This Time, Debt Ceiling Debate May Not Be a Golden Opportunity

In 2011, the debt ceiling fight helped push gold prices to record levels, but the market looks calmer now.


Gold prices have remained steady at around $1,300 an ounce during this year’s debt ceiling fight.

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Back during the 2011 debt ceiling debacle, gold prices were already on their way up...and then they skyrocketed. Fears about a potential government default helped to push prices to record highs.

[MONEY: A Billion-Dollar Misunderstanding, in Gold]

That's not happening now, at least not to the same degree that it did back then. With just a few weeks until the nation is slated to hit the end of its borrowing rope, gold prices are currently around $1,300 per ounce and have held relatively steady for a month, according to figures compiled by USA Gold, having fallen off sharply since the start of the year, when they were at around $1,700 per ounce.

Meanwhile, in the leadup to the 2011 crisis, prices hit then-record highs of over $1,600 per ounce, climbing by 14 percent over the course of the year, driven by both global economic fears and U.S. debt problems..

At the time, "[investors] were seeking the perceived safety of gold, and that's not happening this year," says Gary Thayer, chief macro strategist at Wells Fargo Advisors.

Thayer says investors' attitudes toward the debt ceiling debate have changed from fear to frustration, due to Congress' repeated fiscal deadlocks. Combine that with a stronger economy and you get investors who aren't flocking to gold.

"I think the fear of going back into recession has diminished. I think investors recognize that we did get through the last debt ceiling fight, we did get through the fiscal cliff, we did get through sequestration," says Thayer.

But as long as Ben Bernanke and his colleagues at the Federal Reserve continue their stimulative monetary policy, the price of gold is unlikely to tumble. The central bank opted last week to continue its QE3 program, thus helping to keep interest rates low and stabilizing markets.

"As long as the fed continues to stimulate, that kind of either creates a floor under gold prices or makes them go up," says Doug Roberts, managing principal at Channel Capital Research.

[READ: Is Congress Accidentally Stimulating the Economy]

Fear is one factor that drives investors to gold and away from other assets like treasuries. If investors believe that ultra-safe investments like U.S. treasuries are unstable, they might flock to commodities like gold. In this way, gold prices can be seen as one proxy for how fearful investors are about the prospects for Congress to reach some sort of agreement on the debt ceiling.

Which means that there's plenty of room for prices to shoot upward in the coming weeks. If investors decide that lawmakers are sufficiently dug into their respective positions on the debt ceiling, prices could again shoot upward. And though investor fears may have diminished, they are not gone altogether. One economist says this debt standoff is even scarier than the last one because it represents a repeat offense on the part of Congress. That means credit rating agencies may choose to downgrade the United States' credit ratings, as S&P did in 2011, when it downgraded US debt from AAA to AA+ status.

"The more often this happens, and the closer to the brink we go, especially if we go over the cliff on the government shutdown issue first, the less likely they're going to be able to give us all our prime rating," says Isabel Sawhill, senior fellow at the Brookings Institution. That might give the gold bugs something to cheer as their investments soar in value. Then again, it could be cold comfort, given the economic catastrophe that could follow from actually hitting the ceiling.

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