Republican congressional leaders are demanding spending cuts before approving an increase in the federal debt limit, while the White House says it will not negotiate on the debt ceiling. This standoff has already forced the Treasury Department to resort to “extraordinary measures” to continue funding the federal government, a tactic that will only work until the summer. Given the standoff, a debt ceiling crisis that could cause the United States government to default on some of its debt is a distinct possibility. For investors, this means U.S. Treasury bonds, notes, and bills, are no longer the super-safe, risk-free investments they normally are; the full faith and credit of the U.S. government will lose its meaning if there is not good faith effort in Washington to resolve the looming fiscal crisis.
Were Washington to default on its Treasury securities, there would be a financial earthquake whose tremors would be felt around the globe, in every market for stocks and bonds.
In 2011, the U.S. came within days of defaulting before Congress finally raised the debt limit. In the weeks preceding the deadline, the Standard and Poor’s 500 Index sank more than 16 percent. S&P also downgraded the credit rating of the U.S. government for the first time in history.
Gold, of course, does not depend upon the full faith and credit of any government, nor the resolution of quarrels between political parties. The precious metal is the universal safe haven that has been a store of value for millennia. As such, it stands to benefit as the summer deadline approaches for Congress to resolve its differences with the White House and raise the federal debt ceiling.