Both Parties Bracing for Debt Ceiling Blowup This Year

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Well, this week brought some big moves in currency and commodity markets. On Wednesday, European Central Bank President Mario Draghi insisted stimulus programs were working and cited improving economic numbers in the region. So we had an upbeat ECB along with the International Monetary Fund raising its forecast for Eurozone growth to 1.5% this year. And that helped lift the euro versus the U.S. dollar.

The Dollar Index dropped 2% this week after finding resistance at the 100 level once again. Dollar selling began with the release of retail sales data on Tuesday. Though retail sales moved higher in the report, they fell short of economists’ expectations.

The weaker dollar plus encouraging news on the global economic demand front gave a huge boost to the oil market. Crude oil surged more than 9% this week to new highs for the year at close to $57 per barrel for West Texas Intermediate Crude. Just a month ago oil prices were sitting at multi-year lows in the low $40s.

So, does the dramatic turn-around in oil portend similar moves for precious metals? Perhaps we’ll find out in the days ahead. But for now, gold and silver aren’t following in oil’s footsteps. Gold prices closed Thursday at $1,200 an ounce – a level that’s been hit repeatedly over the past month. For the week gold shows a slight loss of 0.4% and currently trades at $1,204 an ounce.

Silver is also struggling to gather strength. Spot silver prices currently come in at $16.32 an ounce, down 1.1% on the week as of this Friday morning recording.

Turning to the other white metals, platinum prices show a decline of 0.6% to trade at $1,165 per ounce, while palladium for the second week in a row is outperforming all the precious metals, although that just means it’s not in negative territory like the other metals. Palladium currently comes in at $780 an ounce – essentially unchanged since last Friday’s close.

The action in the precious metals markets is discouraging given the weakness in the dollar. Gold and silver move inversely to the dollar over time, but day-to-day moves in the currency markets don’t necessarily drive day-to-day moves in the metals. Over the past few days, oil has been the hot trade on the long side. And industrial commodities fared better than precious metals.

But with the U.S. Dollar Index on the verge a major breakdown, currency market gyrations could serve as a catalyst for precious metals markets to embark on a new uptrend. The long-term fundamentals for the dollar are looking worse and worse as the debt problems get bigger and more intractable. The oft-made argument that the U.S. is the best looking house in a bad neighborhood doesn’t change the reality that owning dollars puts you in a bad neighborhood. What happens to the value of a nice home in an undesirable neighborhood on the decline? That home will typically lose value, too. All fiat currencies stand to lose value in real terms.

But it’s not even clear that the U.S. is the best house in a bad neighborhood. It just happens to be the biggest. The dollar enjoys privileged status as a world reserve currency. But the U.S. government is abusing that privilege by running up debts that cannot be paid off except by massively inflating the currency supply in the years ahead.

Even as the U.S. hit its statutory debt limit last month, the deficit spending continues. The Obama administration has congratulated itself for shrinking the deficits over the past few years. Yet the budget deficit widened slightly in the first half of fiscal year 2015 to $439 billion. And it’s projected by the Congressional Budget Office to hit $1 trillion in the next decade.

Republicans may talk a good game about being more fiscally responsible. But the four biggest components of the federal budget are politically untouchable – those being Defense, Social Security, Medicare, and interest on the debt. In reality, there’s little Republicans will be willing to do besides nip around the edges of relatively small programs. The last time Republicans had control of Congress and the White House, they didn’t even do that. They actually increased discretionary spending.

Make no bones about it, America’s debt crisis will grow more acute regardless of who wins the White House in 2016. And eventually, the debt crisis will morph into a currency crisis. Holders of dollars stand to see much of their purchasing power wiped out over time. And no other national currencies can be counted on to be safe havens from a dollar collapse. In a currency crisis, you want to be holding the soundest money available: physical gold and silver.

Well that will do it for this week’s Market Wrap Podcast, thanks for listening. This has been Mike Gleason with Money Metals Exchange reminding you that we remain fully committed to getting you the most value for depreciating dollar…with speed, with accuracy and with top notch service. Have a great weekend everybody.