I'm an avowed gold bull, and I truly believe that gold investors will end up benefiting from the biggest bull market of our time.
But we have to be honest: Investor psychology plays a crucial role in shorter-term investment results. And recent trading patterns clearly demonstrate that most of the recent increase in the price of gold is due to the debt-ceiling debate in Washington, as well as the European sovereign-debt crisis that continues to lurk in the background.
The bottom line: The debt-ceiling debacle could cause a short-term drop in gold prices.
Congressional leaders as of early Sunday afternoon had yet to reach a debt-ceiling deal, but said they were close to an agreement that they hoped would prevent default.
As of late Thursday, gold was trading within 1% of the all-time high of $1,628.05 reached on Wednesday, and was poised to record its first monthly increase in three – all because of the debt-ceiling deadlock and the fear that a U.S. government default would level the global financial markets. Spot gold has surged 7.6% in July.
If you think about it, a number of things just don't add up. For instance:
- The 30-year U.S. Treasury bond is yielding just 4.31% – meaning the rate is virtually unchanged since the start of the year. But with Standard & Poor's saying there's a 50% chance it will downgrade the United States' top-tier AAA credit rating – something once considered bulletproof – you'd expect that yield to be surging as "rational" investors dump U.S. debt. Right?
- In fact, a quick glance at yields on the one-month, one-year, two-year, five-year, 10-year, 20-year – and every maturity in between – shows that yields are down from the start of the year, meaning investors are still buying U.S. Treasuries, despite record deficits and the fast-approaching debt-ceiling deadline. If there's a risk of a downgrade and a default, shouldn't those same "rational" investors be avoiding all new purchases, even as they dump current holdings?
So what will we see if tomorrow's (Tuesday's) deadline comes and goes, and no deal is reached down on Capitol Hill?