Morning Market Update Oct 16: Final Countdown

October 16th, 2013 by

titanicGold kept to the $1.275-$1.285 range overnight after gaining yesterday, as the last few hours count down to a possible destruction of the world economy and politicians in Washington continue to fail to reach an agreement on the budget and the debt ceiling. Hundreds of thousands of federal workers, including in the military, enter day 16 of involuntary furloughs.  The U.S. stock market still disbelieves that the impossible could happen, but then, that’s what they said about the Titanic. Right now, the iceberg of a national default is looming in the path of the ship of state, and ratings agency Fitch is in the crow’s nest, shouting a warning.

Fitch announced yesterday that it was placing U.S. sovereign under a negative watch, and will downgrade the country if the government defaults on any debts. The Treasury Department pays $10 billion a day in government bills, but only takes in $7 billion a day. Add to this the fact that the government is scheduled to mail out $67 billion in Social Security checks on November 1, which it will be unable to do if the debt ceiling isn’t raised.

Some congressmen unfamiliar with how massive payment systems work are calling on the Treasury to selectively default, and only pay “important” bills, but this is likely technically impossible without a total re-write of the computer system. The network is programmed to pay the nation’s bills as they come due, and even if it were possible to hack the system to prioritize payments, Treasury Department lawyers cannot find any law giving the government the authority to do so. Ignoring some due bills in favor of others would still be a default.

The dollar is weakening, and Treasury yields increasing, as investors overseas do not share the sunny outlook on Wall St. The yield on the 1 month Treasury spiked to the highest level in 6 years, while yesterday’s auction of 3-month and 6-month Tbills attracted the lowest number of buyers in four years. Conversely, German 2-year bunds had the best auction in over two years, as investors seek safe haven from American debt.

Gold was hammered early in the budget crisis by a couple of gigantic “not for profit” sales into the market, which effectively kept precious metals from adding to the unease in the general market. However, short-term speculators have been continually bitten during the shenanigans in Washington, by trying to time a resolution to the impasse, then being forced to scramble to cover shorts. This is showing up as choppiness in the precious metals market.

Hopefully, Congress will do their job before it is too late. If there can be said to be a silver lining to all this, it is highly probable that the Fed will not begin tapering its quantitative easing program at the end of October, in light of the economic damage the politicians have already done.

by David Peterson