Why Gold Investors Are Losing Sleep Over 15 March

Gold Pet Rock

Gold remains a major disappointment.

That’s a worry for gold bulls. There’s plenty of political uncertainty, as I wrote to you last week:

If gold breaks through and closes above US$1,283 per ounce this month, we could see a rally towards the US$1,300 per-ounce level. That’s a possibility, given the political tensions over in Europe — especially with the election in the Netherlands on 15 March.

Gold failed to climb above the resistance level of US$1,283 an ounce. Instead, it turned to the downside and plummeted to a two-week low.

That’s a warning.

Janet Yellen, Chair of US Federal Reserve, hinted of another interest rate rise last week. There’s currently an 86.4% chance of a rate rise according to CME Group’s FedWatch tool. If the US non-farm payrolls number (a key employment figure) comes in at roughly 190,000 new jobs when it’s announced this Friday, it should confirm a rate increase on 15 March.

That could push down the price of gold into the Fed meeting. Remember, higher interest rates tend to attract more capital into the US dollar. That pushes down the gold price, which historically moves inversely to the US dollar.

The story gets worse for gold bulls…

The US federal government will hit its debt limit on 15 March. Despite the wider mainstream opinion, that could push gold prices down to US$1,200 per ounce.

I’ll explain…

What debt limit?

Have you heard about the debt limit?

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

The cap shows the total debt outstanding, which 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 and Medicare.

Indeed, the debt ‘limit’ seems like a massive joke. The government doesn’t have any intention of paying back even one cent.

Yet the US government has always set some kind national debt limit. The modern-day version was developed in 1917.

The US government couldn’t finance its military ambitions during the Frist World War. It ordered the Federal Reserve 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.

And you know how well 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 Treasury Secretary Jack Lew.

A look at recent history

This is why the debt ceiling continues to rise, with little worry about future consequences from those in government. Take the last two times as an example for what’s to come in the weeks ahead. Remember, history tends to repeat.

The Huffington Post wrote 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.

Despite the dog and pony show, 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.

We are back to square one, folks.

The US government will hit the debt ceiling on 15 March 2017. There’s no doubt that President Donald Trump will pressure Congress to increase the limit once again. The Donald built an empire on debt, and has massive plans for the country that will cost a lot of money.

So, what does this mean for gold?

Debt ceiling looms — what it means for gold

The gold bulls are out in force, arguing that a major stock market crash is coming…if not the end of the world!

Their solution: buy gold.

Not so fast…

Take a look at the weekly gold chart below. It shows how the yellow metal traded during the last two debt ceiling crises in the US:


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

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

As famous baseball player and manager Yogi Berra said: ‘It’s like déjà vu all over again.

If gold pulls back towards US$1,200 per ounce into mid-March, that’s a great time to consider ‘penny gold’ stocks. The best tiny gold mining stocks could go up thousands of percent if they hit the mother lode or even just announce a major resource upgrade this year.

And if gold pulls back as I expect, you could have the opportunity to get in at bargain-basement prices.

For more information, check out Jim Rickards’ Gold Stock Trader here.

Regards,

Jason Stevenson,
Editor, Markets and Money

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.

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Joseph Slabaugh
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Frist World War

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