US Govt shutdown: How it will impact commodities

September 30, 2013

WASHINGTON (Sept 30)   US Government is on the verge of a shutdown for the first time in 17 years and markets have turned jittery with gold making gains while crude oil and base metals complex is set to weaken further as economic growth prospects are hindered and whatever positive trends recently seen in the economy may be reversed, analysts said.

The House of Representatives voted 231-192 yesterday to extend U.S. government funding through Dec. 15 by tying it to limits on the central provisions of Obama’s Affordable Care Act. All eyes are glued to the Senate vote on the midnight of Monday which will decide whether worse is in store for the US economy. Bloomberg quoting analysts said that economic growth could fall 1.4% if the duration of the shutdown is extended as workers lose jobs and production is curtailed.

The last government shutdown ran from December 16, 1995, to January 6, 1996, and was the product of a budget battle between Democratic President Bill Clinton and Republicans, led by then-Speaker Newt Gingrich.

Effect on Commodities
The US Government shutdown is positive for Gold and is currently trading at $1336 an ounce in spot markets and in Comex with prospects for further uptrend in case the US Senate rejects the bill, analysts added. US Copper futures have fallen 0.28% to $3.320 per lb with weak economic growth prospects impacting market sentiments.

A Kitco News survey last weekend has shown that 11 out 19 respondents expect gold prices to move up, according to Debbie Carlson. The last time US Government was shut down Dec. 16, 1995 to Jan. 6, 1996, gold prices did rise. "Looking at a price chart, from Dec. 15, 1996 to Jan. 10, 1996, gold prices went from about $386 to $396. While gold prices rose during the government closure, analysts said it’s important to remember that other factors may have influenced gold’s rise at the time," Carlson added.

US WTI crude oil for November delivery has fallen to $101.80 per barrel levels as the US development is seen as negative for economic growth and hence for oil demand growth. ICE Brent Crude for November delivery has fallen 0.76% to $ 107.81.

According to CFTC data, bullish bets on Crude oil have fallne to a 12 week low to 275,098 futures and options for the seven days ended September 27. It was the lowest since July 2.

The funding standoff is a harbinger of the next big political battle: a far-more consequential bill to raise the federal government's borrowing authority. Failure to raise the $16.7 trillion debt ceiling by mid-October would force the United States to default on some payment obligations - an event that could cripple its economy and send shockwaves around the globe, Reuters reported, Reuters report said.

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