Wednesday, May 4, 2011
Could the debt ceiling issue destroy gold?
Treasury Secretary Tim Geithner put out a list of measures that the Treasury could take to keep the government from defaulting for a period of time. Since it will not be able to sell any more Treasuries, it would have to resort to using funds in various accounts (like the exchange stabilization fund, for one, but there is only $23 billion in that) and/or stop making payments on some “non-essential” things. (Like gov’t pensions. Too bad for the pensioners, I guess.)
The Treasury could also sell assets and gold could be one of those assets. The U.S. has A LOT of gold: over 8,000 tons, which is equal to about $400 billion at today’s prices. If the Treasury decided to sell even a small fraction of that, gold would totally collapse. Geithner said he is not in favor of asset sales because he doesn’t want to create a “fire sale” when it comes to prices. However, the longer this thing drags on the less of a choice he is going to have. Bottom line: probably a good idea to be careful with gold right now. Could even be a good short.