Yet another opinion on the debt ceiling

The US again failed last night to pass a resolution. A statement was issued saying there was a resolution in progress but the details would not be available until the earliest after the markets close today. Good luck being in the market over this weekend! Id like to look at the historical impact the debt ceilng has on gold prices.

So i went back to 2003. What scared me was not the amount the ceiling was raise but that the frequency is getting quicker. And most of the time this happens without us noticing. 

Date	New Limit ($bill)	Change from prev ($Bill)
may 27 2003	7,384	984
November 19 2004	8,184	800
March 20 2006	8,965	871
Sept 29 2007	9,815	850
July 30 2008	10,615	800
Oct 3 2008	11,315	700
Feb 17 2009	12,104	789
Dec 28 2009	12,394	290
Feb 12 2010	14,294	1,900

Sources: CRS, compiled using the Legislative Information System, available at http://www.congress.gov; OMB

Lets compare this against the gold price.

Sorry about the quality and the misdated in sept 07 but the price does rise I was too lazy to redo the pic once I noticed 🙂

So far so good, every time we get a raise in the debt ceiling gold price goes up because the players in this market recognise that raising the debt ceiling means that there is going to be more money being put into circulation which, being the good austrian economists we are, is inflationary.

Again we see after the president has signed it into law we get a price rise, even in 2008 when we had the “start” of the financial crisis after the collapse of lehman brothers.
So with the exception of mid 2008 the price of gold rose. (Aside even tho gold sold down to 750 in august 2008 it was at new highs before year end) History looks bullish for the price. I personally however think it would be overly risky to trade this trend. We have already had a good run in the gold price supported by a crisis in the euro financial system and there is currently a lot of fear priced into this market. The media has made a big deal out of the US raising its limit compounded by the rating agencies threatening of a downgrade. I think when a deal is reached (My guess over the weekend) the markets will calm down and people with think “everything is ok, we’re safe”. However the fundamental problem (The US has a spending problem NOT a revenue one) wont get addressed. In fact they will take on more debt and print MORE money. Short term I expect the metals to get slapped down (Technically we are overbought) as the market needs a reason to rest. Long term however we’ll be at all new time highs probably as early as september this year.

Dont own gold? WHY NOT!

– P