Why Gold Prices Will Rise as Debt Ceiling Deadline Nears

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Gold prices have been in a narrow trading range over the last week, hanging mostly between $1,291 and $1,297 since Friday, Aug. 18. But the looming debt ceiling deadline could be bullish for gold…

The biggest gold news this past week was Treasury Secretary Steven Mnuchin’s visit to the gold deposit at Fort Knox. This, of course, is the Kentucky army post that serves as the U.S. Bullion Depository and home of most of the country’s gold reserves.

Treasury Secretary Mnuchin and Senate Majority Leader Mitch McConnell visited Fort Knox on Monday. We don’t know how much gold they actually saw, but Mnuchin stated it was the first time the vault had opened up to outsiders since a congressional delegation and journalists had access in 1974.

In fact, inventory hasn’t even been taken since 1986, and the last audit took place in 1953. All of this begs the question of why government officials would visit the site now.

Could the looming debt ceiling deadline on Sept. 29 justify a visit to America’s gold? They might want to make sure it’s all there just in case the United States can’t issue more right now, and it will run out of extraordinary measures to keep the government solvent by the end of September.

But gold investors are positioned to profit from the controversy. I’ll discuss how the debt ceiling debate could actually end up lifting the price of gold to my bullish target by the end of the year.

First, let’s take a look at the gold price’s 0.4% rise this past week…

Gold Prices on Track for 0.4% Gain This Week (Aug. 18 – Aug. 25)

While day-to-day movements have been uneventful, the metal is still on track for a weekly gain of 0.4% if it closes at the current $1,297 level.

After settling at $1,292 on Friday, Aug. 18, gold opened lower on Monday at $1,287 despite the DXY falling from 93.50 to 93. But the metal saw a strong recovery during the session and ended the day at $1,297 for a 0.4% gain.

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Tuesday saw the dollar bounce back, regaining all of the previous session’s losses. By early morning, the DXY was back above 93.50. That weighed on the gold price, which opened lower at $1,285. Although the metal moved higher from there, it wasn’t enough for a gain on the day. Gold prices settled at $1,291 for a 0.5% loss from Monday’s close.

Here’s how the dollar has trended since Monday, Aug. 21…

 

gold prices

On Wednesday, Aug. 23, the price of gold dropped to $1,289 at the open despite the DXY also falling back in morning trading. But as the dollar fell below 93.25 later in the day, the metal steadily climbed to $1,295 by the close for a 0.3% rise.

Gold prices closed mostly flat on Thursday as the DXY traded mostly near the 93.25 level throughout the day. After opening sharply lower at $1,287, the metal moved higher during the session to close at $1,292. That marked a 0.2% decline on the day.

But the price of gold today (Friday, Aug. 25) is trending higher. It’s currently up 0.4% and trading at $1,297. If the gold price closes at that level, it will post a weekly gain of 0.4%.

After a week of hardly any daily movement, now is the best time to look ahead to see how the dollar and the anticipated debt ceiling deadline could influence the gold price in 2017.

I think both the DXY and Sept. 24 deadline could provide a boost to the metal through the end of the year. In fact, here’s precisely where I see gold heading by the end of Q4…

My Bullish Gold Price Target for the End of 2017

As I mentioned, gold over the past week has barely budged, trading within the tight $1,291-$1,297 range. Price volatility has been lower than I can remember in a long time.

Regardless, the price of gold’s 12.6% gain this year is now outperforming the S&P 500’s 9.4% rise over the same period. This is largely thanks to the metal’s stunning 7.2% rebound from the July 7 low…

price of gold

Even at current levels, gold is not looking overbought according to the RSI and MACD momentum indicators (highlighted). On that basis, I think prices have a lot of room to move higher.

Meanwhile, the dollar is also consolidating. And its own RSI and MACD strength indicators suggest there’s room for the rebound from its two-and-a-half-year low on Aug. 3 to continue…

price of gold in 2017

For now, its uptrend only started three weeks ago, and its price action is confirming its momentum.

But I still contend the DXY’s recent bump is just a dead cat bounce – or a temporary rebound for the long-declining asset. These typically don’t last long, meaning the dollar’s eventual fallback will be bullish for gold.

Meanwhile, Mnuchin’s timing for a Fort Knox visit is certainly suspicious with the debt ceiling debate heating up ahead of the Sept. 24 deadline…

In a nutshell, the debt ceiling limits how much debt the federal U.S. government can carry at any given time. The current debt level of $19.9 trillion is just under the current ceiling of $20.1 trillion, and the Treasury Department can’t borrow the money it needs to fund the government.

Unless Congress agrees to raise that ceiling by Sept. 29, Mnuchin says the government will essentially run out of money and no longer be able to cover current deficits and expenses.

The biggest consequence of not raising the debt ceiling is a potential credit downgrade. Right now, the United States has a pristine AAA credit rating – meaning the country has the smallest risk of not paying back money that’s been borrowed. But not raising the ceiling could urge ratings agency Fitch to downgrade that rating to AA.

U.S. downgrades have historically caused stock market sell-offs. The last time ratings agency S&P downgraded the United States on Aug. 5, 2011, the Dow Jones plunged 2.7% over the following month. On April 5, 2012, Egan-Jones Ratings Company lowered U.S. credit from AA+ to AA, dragging the Dow Jones 1% lower in just two sessions.

If the debt ceiling isn’t lifted by the deadline and Fitch issues a downgrade, another sell-off is certainly possible. This would likely boost gold prices as investors rush to buy the metal as a portfolio hedge. The Aug. 5, 2011, downgrade sent the price of gold soaring 13.6% in just one month.

I will keep you updated on this major deadline as it gets closer in the coming weeks. While we don’t yet know the outcome, I think gold could still keep moving in a sideways pattern, with the $1,300 level becoming the next support level.

From there, I believe the gold price can reach $1,400 by the end of the year. That would be up 7.9% from today’s $1,297 level.

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