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October 1, 2013, 2:21 p.m. ET.
The Shutdown's Golden Promise
Gold Does Best When Washington Takes Its Time Getting House in Order
By LIAM DENNING
.
Bloomberg News
Gold bugs love a crisis, but they need it to last.
On day one of Washington's shutdown, gold fell 3%, dipping again below $1,300 an ounce. That might seem odd, given the metal is often viewed as insurance against bouts of governmental madness.
But it actually fits broadly with history. Renaissance Macro Research looked at how key markets moved during 17 previous shutdowns between 1976 and 1996. There is a low, but noticeable, positive correlation between how long a shutdown lasts and how much the gold price goes up. In particular, for the six shutdowns that lasted three days or less, five saw gold prices drop by an average of 1.1%. By contrast, of the five that lasted 10 days or more, three saw gold rally by an average of 3.5%.
But it actually fits broadly with history. Renaissance Macro Research looked at how key markets moved during 17 previous shutdowns between 1976 and 1996. There is a low, but noticeable, positive correlation between how long a shutdown lasts and how much the gold price goes up. In particular, for the six shutdowns that lasted three days or less, five saw gold prices drop by an average of 1.1%. By contrast, of the five that lasted 10 days or more, three saw gold rally by an average of 3.5%.
As with just about everything these days, though, the Federal Reserve's role is critical.
The biggest gain for gold came during the 18-day shutdown in the fall of 1978, when it rose 5.5%. Back then, though, inflation was north of 8.5% and rising. Meanwhile, real interest rates—calculated as Treasury yields minus inflation—were falling rapidly toward zero and beyond. This was perfect for gold, as it is a safe haven and inflation hedge. And the opportunity cost of holding such a non-yielding asset dwindles as real rates turn negative.
Today, inflation is moribund and, given the possibility for Washington's shenanigans to damage the economy, the more prevalent risk may be deflation. Real rates, which turned sharply negative after the financial crisis and fueled gold's earlier rally, appear to have bottomed out and could soon turn positive, especially if the Fed starts tapering bond purchases anytime soon.
An extended shutdown or a debt-ceiling debacle could well stay the Fed's hand as well as stoke investors' fear in general. Most Americans might gnash their teeth at that prospect. But for gold's hardcore fans, things may have to get much worse before they get better.
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