Day 4: our spot gold trade

Spot gold rallied to a high of $1338.21, finding sellers at the 38.2% retracement of the June to August rally of $1180 to $1433.

Our sell limit of $1335 has now been triggered and we feel the technical picture should see gold trade lower over the coming weeks. In case the trade goes against us we have a stop loss in place at $1378 – just above August downtrend and September 19 high.

The key issue now is around the US fiscal issues, with the market starting to show more concern around the debt ceiling and the potential for a government shut down.  It is a complicated affair, but ultimately between now and Monday we need to see Congress pass a continuing resolution to keep the government funded.

The current proposal that has passed the House is for the continuing resolution for the budget authority to continue through to December 15, but will defund Obamacare.

This bill has now been passed to the Senate, where Senate majority leader Harry Reid is in the process of executing legislative equivalent that will strip out the language used to defund Obamacare. He is also asking the Senate to shorten the funding period to November 15. The final vote on these amendments are due Sunday, which will automatically send it back to the Republican-controlled House for approval.

This is the tricky part as John Boehner (the House Speaker) will need to convince his Republican colleagues to approve the bill. If they chose not to vote in favour of the legislation then we will see a government shutdown on October 1.

The implications of a government shutdown would firstly see all non-essential government employees staying at home. There will also be no government released data, thus the prospect that the US government doesn’t’ release the non-farms report on October 4 would be real and it would have to delay the data release, which of course has implications on the October 31 FOMC meeting.

The chance of a shutdown though is still low, with Morgan Stanley saying the chance is one in four. Government shutdowns have happened on numerous occasions and there have been seventeen shutdowns since 1976, with the last being a period of twenty-one days over the end of 1995 and into 1996. One of the key reasons why most see the probability of a shutdown as a low affair is that there are mid-term elections next year and thus we know the public is certainly supportive of an agreement that favours continuing the same levels of funding for Obamacare.

Once a resolution is in place, then Congress will start working on the debt ceiling, which could be the bigger issue. There are risks to the trade; however the probability a favourable outcome is seen high and thus we feel downside risks remain to gold over the coming weeks.

See gold chart below.

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