Did Congress Just Undercut Gold?

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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks fell for the third consecutive day, as the S&P 500 fell 0.4%, while the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) lost 0.7%. The losses occurred despite a better-than-expected 0.7% gain in retail sales in November.

Is Congress to blame for today's 2.6% drop in the SPDR Gold Shares (NYSEMKT: GLD  ) , and the 3.8% fall in the iShares Silver Trust (NYSEMKT: SLV  ) ? Quite possibly. Here's how that works:

The House of Representatives was, on Thursday, set to vote on a budget agreement that would fix tax and spending levels for the next two years, thereby averting another government shutdown on Jan. 15. The agreement actually looks like a bipartisan achievement; we even witnessed Republican House speaker John Boehner criticizing conservative political action groups, saying, "They have lost all credibility."

The prospect of this bill passing (which is thought to be likely, at this stage), hurts gold on two fronts. First, it directly reduces political risk with regard to fiscal policy – as mentioned above, the bill would remove the possibility of a government shutdown, for example.

Second, it also has an impact on forecasts for monetary policy. By reducing political uncertainty, the possibility of an agreement also raises the odds that the Fed will begin to taper its monthly bond purchases at next week's December monetary policy meeting. The Fed is rightly concerned about budgetary squabbles and their impact on the economy. Take the following passage from the minutes of the last monetary policy meeting:

Nonetheless, consumer sentiment remained unusually low, posing a downside risk to the [economic growth] forecast, and uncertainty surrounding prospective fiscal deliberations could weigh further on consumer confidence.

If this risk were removed, the Fed would feel more confident scaling back some of its monetary largesse by tapering its bond purchases. Last week, PIMCO's Bill Gross said the odds of a December "taper" are "at least 50-50 now." Admittedly, that estimate is well above the consensus, but my point is that the likelihood of a December taper had already increased on a spate of positive economic news, and today's political news adds to that dynamic. As market participants adjust to that reality, so do asset prices, including that of gold and silver.

Gold has had an absolutely miserable year in 2013; as of Thursday's close, the yellow metal had lost just over a quarter of its value year to date (-26%), and is destined to record its first losing year since 2000. The underperformance is even more striking when matched against stocks' roaring returns:

^SPXTR Chart

^SPXTR data by YCharts

Barring a flare-up in the eurozone crisis, it's difficult to see what would cause gold to convincingly break this year's negative trend in 2014. One thing now looks likely: The yellow metal won't be getting any help from Congress.

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8/24/2016 1:48 PM
^DJI $18525.52 Down -21.78 -0.12%
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