Daily Gains Letter

Debt Ceiling Debates Pushing Central Banks Toward Financial Independence

By for Daily Gains Letter |

Financial IndependenceI realize gold is out of favor right now, but there are just too many technical and fundamental indicators pointing to the upside. With the yellow precious metal currently trading near a three-year-plus low, one has to wonder if now is a good time to get involved.

While gold prices recently dipped below the 50-day moving average, they have been finding support on the back of the U.S. government shutdown and impending debt ceiling showdown.

Gold prices were up earlier this week as the U.S. government shutdown barreled into its second week with no end in sight. Astute investors have turned their backs on the U.S. dollar in favor of the yellow precious metal, a global, borderless currency that acts as a store of value.

Granted, Federal Reserve chairman Ben Bernanke claims he doesn’t understand gold prices. But that hasn’t prevented other central banks around the world from adding it to their coffers.

Central banks, which own roughly 18% of the world’s gold supply, are expected to increase their reserves of the precious metal in 2013 by as much as 350 tons, valued at about $15.0 billion. In 2012, central banks from around the world purchased 535 tons of the yellow precious metal, the most since 1964.

Gold may be trading down more than 20% year-to-date, but between July and September, it posted its strongest quarterly gains in a year. Why is the precious metal re-emerging? Oddly enough, it has nothing to do with the Federal Reserve’s $85.0-billion-per -month monetary policy; rather, it’s the idea that the world’s strongest economy and holder of the reserve currency could default on its debt on October 17, which would create an economic tsunami felt around the world.

Now, deep down, no one really expects the U.S. to default on its $12.0 trillion of outstanding debt. That’s because Congress has always managed to dig its heels in and, miraculously, work things out—or rather, it’s raised the debt ceiling 78 times before (49 Republican vs. 29 Democrat), so there’s no reason to suspect it won’t do it again.

But that’s not the point. Just seeing how the politicians behind the world’s biggest economy and reserve currency are playing chicken with each other is enough to send central banks and investors around the world seeking a financial safe haven in the economic storm.

If the debt ceiling fiasco of 2013 has taught central banks anything, it’s to work towards financial independence. The United States may not want to strap its currency to gold reserves, but that doesn’t mean other central banks don’t want to take a proactive approach with the yellow precious metal and ensure their country’s long-term financial security.

Incredibly, not everyone subscribes to this point of view. Those who do might want to consider an exchange-traded fund (ETF) made up of gold mining companies, or one that is long on physical gold. Those who are bearish on the yellow metal have an equally exhaustive list of ETFs that short gold prices.

Again, chances are good that the U.S. dollar will rebound and gold will retrace on exuberance after the debt ceiling is raised. However, gold will continue to be bullish, because investors and central banks know how fragile the U.S. economy has become.

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