The U.S. government partially closed at midnight on Friday. But the UK deals with a much more serious crisis. Potentially also for gold.
Unlike the U.S. Government, the gold market never closes
So it happened again. The most powerful country in the world didn’t manage to renew another short-term government funding extension. It’s quite embarrassing, but we all should already get used to it. Since 1976, there have been almost 20 previous occurrences. But the world never collapsed. Why should it, given the character of the government? In the worst case, it is a parasitic, mafia-style organization, while in the best scenario it is an inefficient bureaucratic Moloch with the dynamism of a sloth.
And this time the apocalypse didn’t occur as well. You see, political embarrassment is not equal to an economic headwind. After all, much of the government continues to function. We hope that nature and culture lovers will not be offended, but the world will cope with the temporary closure of museums and national parks. Surely, a reduction in hours worked by government employees may shave a portion of the Q1 GDP, but the impact shouldn’t be substantial. Gold traders must sense it, as the price of the yellow metal rose amid a softer greenback and worries caused by the government shutdown, but the increase was moderate, as one can see in the chart below. It suggests that the economic impact of the government shutdown is likely to be limited and temporary – gold investors shouldn’t take positions based only on that factor.
Chart 1. Gold prices over the three last days.
Will the next crisis come from the UK?
While the world’s attention is focused on the U.S. (or on the Germany, as the Social Democratic Party voted for the entering formal talks with Angela Merkel to create a coalition and form a new government), the UK’s economic outlook is rather gloomy. According to some insolvency specialists, almost half a million UK businesses started 2018 in significant financial distress due to the plunge in the value of the pound after the Brexit vote, weaker consumer spending, growing business uncertainty, rising inflation and interest rates. The number of UK firms in financial problems soared 36 percent from 2016 to 2017.