Most believe that when the deadline arrives, Congress and the White House will reach an agreement—even if it’s to kick the can down the road. As of now, Treasury Sec. Janet Yellen has set the deadline as June 1. There are still a few weeks left, and if history is any indication, no resolution is likely to be reached until the eleventh hour.

So far, institutional investors have not entirely balked at buying new issue U.S. Treasury bills. During the May 11 Treasury auction, four-week T-bills drew an annualized bond yield of 5.723 percent, a high but not exorbitant interest rate for bonds expiring on June 13. The eight-week T-bills were sold with an annualized yield of 4.793 percent by contrast.

Usually, longer duration paper will have higher yield. But this recent disconnect, where the four-week bills cost more than the either-week bills, reflects some concern that the June 13 T-bills won’t be paid on time while the July 11 paper will. This assumes a new debt deal will be in place by July. But even recognizing that, the 5.723 percent yield is no indication that any catastrophic debt default event is expected to pass.

What should investors do if there is indeed a debt default, or if the debt ceiling fight gets ugly and no deal is in sight?

Enter gold. Gold has approached its record high in recent weeks without much fanfare. That’s an impressive feat given that gold pays no yield and bond yields remain very high. The Gold spot price has climbed around 10 percent year to date through May 12.

There have been a few causes for gold’s recent rise. Global central banks bought 228 metric tons of gold during the first quarter of 2023, according to the World Gold Council. That’s after they collectively added 1,136 metric tons in 2022, a record year. Part of this demand has been driven by certain countries moving away from the U.S. dollar for global trade and potentially establishing a new common settlement currency.

Gold had a previous extraordinary run during the 1970s. President Richard Nixon ended the Bretton Woods system where the dollar converted into gold (at $35 per ounce) in 1971. Gold then eclipsed $850 by January 1980—a 33 fold increase. Gold served as an effective inflation hedge during a period of high inflation during the 1970s, when inflation averaged nearly 7 percent during the decade and culminated at 14 percent by 1980.

Silver, which typically outperforms gold in a bull market, increased by 7 percent to $25.01 year-to-date to May 12. Silver grew from $3 an ounce in the early 2000s and exploded to almost $50 in 2011. At around $25 per ounce today, it remains to be seen how silver will track gold and inflation going forward.

What else is in play?

Currently, the Swiss franc has proven itself to be the strongest currency and an FX haven in a volatile year for global foreign exchange market. During the last twelve months, the CHF gained more than 11 percent against the USD, while notching a four-decade high against its traditional currency haven competitor, the Japanese yen, by early May.

Global currency traders have been betting that the Bank of Japan will keep its ultra-loose monetary policy, which will keep the yen weak against a basket of global currencies. The Swiss National Bank, in the meantime, began hiking rates last year.

But is there value in holding Treasury bills or bonds?

Many investors say yes, despite the risk that America may not pay its bills on time.

Former PIMCO chief investment officer Bill Gross recently advised clients to take advantage of the one percent of extra annual yield on the shorter term T-bills despite default risk. The assumption is that a deal will definitely be reached even if the U.S. government can’t pay its obligations for a short period of time.

Article cross-posted from our premium news partners at The Epoch Times. Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

With that said, my personal opinion is that precious metals are the smartest money right now for protecting wealth and retirement from attacks on multiple fronts. We did not accept precious metals sponsors before mid-2021 because before then, I didn’t see a need. Even during the early stages of Pandemic Panic Theater I remained confident that Americans didn’t need to shift large portions of their portfolios to precious metals. Things have obviously changed now, which is why we vetted out 28 precious metals companies to see who was donating to Democrats, who was working with the Chinese Communist Party, and who was doing the bidding of the World Economic Forum. Out of those 28, we only found three we could consider to be true America First companies. With that said, here’s Fan Yu’s article about the future of gold…

After a tumultuous several months, gold prices have enjoyed a decent run up in Q4 2022.  Recent price movement was helped by the dollar’s retreat, hopes that the Federal Reserve will slow down its aggressive monetary tightening, and renewed demand for the metal from emerging markets.

Is this the beginning of a multi-year bull market in gold? To be fair, gold investors have endured years of underperformance. Gold closed 2022 on two consecutive down years.

The World Gold Council, in its 2023 outlook report, said gold will enjoy a “stable but positive performance” in the year ahead. It’s not an outright bullish view, as central banks around the world will continue to maintain a strong bias to fight inflation—and keep interest rates high, a deterrent to gold price increasing. But recession is near inevitable in many economies. Gold typically performs very well in classical recessionary economic environment. 

Another supportive fact pattern to a rebound in gold price is continued decline in the U.S. dollar. The World Gold Council’s research indicates that peaking dollar value has historically been positive for gold, with a positive spot price movement during the 12 months after the dollar has peaked. 

Gold investors should pay close attention to the dollar. Gold’s approximately 10 percent price increase during the fourth quarter of 2022 very closely tracked to the dollar’s decline during the same period.

Cooling inflation—and therefore rate-hike expectations—is only one factor going against the dollar. Another factor is improving expectations for economic growth outside the United States, such as in China and Europe.

China’s reopening will put further pressure on the dollar. Beijing during the last week of December announced the rollback of inbound quarantine in January. This measure is expected to boost the local economy and stimulate foreign investment in the country. 

Geopolitical risk is another major determinant of gold prices. Political uncertainty and war makes gold a valuable tail risk hedge.

Saxo Bank’s Head of Commodity Strategy Ole Hansen recently predicted that gold will top $3,000 per ounce in 2023 due to “war economy mentality of self reliance and minimizing holdings of foreign FX reserves, preferring gold.” This coincides with another prediction that countries will move to invest in locking in energy and commodity resources as well as supply chain security. In addition to gold itself, Saxo is also bullish on junior gold miners.

No doubt this view has been informed by the ongoing war between Russia and Ukraine, and China’s continued saber-rattling against Taiwan. Russia’s largest bank—SberBank—on Dec. 26 announced launching a gold-backed digital financial asset, claiming that it offers an “alternative” investment amidst de-dollarization.

Central banks have been some of the biggest buyers of gold this year. In Q3 2022, central banks added a record 399 tons of gold, according to World Gold Council data. Among them, China has been one of the biggest buyers. Beijing is well known in its intentions to cut U.S. dollar dependency, and it had a front-row seat to Russia being locked out of the dollar-dominated global financial system, faced with price caps and sanctions against its energy exports and its overseas foreign exchange assets frozen.

There have been rumblings of BRICS nations (Brazil, India, China, Russia, and South Africa) and their allies banding together to develop a new reserve currency backed by commodities such as gold and oil. No such plans have been officially announced, but certain BRICS nations have been preparing to diversify away from the U.S. dollar for years. 

Despite the positive backdrop, there are risks that gold will continue to underperform. 

The worst-case scenario would include more interest rate hikes by the Federal Reserve and keeping monetary conditions tight despite an economic recession. However, this policy path would go against the Fed’s recent history and philosophy. 

Inflation has been elevated. The Consumer Price Index was up 8.5 percent in July versus a year ago, slightly lower than the 9.1 percent year-over-year reading in June. And despite a recent U.S. stock market rally, the S&P 500 Index remains down 10 percent year to date. And gold’s theoretical nemesis, bitcoin—which some experts dub as “digital gold”—is down almost 50 percent on the year.

All of this suggests a perfect backdrop for gold to outperform, right? Wrong.

While gold hasn’t been the worst performing asset class, it has nonetheless languished. The price of gold has fallen by more than 3 percent since Jan. 1. The NYSE Arca Gold Miners Index is also down more than 16 percent on the year.

There are a few reasons for this, despite the seemingly ripe conditions.

First, gold is priced in U.S. dollars. So the stronger the dollar, the fewer dollars it takes to purchase an ounce of gold. That’s a mathematical and mechanical truism.

While U.S. inflation has been running hot, the Federal Reserve has been diligent in raising benchmark interest rates. And more importantly, investors still expect further interest rate hikes in the future. While many economists believe the Fed has been behind the curve in “normalizing” interest rates, on a relative basis it has acted quicker in raising rates than other national central banks.

High relative interest rates versus other nations have attracted foreign investment flows into the United States and strengthened the U.S. dollar. Year to date, the dollar has risen more than 11 percent against the euro and more than 16 percent against the yen.

This dollar strength has effectively capped the performance of gold.

The other deterrent is interest rates. The Fed’s rate hikes have also sunk bond prices. This means the yield on various types of fixed-income instruments, such as government, corporate, municipal, and consumer debt, are rising as their prices go down. Such a dynamic makes bonds an increasingly attractive investment.

A high interest rate is perhaps the biggest factor working against gold. Gold, as a commodity, does not pay a coupon. So higher yields on bonds are an argument against investing in gold.

Since hitting an all time high of around $2,100 per ounce in 2020, gold has been steadily declining.

So is gold’s appeal as an inflation hedge and haven asset class over?

It depends on which side of the fence you sit on regarding the outlook of the U.S. economy.

The argument against gold lies in the belief that the central bank can control inflation by increasing interest rates and managing a “soft landing” of the U.S. economy and avoiding a deep recession.

That’s effectively the thesis from Capital Economics, which forecast a year-end price of $1,650 for gold. That’s not a huge decline from today’s price, but the modest decline would be driven by further strengthening of the dollar and the 10-year Treasury bond yield settling in the 3 percent range.

So far, that’s the path the Fed hopes the nation’s economy is on. Minutes from the August meeting showed that policymakers were intent on increasing interest rates and tightening monetary policy to a level that could restrict economic growth. Though that’s always been the plan, there is a fine line between restricting growth and causing a deep contraction.

But if you believe the U.S. economy is doomed and the central bank will be pressured to lower rates to stimulate growth, then gold prices will likely outperform.

Such an argument was made by economist Nouriel Roubini—aptly nicknamed “Dr. Doom”—in a recent interview with Bloomberg TV.

Roubini sees two options for the U.S. economy. One is the Fed aggressively increasing interest rates to the 4–5.0 percent range, at the detriment of the economy. The other option is sustained high inflation of above 8 percent with relatively lower interest rates because the Fed would have no choice but to stop raising rates or even lower rates owing to the poor economy.

Investment bank Goldman Sachs & Co.’s chief economist Jan Hatzius also believes the United States find it hard to avoid a deep recession.

Relatively high inflation and relatively moderate interest rates. That is an environment ripe for gold prices to outperform.

Article cross-posted from our premium news partners at The Epoch Times.