Gold vs. Debt Ceiling: What is the Correlation?

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Bloomberg’s Chart of the day (hat tip: Zero Hedge) ostensibly shows a relationship between the US debt ceiling extensions and price of Gold.

Color me unconvinced.

It has a few specific problems. First is the timing: The chart is dated August 1, 2011. Since then, the US credit rating was downgraded, and Gold took a big swan dive. Up 33% YTD at the time of that chart, it finished the year up 10% — certainly respectable, but no where near the home run it was as of August.

The second issue with this chart is that we only see a small slice of history. The correlation may or may not be spurious. We don’t see what took place prior — the pre 1997 era. Prior to this period, there was little correlation between the two. That sort of selective use of a time segment leads to questionable conclusions based upon that one time frame.

I bring this up today because last week, President Obama formally requested the raising of the debt ceiling (again). This is a different debt ceiling structure than the August debacle. Congress now has 15 days from that date to pass a resolution disapproving of this request before the limit is lifted.

David Semmens of Standard Chartered Bank gives us the details why that is unlikely to occur:

“It is important to note that a bill would have to be passed to stop the raising of the debt ceiling this time around – a far more straight forward mechanism that was built into the Budget Control Act of 2011 to ensure a relatively trouble free procedure.

The first hurdle will come in the House of Representatives which returns today (Tuesday 17th Jan) and is expected to vote on Wednesday (18th Jan), with the  Republican controlled legislative branch expected to pass a bill of objection which will be sent to the Senate. The Democratic majority Senate resumes after finishing its holiday break next Monday (23rd Jan) and is expected to reject any move to block the extension, shortly after that. While we would expect that there will be some political posturing surrounding the vote with the House Republicans passing a bill to reject the extension, this would almost certainly be blocked in the Democrat controlled Senate and failing that receive a presidential veto. If the second reading of the bill were to follow a presidential veto, a two thirds majority would be required in both houses to override the presidential veto. A $1.2trn extension will see the debt ceiling raised to 16.394trn and given current projections see the US through until early 2013 before this issue is revisited.

There are plenty of good reasons to own Gold. I remain unconvinced that the debt ceiling is one of them . . .


David Semmens, CFA
Gold vs. Debt Ceiling
Global Research, Europe
Standard Chartered Bank

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