To The Moon

By Kevin George

Author of "The Stock Market is Easy - How to Avoid the Pitfalls of the Average Investor".

Key Points:

• $Gold - main 2306(GCmain)$ prices could face a downturn as the debt ceiling drama is expected to resolve, leading to a market rally and a stronger r$USD Index(USDindex.FOREX)$ .

• UBS predicts gold to reach all-time highs by year-end, but the author disagrees, citing the triple-top resistance dating back to 2011.

• A debt ceiling deal or "breach" deal could result in a significant rally in stocks, attracting investors back to the U.S. market and negatively impacting gold prices.

In October 2022 I said we were close to a low in the gold (XAU-USD) price. The price of the precious metal rallied in the following weeks and is up around 17% since that date, matching the performance of the S&P500, accounting for a drop from the 2022 highs. In this article, I will discuss a potential downturn for bullion.

The debt ceiling drama is the same as the last

Does any professional investor believe that the White House and Republicans will allow a default on the U.S. debt, creating a catastrophe that would see all politicians losing their jobs?

The current debt ceiling drama is the same as the last handful of debt ceiling dramas where politicians clash over spending and take it to the wire. I am highly confident that this week will see one of two outcomes:

1) A debt ceiling deal to raise the U.S. debt ceiling by $4 trillion, postponing the next dramatic negotiation until after 2024.

2) A postponement of spending in other areas to keep bondholders whole until we get the first option.

Carsten Brzeski, head of macroeconomic research at Dutch bank ING, outlined the latter, saying that a debt "breach" would mean no "automatic reaction” to a deal failure. Brzeski said the United States could avoid a technical default for a few weeks by continuing to pay bondholders at the expense of items such as social security or healthcare.

Markets would still be rattled but would not create “the mother of all crises,” Brzeski added.

Moody’s Analytics said that a breach of more than a week could see U.S. gross domestic product dropping by 0.7% with 1.5 million jobs. Writing in a paper this month, they added that there was a 10% probability of a breach, which would likely be a short one.

And it would be short because some of those 1.5 million jobs would be House Republicans and Democrats.

The revival of the world's safe haven beats central bank buying

Coming back to precious metals, I read a weak analysis from UBS saying that gold hits $2,100 by year-end and $2,200 in March 2024.

In its "Three Reasons to Buy Gold Now” publication, the bank’s strategists were bullish for gold this year.

“The yellow metal remains 8.2% higher since the start of this year, and we think it’s likely to break its all-time high later this year with multiple mid- to longer-term drivers.”

Last year marked the thirteenth year of growing gold purchases by central banks and the analysis referred to first-quarter data from the World Gold Council in 2023. The WGC said central banks are on course to acquire around 700 metric tons of gold this year, surpassing the average since 2010 of below 500 metric tons, UBS said.

We think this trend of central bank buying is likely to continue amid heightened geopolitical risks and elevated inflation. In fact, the U.S. decision to freeze Russian foreign exchange reserves in the aftermath of the war in Ukraine may have led to a long-term impact on the behavior of central banks.

UBS also said that the weakening $USD Index(USDindex.FOREX)$ would also be a big factor in $Gold - main 2306(GCmain)$ 's push higher. However, I recently predicted a potential bottom in the $USD Index(USDindex.FOREX)$ , which is currently up 3% despite the debt ceiling drama. A much larger U.S. dollar rally would come with a debt ceiling deal and an increase in price shows that international investors also know the likely outcome of the current negotiations.

Much ado about nothing, brace for the rally

The $S&P 500(.SPX)$ rallied 1.45% on Friday and there is potential for a much sharper rally this week.

In mid-May, U.S. equity funds suffered outflows worth $5.7 billion, marking a seventh consecutive week of outflows.

The investment flows didn't go to cash, they went to global investment opportunities. Again, Reuters and Refinitiv said global money market funds received around $17.6 billion of inflows, the largest in three weeks. U.S. money market funds received $39.89 billion worth of inflows but investors sold European and Asian funds of $15.76 billion and about $30 million, respectively.

The reality is that in the week ahead, a debt ceiling or "breach" deal will lead to a big rally in stocks as spooked investors return to the world's safe haven. For gold, a big rally in the U.S. dollar could crush bullion in the week ahead.

Worse still for gold investors, the $2,000 level capped the price of bullion in 2011. It also capped the price of the precious metal in 2022. A third failure at this level could lead to a long-term downtrend in gold prices.

Conclusion

The current debt ceiling drama is the same as previous episodes over recent years and I am highly confident that a deal or bridge will lead to a market rally. The U.S. stock market could see a flood of money as fearful investors rush back to the world's most secure safe haven. For gold investors that is a negative as an investment drive to U.S. assets will push the buck higher and dampen the potential for gold. UBS thinks gold will get back to all-time highs in the next nine months. I believe they are wrong and the triple-top resistance dating back to 2011 is a big warning sign for precious metal investors.

Source: https://seekingalpha.com/article/4608046-gold-price-will-lose-as-inevitable-debt-deal-looms