Gold and Silver Prices Climb and Safe-Haven Demand Rises Amid U.S. Debt Vote Uncertainty

While lawmakers may have initially agreed to extend the debt ceiling, nothing has been finalized yet. The U.S. House and Senate still must pass the bill. While most of the marketplace expects that the deal will go through, the uncertain outcome created a bit of fear and anxiety for traders.

The government’s extreme debt levels and extension may not be excellent news for the economy, though the added tension gave rise to more safe-haven demand. As traders anticipated what could’ve been a default and one of the most significant recessions in U.S. history, both gold and silver saw excellent price increases. Investors want to protect their hard-earned cash from a crumbling economy riddled with inflation, so they purchase stable, appreciating assets they can rely on, like gold.

As of May 31, gold increased by $10.80 per ounce to $1,988.30, while silver increased by $0.361 per ounce to $23.60. The failing U.S. treasury yields during this debacle also gave rise to both precious metals as investors quickly shifted around their portfolios in favor of the high-performing assets.

“Gold prices are expected to remain elevated as economic uncertainty and the possibility of the U.S. Fed stopping interest rate hikes keep the demand line ticking higher,” the assistant VP of research, non-agri commodities, and currencies at Angel One,  Prathamesh Mallya, explained in response to gold rising as the Federal Reserve failed to combat climbing interest rates.

As the debt-limit extension votes near a close, the U.S. stock indexes remained low as well. Both Republican and Democratic U.S. leaders agreed on the debt-limit extension terms, yet many in the marketplace remain worried over whether the package will actually close. Both bodies must approve the movement for it to go through.

The U.S. Treasury set June 5 as the final deadline for the U.S. government to reach a decision. The government will be entirely out of funds by June 5. If both parties cannot reach an agreement by this date, the government will default on its debt and likely send the economy into a spiraling recession.

A default and recession may sound like the worst-case scenario in practically all aspects of life, though the one silver lining would be the rise in gold and silver. Precious metals perform best during recession periods. At the start of the Great Recession in 2007, gold increased by 31.59% during the year.

Aside from the U.S. debt decision, many traders also have their eyes on China’s economic data, yielding weaker-than-expected results. For the second month in a row, China yielded contracting figures. The nation’s official purchasing managers index in May plummeted to 48.8 after April’s figure of 49.2, despite expectations above this line.

Any purchasing managers index reading above 50.0 indicates a contraction. Two contracting months in a row signal concerns to many in the marketplace.

“China’s era of rapid growth is over. Its recovery from zero-Covid is stalling. And now the country is facing deep, structural problems in its economy,” the Wall Street Journal reported a few days ago.

China is the primary importer and buyer of numerous raw commodities. Nations around the globe rely on China’s heavy level of demand for all sorts of goods. A dip in figures, especially two months in a row, creates devastating levels of panic across numerous sectors as investors realize the consequences of dropping demand rates.

Luckily, precious metals gain their prices from complex, multi-faceted demand sources. Central banks aside from China have continued stockpiling gold at excellent rates entering the second quarter of 2023. Even Poland bought 15 tons of Gold in April, its first major precious metals purchase since June 2019.

According to previous statements, the nation plans to add much more to its reserves too. Back in 2021, the central bank’s president explained that they would add 100 tons to the nation’s reserves if the economy reached “unfavorable circumstances,” which we may be entering now.

“Gold will retain its value even when someone cuts off the power to the global financial system, destroying traditional assets based on electronic accounting records,” Adam Glapinski, the president of the National Bank of Poland, explained in 2021.

“Of course, we do not assume that this will happen. But as the saying goes—forewarned is always insured. And the central bank is required to be prepared for even the most unfavorable circumstances. That is why we see a special place for gold in our foreign exchange management process.”

Clearly, endless factors contribute to precious metals prices. As always, investors should consult their financial advisors before making portfolio decisions.

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