Gold and silver made substantial gains this week as the government shutdown finally came to an end. It might have taken 16 days, but Democrats and Republicans finally collaborated and were able to draft an agreement in regards to both the budget and the debt ceiling.
As you could have probably imagined, the only story dominating headlines this week was once again the government shutdown, which officially came to an end late Wednesday giving the over 800,000 temporarily laid off government employees a chance to return to their jobs on Thursday. Even though the official shutdown is behind us, its long-term implications must be taken into consideration by investors of all types.
Budget and Debt Ceiling Deals Only a Temporary Fix
When Wednesday got underway, the first bit of news indicated that Republicans and Democrats had more or less come up with a deal in regards to the budget and debt ceiling. This was received as good news by most investors as stocks, bonds, and most commodities grew in value. By Wednesday night the deal was signed and made official, only hours before the debt ceiling was going to become a real, troubling issue.
By the next morning everything seemed to be back to normal as government agencies opened back up for the first time since the end of September. After a while, however, markets that initially gained value in the wake of a budget/debt ceiling deal being reached began to move the opposite direction. This can be attributed to the fact that both deals reached by Congress are temporary in nature. The budget which was agreed upon only funds government operations until the middle of January, while the debt ceiling has only been raised to allow borrowing until the beginning of February. What this all really means is that the government shutdown scenario which we have been a part of for the past 16 days has the real possibility of playing out all over again during the first month or so of 2014. Because the deals are temporary, investors are avoiding US stocks and especially the US currency. The USD has fallen since Wednesday and is now hovering around a 10-month low.
The possibility of repeating the government shutdown a few months down the road has prompted some safe-haven demand for gold and silver, as most other investment vehicle are being seen as increasingly risky.
Long-term US Economic Growth Implications
To some, the shutdown was really not that big of a deal, while for others, such as those who temporarily lost their jobs, the shutdown went on for far too long. In the grand scheme of things, 16 days is not too long of a time, but the shutdown’s affected US economic activity and growth in ways that many people may not be aware of until a few weeks down the road.
It is expected that the two-week hiccup in government operations will severely hurt 4th quarter economic growth and will prevent the Fed from even entertaining the thought of reducing their monthly bond-buying initiative, known as Quantitative Easing. With that being said, this is merely speculation at this point because we have seen 0 economic reports released by the government since operations were shutdown on the first of the month.
As late economic reports begin to make their way to the public, the full impact of the shutdown will be realized and assessed.