How to Profit from Gold’s Likely Drop into 29 September

Gold stocks

Have you heard about the debt limit in the US?

The debt ‘limit’ is set by the US Congress to ‘control’ spending.

The cap shows the total debt outstanding. It tells the federal government how much money is left to spend. The ‘limit’ accounts for debt owed to public investors (i.e. anyone who buys US bonds) and federal government trust funds, such as Social Security.

The debt limit is a massive joke.

The US government doesn’t have any intention of paying back its debt. Yet it has always set some kind of national debt limit. And, strangely, whenever the debt limit gets breached, gold tends to fall.

I’ll explain…

What debt limit?

The modern-day version of the debt ceiling was developed in 1917.

The US government couldn’t finance its military ambitions during the Frist World War. It ordered the Federal Reserve Bank to buy government bonds to fund the war. Previously, the Federal Reserve was a private institution that bought corporate paper.

The government spent big and ordered the Fed to pay the bills. To make matters worse, there weren’t any income taxes before the war. Income taxes were created to finance military spending.

Following the war, nothing changed…

Income taxes stayed in place and grew exponentially…alongside government spending. The debt limit was introduced to control spending in 1917.

How well has that worked out?

The limit has been raised nearly 100 times over the past century. Raising the debt ceiling allows the government to borrow more money to pay its bills (and repay its bonds) on time. For the record, those bills are for services already performed, and entitlement benefits already approved, by Congress.

The bottom line: Raising the debt limit gives the government license to borrow in perpetuity. If the government doesn’t raise the limit, ‘interest rates will skyrocket, instability will roil the financial markets, the federal deficit will soar and the resulting “catastrophic” harm will last years,’ according to former US Treasury Secretary Jack Lew.

A look at recent history

Indeed, the debt ceiling continues to rise. There’s little worry about future consequences from those in government. Take a look at the last three times the debt limit expired. As The Huffington Post reported on 17 March 2015:

At the stroke of midnight, March 16, 2015, the debt ceiling was again breached. The Treasury Department has begun “extraordinary measures” to forestall the certain default.

Jack Lew must rob Peter to pay Paul. He started by shorting federal employees’ TSP (G) retirement fund. Independent experts predict that such measures may push the actual default into October. The near-shutdown of the critically-important Homeland Security Department demonstrates that asymmetric partisan dysfunction has worsened. Indeed many of the new Tea Party members of the 114th Congress ran on a no debt-limit increase, default-denier platform.

History tends to repeat.

The government kicked the can down the road. It raised the debt ceiling to reset at US$18.113 trillion. That limit was roughly US$1 trillion above where it stood in February 2014, when lawmakers decided to ‘suspend’ the ceiling. In reality, the government didn’t want to deal with the debt ceiling, delaying it to November of that same year.

CNN Money reported on 2 October 2015:

Treasury Secretary Jack Lew said Thursday he now estimates that “on or about” November 5, Treasury is likely to exhaust special accounting measures that are keeping the country’s debt below its legal limit.

At that point, the Treasury Department would only be able to pay the country’s bills with the cash it has on hand — which Lew expects to be roughly $30 billion.

If Congress doesn’t act in time to raise or suspend the nation’s borrowing limit, currently set at $18.113 trillion, Treasury will not be able to borrow to fulfill all its payment obligations.

No need to worry about that time, either…

Barack Obama signed a two-year budget agreement on 30 October 2015. He raised the limit to roughly US$20 trillion; meaning he wouldn’t need to deal with the debt ceiling and government shutdowns for the remainder of his presidency.

Here’s the weekly gold chart for both periods:

Gold Chart 22-08-17


Source: Tradingview.com; Resource Speculator
[Click to enlarge]

As you can see by the yellow bars, gold crashed during the two debt-ceiling periods. Furthermore, just like today, the Fed was talking about raising rates during both of these periods.

Debt ceiling looms — what it means for gold

The US government — once again — hit the debt ceiling on 15 March 2017. At the time, President Donald Trump kicked the can down the road. US Treasury Secretary Steven Mnuchin didn’t seem worried. He wrote a letter stating that ‘extraordinary measures’ would be used to avoid default.

Take a look at the gold price at the time:

Gold Chart 22-08-17


Source: Tradingview.com; Resource Speculator
[Click to enlarge]

Talk about being saved by the buzzer…

The next debt limit expires on 29 September. CNN Money reported on 18 August:

Treasury Secretary Steven Mnuchin has said he feels confident that the Treasury can continue paying the country’s bills in full and on time through September 29 without breaching the limit, currently set at $19.81 trillion.

I believe Trump will pressure Congress to raise the limit this time around. I don’t think it will be kicked down the road again. Trump built an empire on debt, and has massive plans for the country that will cost a lot of money. Unfortunately, however, I don’t think there will be a swift deal. The debt ceiling argument is likely to go down to the wire.

What does this mean for gold?

Expect history to repeat. As Yogi Berra — a famous baseball player and manager — once said: ‘It’s like déjà vu all over again.

Technically, there’s support for gold around US$1,220 per ounce. If gold falls to US$1,220 an ounce in the lead up to 29 September, tiny gold stocks on the ASX could see their share price drop too, which would make them an attractive investment in my view. That’s where I believe you should buy the best tiny gold mining stocks on the ASX.

Regards,

Jason Stevenson,
Editor, Resource Speculator

PS: There are less than two weeks until 30 August — the day on which you should expect a major decision for the best nickel company on the ASX. If I’m right, this company’s share price is about to explode through the roof. Do not miss out on buying some shares at a dirt-cheap price. Find out more here.

Jason Stevenson

Jason Stevenson

Analyst at Markets & Money

Jason Stevenson is Markets and Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options.

Leave a Reply

Be the First to Comment!

avatar
  Subscribe  
Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au