Investors looking for a surge in gold prices as the U.S. government shutdown rumbles on and the deadline for raising the debt ceiling approaches are likely to be disappointed.
While the threat of a U.S. debt default on October 17 offers gold bulls a ray of hope, it will take a worse scenario than is envisaged to lift prices after they plunged by more than a fifth this year.
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The precious metal is often seen as a safe store of value against inflation or financial market stress, and hit record highs during a 2011 stand-off over the debt ceiling that led to a credit ratings downgrade of the world's largest economy.
But times have changed. The metal is on track for its first annual fall since 2001 after heavy selling by investors banking on a withdrawal of the bullion-friendly U.S. monetary stimulus program.
The wider markets are calmer too, offering attractive alternatives. The S&P 500 is up 17.5 percent, hitting record highs last month, while European shares are 9 percent higher and yields on safe-haven U.S. 10-year Treasuries are up by half, suggesting keener appetite for risk.
"I don't think the conditions are the same as they were when we had that first downgrade of the U.S. debt outlook by rating agencies in 2011, which really helped drive gold very strongly upwards," Credit Suisse analyst Tom Kendall said.
"That was really at the height of the euro zone crisis as well, and we were a long way from anyone talking about the withdrawal of stimulus. I don't think conditions are the same as they were to recreate that move of June, July 2011."
Gold has traded in its narrowest monthly range since March since the U.S. government shut non-essential services on October 1, after failing to reach a deal on federal spending measures.
Volume in U.S. Comex gold futures this month so far was less than 150,000 lots, versus an average of 210,000 contracts for the first nine months this year. Daily turnover slipped to a one-month low at 96,000 on Monday, underlying a lack of commitment by institutional investors, traders said.
The precious metal has consistently failed to benefit from previous U.S. government shutdowns.
However if the stalemate, currently in its second week, goes on long enough to damage U.S. growth prospects, the Fed could prolong monetary stimulus, potentially lifting gold.
The U.S. central bank's quantitative easing policy, unveiled in 2008, was a key driver of higher gold prices during the financial crisis. The program kept up pressure on long-term interest rates, cutting the cost of holding gold, while fuelling fears of burgeoning inflation down the line.
"The longer the shutdown goes on, the bigger the problems we are going to have in the economy," said Ed Moy, chief strategist of Morgan Gold, which offers retirement accounts that include precious metals coins and bars.
"The Fed will likely want to see what the impact of the shutdown is going to be before it tapers its stimulus," said Moy, also a former head of the U.S. Mint.
But few expect the shutdown to go that far. More importantly for gold, policymakers are even less likely to threaten a U.S. debt default, analysts say.
"Almost everybody thinks that it will be solved and there will be no default, but still people are nervous," said Bill O'Neill, partner of commodities investment firm LOGIC Advisors in Upper Saddle River, New Jersey.
"There is a certain caution in people's mind, and that's why there's no aggressive selling pressure...You're certainly not going to go short against it."
The U.S. Treasury has said it will hit the nation's $16.7 trillion debt cap by October 17. When it does so, because the Treasury won't be able to add to the national debt, bills will have to be paid with incoming revenues and cash on hand.
In the event of a default, the government would have to cut spending overnight by about a third. If investors lost their cool, stock markets and other financial assets could tumble as they bolt towards cash, while gold could potentially surge.
However, few are betting on such a scenario. If talks to lift the ceiling go down to the wire, gold prices are likely to rise, but they would have to go seriously wrong to put much of a dent in gold's overall losses for the year.
"I think investors assume that a rise in the debt ceiling will be approved and that any stand-off will be temporary," economist Caroline Bain of the Economist Intelligence Unit said. "There could be some gold buying, but unless a U.S. default scenario really starts to seem probable, I don't see a wholesale move into gold."