Gold lost more of its sheen during the week ended May 26, but a bullish case remains as US President Joe Biden's budget deal to avert a US default heads to Congress for approval.
The gold price decreased by 1.36% week over week to $1,940.40 per ounce as of May 26 and has tumbled 5.21% since May 4, when it hit a 14-month high of $2,047.01/oz.
Biden struck an "in principle" budget deal with House Speaker Kevin McCarthy (R-Calif.) on May 28 to suspend the $31.4 trillion debt ceiling until Jan. 1, 2025, in exchange for spending caps. The deal moves to Congress for a vote, and it needs to pass before June 5, when Treasury Secretary Janet Yellen said the US government would run out of money to pay its bills if the debt ceiling is not raised.
All eyes will be "on Congress this week to see if legislation can be agreed to suspend or raise the debt limit," ANZ Research analysts said in a May 29 note.
Attention will subsequently shift to the Federal Open Market Committee's June 13-14 meeting, when ANZ expects officials to be "divided into three camps: hike; skip and possibly hike later; and take an extended pause. The latter are a minority."
Income, spending and inflation remain too strong for the Federal Reserve to ignore, James Knightley, chief international economist at ING, argued in a May 26 note.
'Harsh reality'
Morningstar said in a May 26 note that "a failure to raise the U.S. debt ceiling, however unlikely, could have broad implications for the U.S. and global economy," while other analysts see difficult times ahead either way.
Long hedges and speculative positions have built up in safe-haven assets such as gold in the past two months, in anticipation of a US government debt obligation default scenario if the debt ceiling is not raised, according to a May 26 note from online currency broker OANDA.
However, "gold is in the danger zone as optimism remains that a debt-ceiling standoff will be resolved and as US economic resilience will force the Fed to keep rates higher for longer," OANDA senior market analyst Edward Moya wrote. "Gold can benefit if inflation doesn't prove to be too sticky and the labor market starts to soften. The week ahead will provide clarity on what happens with the US default watch and if the US economy remains too strong and warrants further Fed tightening."
Wall Street "seems to be shrugging off some hawkish data that is making the June meeting a live one for the Fed," according to Moya.
"Once a debt deal is done, markets will have to deal with the harsh reality that the Fed is going to kill this economy," Moya wrote. "The end of tightening might not occur until the end of summer and that means we will probably get bigger rate cuts next year."
Gold as safe haven
"Gold, of course, is not something the Fed (nor anyone else) can print or mouse-click, and gold's ultimate role as a currency-insurer is not a matter of debate, but a matter of cycles, history and simple/stupid common sense," Matthew Piepenburg, partner at Matterhorn Asset Management, said in a May 28 note.
"As history reminds, when currencies die within a backdrop of unsustainable debt, gold in fact does work — and every time," Piepenburg said.
Morningstar said mining issuers with heavy gold portfolios could benefit as investors look to increase holdings in safe-haven assets during a period of economic turbulence.
"Also, mining companies with a high percentage of revenue from the production of critical minerals such as nickel, copper, cobalt, and lithium should fare better as demand for electric vehicles grows. However, mining issuers with a heavy concentration of bulk mineral commodities such as iron ore and metallurgical coal could experience revenue and margin pressure," Morningstar said.
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