Gold could receive a boost in coming days, while stocks could suffer, as investors focus on a matter they have mostly overlooked: political brinksmanship in Congress over raising the U.S. government’s debt ceiling.
There have been five prior occasions over the past decade in which similar political gridlock brought the federal government to the brink of financial default, according to the Bipartisan Policy Center. Leading up to those occasions, gold GC00 rose 3.4% on average while the S&P 500 SPX lost 2.3%.
Yet financial markets so far have largely ignored this brewing confrontation. But investors’ attention could shift quickly in coming days as the Aug. 2 deadline approaches for raising the U.S. federal debt ceiling. U.S. Senate Minority Leader Mitch McConnell has already indicated that no Republicans will agree to do so.
Debt rating agency Fitch in mid-July indicated that the outlook is negative for its rating of U.S. government debt, in part because of “a deterioration in governance.” If the agency follows through on this threat, it wouldn’t be the first time that political gridlock over the debt ceiling was the cause. Standard & Poor’s did exactly that in August 2011, and in the month leading up to the resolution of that showdown, gold prices rose 10.4% while the S&P 500 fell 6.9%.
Contrarian analysis reaches the same conclusion
A contrarian analysis of market-timer sentiment reaches a similar conclusion about the near-term outlook for both gold and stocks. The average recommended gold exposure level among short-term gold timers my firm monitors is currently lower than 87% of all daily readings since 2000. This indicates a considerable level of bearish sentiment on gold, which is bullish from a contrarian perspective.
Stock market timers, in contrast, are relatively upbeat. The average recommended equity exposure level among the Nasdaq-focused stock market timers my firm monitors is higher than 74% of all daily readings since 2000.
So even if there weren’t a debt ceiling showdown in our near-term future, we should expect gold to outperform stocks over the next couple of weeks.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org
Read: Where gold stands a year after hitting a record-high price
More: Gold rallies to a more than 6-week high after Fed policy update and weaker-than-expected U.S. economic data