Gold’s Reaction To 1995 Govt. Shutdown Points To Volatility Ahead
In our view, gold is falling because no one believes that the government shutdown will last beyond a few days, perhaps a few weeks at the most. No one wants to be caught holding the bag once a resolution is inevitably reached.
By the same token, although the debt ceiling deadline of Oct. 17 is fast approaching, no one truly believes that the United States will default on its obligations. The stakes are just too high, and that despite their differences, Democrats and Republicans will reach a deal to avert crisis.
Of course, Washington could surprise everyone and the shutdown could last longer than expected, or the U.S. could default—if only briefly. These are low-probability events, but they could happen. In those cases, gold may rally—or it might not, as risk aversion sweeps across financial markets, pummeling all asset classes.
If history is any guide, gold would climb as the government shutdown went on, but then quickly give up those gains when normal operations resume. During the last shutdown of the federal government, between Dec. 16, 1995 and Jan. 6, 1996, gold rallied as much as 7.5 percent from $386 on Dec. 15 to a high of $416 on Jan. 2.