A great example of distress may be Carillion, a construction firm employing almost 20,000 people in the UK, which collapsed last week under a mountain of unsustainable debts. With £2 billion of debts, the bankruptcy of the company is one of the most spectacular corporate failures of recent years. The situation is grave – although the government refused to bail out the company, it set up a special national task force to tackle the crisis and prevent further bankruptcies in the industry. As Carillon owed money to about 30,000 small firms, analysts are afraid of the domino effect.
However, the chart below, which shows the price of gold in British pounds, doesn’t show a surge in the safe-haven demand for gold. The Carillion crisis is thus believed by gold traders to remain limited.
Chart 2: Gold prices over the last twelve months (London P.M. Fix, in £).
At Friday’s midnight, the U.S. government run out of funds and had to shut down. It triggered some worries, adding downward pressure on the greenback and supporting the yellow metal slightly. However, we believe that the government shutdown will be temporary, so its economic impact will be limited. The effect on the U.S. dollar and gold may actually reverse if the Congress renews government funding.
While the U.S. government shutdown attracted press attention, the Carillion crisis remains unknown for the general public outside the UK. It’s a bit surprising, as there is a serious risk of contagion to the subcontractors and their banks. However, the price of gold expressed in British pounds has remained unruffled so far (or it has actually fallen). But we will monitor the situation, as nobody knows for sure how it will unfold. Even if nothing happens, the Carillion crisis may show what might happen in the U.S. or other countries when inflation will finally hit and the interest rates rise.
This week may be very interesting for the gold market, with some volatility, as both the Bank of Japan and the European Central Bank hold their monetary policy meetings.