Oh Yeah, Life Goes On...

"Life goes on long after the thrill of living is gone..." 

          John Mellancamp, "Jack And Diane"

How bad is the U.S. government shutdown? Apparently not bad enough to make gold and silver the traditional safe havens they usually are. The bet on Wall Street and in The City in London seem to indicate that analysts and investors are viewing the shutdown as a short-term conflict and not a protracted war. 

"While the standoff is not a great thing, the effects seem to be limited, and we are not seeing investors rush to gold for its safe-haven quality," Frank Lesh, a trader at FuturePath Trading, Chicago, said. "Riskier assets like equities seem to be in favor." 

The brawl going on this week in Washington, however, is a bottom of the card bout. The main event comes when the U.S. debt ceiling has to be raised on October 17th, two weeks and change from now. Harry Reid said the GOP is behaving like "banana Republicans," a play on "Banana Republic." 

We are experiencing a clear case of "The Boy Who Cried Wolf." This scenario has popped up so many times in the last few years that the public and media that purportedly serves it have become numbed to the shenanigans in the nation's capital. The three major U.S. stock indexes were up as were two of three indexes in both Europe and Asia. 

Life goes on. 

In some ways, this is good for the longer term outlook of gold and silver. The bettors are thinking that the shutdown won't have a very deleterious effect on the world economy. Yet so far 8000,000 are laid off and their inactivity will quickly surge through the American economy at large. And when the U.S. catches a cold, the rest of the world gets pneumonia. For the nonce, the shutdown is deflationary and that's awful for gold given the soft inflation numbers already ambient in the economy.

Let's say that on average the 800,000 people laid off make around $40K per year or roughly $800 per week. That is a loss of $640 million per week to the economy. 

On the gold futures market, rumor has it that one huge seller entered the arena and its activities in turn touched off technical triggers. The futures market, of course, ripples strongly through the spot and physical markets. One set of analytics says that the real bogeyman waiting over the hill is the question of the debt ceiling. 

Counterintuitively, the budget/shutdown piece of this crisis may prompt a quicker settlement of the debt ceiling crisis. If the right wing strategy hasn't worked so far, only the politically suicidal in the Republican Party will play the same game again on the debt ceiling. A fast settlement of the debt ceiling is a negative for gold in the short term.

Dennis Gartman, publisher of the Gartman Letter, noted that while stocks were finding their sea legs in the storm, commodities generally were becoming depressed. Ag products, crude and base metals all are declining although not with the vigor of the precious markets.

"I think it proves the psychological nature rather than the economical nature of the gold market. Gold gets driven by paranoia. Gold gets driven by depression. Gold gets driven by euphoria," said Gartman. 

Meanwhile, we are hamstrung in terms of trading. An optimist would say that once the storm passes, which indeed it will, there is plenty of upside to gold and silver once they find their bottoms.

And never count out the Fed, which will react to this nonsense in a dovish way regarding QE3.

Wishing you as always good trading,