US Political Volatility Boosts Gold Price

The volatile weather in the USA is causing some volatile politics as well. And the political and economic storms will be with us a lot longer than the most recent hurricanes.

Two weeks ago I wrote about the US debt ceiling limit coming up and the danger this had for faith in the US dollar.

The credit ratings agencies were getting nervous. And the three branches of government were put on notice.

Well, crisis averted….for three months anyway.

On Friday afternoon, Trump capitulated to Democrat demands that the debt ceiling limit be raised for only three months.

Which means the story will rear its ugly head again December this year.

The immediate cash requirements around the two massive hurricanes should have made this an easy political win for the Republicans.

In fact, it was a disaster.

Republican House Speaker, Paul Ryan, asked for an 18 month extension on the debt ceiling. Attaching the bill to an emergency bill that would ensure sufficient cash was available in the aftermath of the two massive hurricanes that have just hit.

Not the kind of thing that can be easily turned down by an opposition party.

The Republicans saw an opportunity to use the disaster as a way to move this tricky subject out of the spotlight. At least until after the mid-term elections next year.

The Democrats — wise to this motivation — said they would give three months instead.

Then Trump — the supposed master of ‘the art of the deal’ — unilaterally caved into the Democrats demands straight away.

Now I’m no expert dealmaker. But even I know that the first offer is never the last one. Yet here’s the guy who has built up his whole persona on this one ideal, suckered into a low ball offer with no counter?

It certainly made his fellow Republicans — who had derided the three month offer — look stupid.

Here’s what Paul Ryan had to say on the morning before the announcement.

Let’s just think about this,’ he said. ‘We’ve got all this devastation in Texas. We’ve got another unprecedented hurricane about to hit Florida. And they want to play politics with the debt ceiling? That will strand the aid that we need to bring to these victims of these storms that have occurred or are about to occur. And then they also want to threaten default on our debt? I think that’s ridiculous and disgraceful that they want to play politics with the debt ceiling at this moment.

It’s an argument that Trump should have been able to put forward — it’s populist and simple to understand — and the Democrats would have eventually capitulated in some way or another.

Instead he threw his own party under the bus.

The Republicans were left stunned.

The rift between the Republican Party and the supposedly Republican President is growing by the day. This adds even more uncertainty to what was already a bizarre and highly volatile political mix.

But let’s put the politics to one side for a moment.

Because it’s the economics that investors need to think about.

Investors set to hunker down

With only three months until the debt ceiling limit issue is up again, markets will clearly be keeping this in mind from now on.

It’s one of those ‘known unknowns’ that is likely to cause an increase in market volatility for the rest of 2017.

That doesn’t mean market falls, necessarily. But it does mean bigger ups and downs.

Such volatility usually triggers more investment into safe haven assets.

To my mind Gold could be the big winner in the short term.

Its history as a safe haven asset is centuries old. And it’s a hedge against all sorts of monetary problems from inflation to market panics.

Though in the last six years it has been on the decline, there are signs of a sentiment turnaround.

In fact, for the first time since 2011 Gold is poised to beat the S&P 500 index in leading US stocks. It’s up 12.4% this year, compared to just 9.2% in the S&P 500.

It’s also beating the other main safe haven asset — bonds.

Gold’s recent outperformance versus long term treasury bonds is particularly noteworthy. After a brutal six years, it suggests gold is finally resuming its traditional ‘safe haven’ role once again.

As always, time will tell.

And today we also have bitcoin — which although extremely volatile — seems to be offering a new, high tech, 21st century version of gold. In addition to some massive potential gains if the technology proceeds as expected, its limited supply provides a scarcity value that gives it value like gold. You can read more here.

US politics is not looking like it’s going to be a beacon of calm over the rest of the Trump presidency. And the massive US debt ceiling problem is not going away.

Currently there is US$62,000 of debt for every man, woman and child in the USA. And it’s growing every day. This time bomb will hit one day.

With global faith in the US wavering, volatility could be set to make a comeback soon. I don’t think this means an imminent crash. But it certainly could mean more hair raising times for investors over the next few months.

Good investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

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