Gold ticked briefly below 1300.00 in overseas trading, before renewed buying interest emerged. The yellow metal is now up nearly 1% on the day; $20 off the intraday low.
Geopolitical tensions continue to ratchet higher: The U.S. conducted live-fire bombing runs on the Korean Peninsula yesterday, along with South Korean and Japanese planes. Some of the planes were reportedly nuclear capable B1s from Andersen Air Force base on Guam.
Treasury Secretary Mnuchin contends that the debt ceiling will be raised, but also warned that Hurricane Harvey relief legislation could further trim the already small September window for Congress to resolve the impending issue.
The Freedom Caucus is already warning that the debt ceiling increase should not be attached to any Harvey relief legislation. Some in the GOP are talking about linking Medicaid reform to the debt ceiling. That would assuredly be a nonstarter for Democrats, as would any link to tax reform that favors corporations or the wealthy.
This is going to be a contentious fight any way you slice it, for a White House that has already lost considerable post-election momentum. A potential default and/or a government shut down hangs in the balance. The next 4-weeks are going to very interesting indeed, with significant implications for risk appetite.
Jim Rickards posited an interesting theory yesterday on Mnuchin’s recent visit to Ft. Knox. “The answer may lie in the fact that the Treasury is running out of cash and could be broke by September 29 if Congress does not increase the debt ceiling by then. But the Treasury could get $355 billion in cash from thin air without increasing the debt simply by revaluing U.S. gold to a market price,” Rickards told Kitco News’ Daniela Cambone.
U.S. gold reserves remain on the books at $42.22 per ounce. If Treasury were to mark those reserves to market — like the ECB does for example — they could buy themselves another 4-months or so.
The downside of doing that is it gives considerable legitimacy to a reserve asset that both Treasury and the Fed are probably loathe to bolster. However, a default may be the greater of two evils.