Shutdowns, Deficits and Record Gold

5 min read

September was one of the strongest months for gold in a generation. The price rose by more than 11% in dollars, its biggest monthly gain in more than a decade. It set new all-time highs on half of the month's trading days. This morning it set yet another record high. Overnight, the United States government ran out of money and shut down. The two events are more closely linked than they first appear.

A month of records

Gold began September close to the record it set in April. By the end of the month it had left that record far behind. In pounds the move was just as striking. Early this morning the sterling price stood at another record for British buyers.

In the early hours of today gold touched a new all-time high of $3,875 an ounce. It has now gained more than 47% since the start of the year. Silver climbed to its highest level in more than 14 years. The dollar sat near a one-week low, which makes gold cheaper for buyers paying in other currencies and is one reason demand has held up so well.

This was not a rush of excitement. It was a steady climb, day after day, driven by the same buyers who have supported gold for three years: central banks, long-term buyers and savers who no longer trust paper money to hold its value.

The latest figures from the World Gold Council, covering April to June, show who those buyers are. Central banks bought 166 tonnes in the quarter, a slower pace than before but still high by historic standards. Demand for gold bars and coins rose 11% on a year earlier to 307 tonnes. Gold-backed funds took in 397 tonnes over the first half of the year, the most for any first half since 2020.

The Federal Reserve cuts

On 17 September the Federal Reserve cut its main interest rate by a quarter point to a range of 4% to 4.25%. It was the first cut of the year. One newly appointed governor voted for a cut twice as large.

We wrote in August about the political pressure on the Federal Reserve. That pressure has not gone away. The White House wants lower rates and has made no secret of it. Markets now expect further cuts before the year is out, even with American inflation still above target. Traders are pricing in another quarter point cut this month and one more in December.

The latest jobs data added to that view. Figures published yesterday showed American job openings barely grew in August while hiring slowed. A cooling jobs market gives the Fed more reason to keep cutting, even with prices still rising faster than it would like.

Lower rates reduce what savers earn on cash. They also make it cheaper for governments to carry their debts. When a central bank cuts while prices are still rising, it is telling you which of those two matters more to it.

A careful step back in London

In London the Bank of England held Bank Rate at 4% on 18 September. Seven of the nine members of the Monetary Policy Committee voted to hold. The other two wanted a cut.

The Bank also slowed the pace at which it shrinks its holdings of gilts. Over the next 12 months it plans to reduce them by £70 billion, to £488 billion, down from a pace of £100 billion over the past year. After the jump in long-term borrowing costs earlier in the month, which we covered in Britain's Borrowing Costs Hit a 27-Year High, that was a careful step back.

The Bank's caution is easy to understand. Consumer prices rose 3.8% in the year to August, close to double the 2% target. The Bank expects inflation to rise slightly in September before falling back. For savers, that means another stretch in which cash in the bank struggles to keep pace with the cost of living.

Why a shutdown matters to gold

At one minute past midnight Washington time, much of the American federal government closed. Congress failed to agree a funding bill. Hundreds of thousands of federal workers face unpaid leave. Official data, including Friday's jobs report, may not be published.

Shutdowns are usually resolved. The deeper problem is what they reveal. The United States carries more than $37 trillion of debt. It runs large deficits even in good years. Each funding fight is a reminder that the world's reserve currency is issued by a government that cannot agree how to pay its own bills.

Gold does not need a budget passed. It has no issuer, no debt ceiling and no deadline. When the institutions behind paper money look less steady, the oldest form of money looks more attractive.

What the last long shutdown cost

History gives a sense of what is at stake. The last major shutdown, over the winter of 2018 and 2019, lasted 35 days.

The Congressional Budget Office, which provides independent figures to Congress, later estimated that it cost the American economy $11 billion. Most of that was expected to come back once workers received their back pay. Around $3 billion, however, was judged to be lost for good. Federal workers went weeks without pay and private businesses lost trade.

Nobody yet knows how long this shutdown will last. What is clear is that each one chips away a little more at confidence in how the world's largest economy runs its finances. That is the backdrop against which gold set its latest record.

Deficits are the real story

Strip away the headlines and a simple picture remains. The major economies are borrowing heavily. America is shut down over its spending. Britain's long-term borrowing costs touched their highest since 1998 at the start of September. Central banks are cutting rates while inflation is above target.

Each of those facts points the same way. Governments are under pressure to keep money cheap and plentiful. Over time that weakens the currencies they issue. Gold's price in dollars and pounds is, in large part, a measure of that weakening.

What it means for savers

For a saver in Britain, the lesson of September is not about chasing a rising price. It is about what you hold your wealth in. Cash in the bank is a claim on a currency whose value is managed by policymakers under political pressure. Gold is a physical asset that sits outside that system.

UK legal tender gold coins such as the Britannia and the Sovereign are 999.9 fine gold or traditional 22 carat gold. Gains on them are exempt from Capital Gains Tax for UK residents. With a Budget due on 26 November, that point is likely to matter more, not less.

None of this means the price will keep rising. Gold has fallen sharply before and can do so again. What has not changed are the reasons people hold it, which is why many British savers now choose to keep part of their wealth outside the banking system altogether.

Speak to a specialist

If you would like to talk it through, call a specialist on 0208 064 0076, Monday to Friday, 9am to 5pm, or book a call at a time that suits you.

Book a call

Sources

This article is for information only. The value of gold can go down as well as up.

Back to blog

Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.