutdown.
On the lower end of projections is an 0.3-percentage-point blow to fourth-quarter GDP, lowering it to a 2.3% rate,according to St. Louis-based Macroeconomic Advisers.
"A shutdown wouldn't be unprecedented," Bloomberg noted. "Seventeen funding gaps happened between 1977 and 1996, based on a Congressional Research Service analysis. In 1995 and 1996, interruptions lasted from Nov. 14 to Nov. 19 and from Dec. 16 to Jan. 6, as Republicans led by then-House speaker Newt Gingrich clashed with President Bill Clinton's administration."
Default puts U.S. back "in uncharted territory"
However, with a debt-ceiling crisis poised to follow so closely to the shutdown, the damage could be worse. "The combined prospect of a budget standoff between the White House andCongress and haggling over the debt ceiling could have a bigger impact on the economy as businesses hold off on investment and households delay spending," Bloomberg said.
Indeed, Macroeconomic Advisers is much more concerned about the debt ceiling. "We believe that because many Republicans fear the potential political fallout, any shutdown will be relatively brief," the firm wrote. "We see the possibility of hitting the debt ceiling later this fall as a far larger threat to the economic outlook, and frankly are incredulous that some Republicans seem more concerned about a shutdown than a sovereign debt crisis."
"A shutdown of nonessential services is inconvenient for a while. If we hit the debt ceiling, we're in uncharted territory,"said Joel Prakken, a senior managing director at the firm. "If you miss an interest payment on the national debt, that's a sovereign default of sorts, and I think it would shake the foundations of the global financial system."
"Last time we had this (debt-ceiling) scenario, gold had a good move on the upside and there is no reason to suspect it may not do the same, should the two houses and the president attempt once again to play a game of brinkmanship," speculated David Govett at Marex Spectron.
Stocks plummeted in 2011 as gold soared
The danger is all this, particularly for the stock market, is complacency. Investors should remember that stocks plunged during the 2011 debt-ceiling standoff, with the Dow losing 2,000 points and the S&P 500 shedding 17%. Gold, of course, shot up to successive highs during the crisis, before peaking at its all-time nominal record price above $1,920 in September 2011.
"Every day we move closer to a government shutdown or debt default, with far knottier politics than we had during the debt-ceiling fiasco of summer 2011, after which the U.S. lost its AAA rating from Standard & Poor's," warned Howard Gold at MarketWatch.
"The complacency on this issue is alarming," Chris Kruegerof Guggenheim Partners told Gold. "Clearly with Washington policy, everybody's been focusing on the Fed and the taper," he said, and are only now looking at the prospects of shutdown or default -- and aren't worrying too much about it.
Crisis "could jar the entire global financial system"
"Our growing concern is that everyone is far too complacent that just because there has been a deal in all the prior fiscal cliff fights that there has to be a deal in this debt ceiling fight," he wrote in a note to clients. "There is no evidence to suggest that the debt ceiling will be raised in time. ...
"It's something that could jar the entire global financial system, [which] is based on the premise that Treasurys are a riskless asset and you're calling that into question."
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