Heard It Before Will Hear It Again
The gold market is solidly lower Tuesday and has now declined below the key $2,000 level. Talks on the debt ceiling are ongoing, buyout markets appear to be getting increasingly nervous about the potential for a default. U.S. Treasury Secretary Janey Tellen today described a severe downturn, millions of unemployed, and a stock market decline of some 45% to paint a picture of what a default could lead to.
Yellen stated that a U.S. default would generate a financial catastrophe. A global panic could ensue that could lead to massive margin calls, bank runs, and fire sales in assets. The dollar has already been under some degree of pressure in recent months and years as global players look to move away from it as the preferred global reserve currency of choice. A debt default could very well sink the dollar completely, and the currency could quickly lose the majority of its value. This decline in value could send investors and market participants into viable alternative currencies, such as the Chinese Yuan.
The gold market, although lower today, could get bought up rapidly as a dollar alternative. Unlike the dollar or the yuan, the gold market does not carry any counterparty risk at all. A default by the United States would give gold investors that much more reason to buy and the market could easily exceed its previous all-time highs. As concerns mount over the potential for a U.S., default, the banking system is also being closely eyed for more signs of trouble.
Bank failures have fed fears of a major banking system collapse in recent months. Although the failures have not yet spread significantly, the fears that they could remain a key market focus. A U.S. debt default could very well be the trigger that sends the banking system into a major collapse, as depositors look to pull funds as quickly as possible. This rapid fund withdrawal could be more than many banks can stand and could fuel a widespread failure rate in banks that could be disastrous for the nation and the economy. Without question, much hangs in the balance currently as President Biden and Speaker McCarthy continue their talks.
A U.S. default could have major implications for monetary policy as well. The Federal Reserve would have little choice but to begin cutting rates aggressively to combat the likely recession that could occur. Inflation, which has been a problem for some time, could accelerate once again if rates are taken down. The country could find itself in a scenario of rampant inflation with little to zero growth. Such a scenario would be disastrous for the nation and could take years to undo.
The gold market is likely to try to remain near or above the $2,000 level as these concerns mount. Any significant dips in gold may be bought aggressively by long-term investors seeing the forest through the trees.