The Potential Impact of Government Shutdowns
With the threat of a federal government shutdown looming, investors may consider turning to gold as a safe haven asset. However, the track record of gold during previous shutdowns suggests a more nuanced outlook.
Negative Effects on the Economy
It is clear that a partial shutdown of government services and spending has detrimental effects on the overall economy. When federal government employees are furloughed or laid off, it reduces consumer spending during the holiday shopping season. These circumstances should theoretically be supportive of gold prices.
In the past, shutdowns have significantly impacted economic growth. For example, the 2013 federal government shutdown, which lasted 16 days and resulted in the furloughing of 800,000 federal employees, reduced fourth quarter GDP growth by 0.3 percent. Another estimate in 2018 projected that each week of a shutdown would cut 0.2 percentage points off quarterly GDP growth. These instances of broad economic weakness should boost gold prices.
Inconsistent Performance of Gold
Interestingly, gold prices have not aligned with the expectations during previous government shutdowns. Over the past three shutdowns, gold prices either stagnated or declined, while equities rallied.
In 2013, gold prices remained relatively flat during the 16-day shutdown. Similarly, during the brief Jan. 20 – 23 shutdown in 2018, gold prices actually declined. Even during the longest shutdown in history from 2018 to 2019, gold prices only saw a modest increase of $20.
Contrary to gold, the stock market has shown a tendency to thrive during government shutdowns. Historical data reveals that the S&P 500 gained an average of 10.3% during the last government shutdown, and an average of 0.3% during shutdowns since 1976. This phenomenon is not limited to stocks – bonds, the U.S. dollar, and gold also demonstrate mixed performance during shutdowns.
Gold’s Rally After Shutdowns
The true rally for gold often occurs after the political stalemate is resolved and the shutdown ends. In all three cases, gold experienced stronger and more sustained gains once the federal government resumed regular operations.
Current Market Movement
As the possibility of a government shutdown looms, spot gold prices are seeing a rally, reaching $1,945.40 at the time of writing. It is important to monitor how gold performs during and after the shutdown to fully understand its potential as a safe haven asset.