Gold is down, challenging the low end of the range that has dominated for the past two-months. The yellow metal is being weighed by persistent optimism that tax reform is going to get passed this year, the impending government shutdown will be averted and the Fed will raise rates next week.
The current continuing resolution to fund the government expires on Friday. It’s a given at this point that a new budget will not be passed, but there is an expectation that another temporary spending measure will be reached in order to prevent a government shutdown. Of course another kick of the can does nothing to resolve the underlying problems, not the least of which is the massive and growing debt burden.
That debt burden is expected to grow significantly if the current version of tax reform is ultimately signed into law. The University of Chicago recently asked a panel of economic experts to react to the following statement:
If the US enacts a tax bill similar to those currently moving through the House and Senate — and assuming no other changes in tax or spending policy — the US debt-to-GDP ratio will be substantially higher a decade from now than under the status quo.
Not a single participant disagreed with that statement. When asked whether “US GDP will be substantially higher a decade from now than under the status quo,” a mere 2% agreed that it would. The rest were either uncertain or disagreed.
The Fed really needs to ask themselves during deliberations next week, how confident they are that tax reform is going to provide a fiscal jolt to the economy; to the point where they can continue removing monetary accommodations. If confidence is low — similar to the UC survey — then staying on hold seems the logical policy decision.
The continued absence of inflation and the flattening of the yield curve seem to be also in favor of leaving the Fed funds rate unchanged. However, with the pre-FOMC FedSpeak blackout underway, at this point it’s too late to try and change the market’s mind.
I also think the central bank is disinclined to surprise the market. If the Fed is worried about any of these factors, they may go ahead and hike rates, but issue a dovish policy statement.
With jobs data out on Friday as well, the next week or so has the potential to be pretty interesting. Gold sold off into year-end in both 2016 and 2017, only to rally back after the December FOMC. What’s different this year is that the year-end action has been more consolidative than an an actual sell-off.