What does the US government shutdown mean for gold?

Gold prices are surging once again, and this time, they are being spurred on by a constitutional gridlock that has caused the US government to shut down.

Republicans in the Senate had been pushing to pass a bill that would have extended government funding, but failed to attract the Democrat support needed to reach the 60 votes required.

Democrats were holding out for health care policy reforms in order to lend their support to the bill. Without either side having budged, both are now blaming each other for the shutdown, which will see certain parts of the US government temporarily cease to function.

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This is the first time the US government has closed down since 2018, during Donald Trump’s first term in the White House.

Assuming the shutdown isn’t too lengthy, economists don’t expect it to have a major impact on the US economy. Ryan Sweet, chief US economist at Oxford Economics, for example, has stated that the shutdown won’t change the company’s outlook for US GDP, unemployment or inflation in the near term.

But Sweet did say it could impact the timing of any future Federal Reserve (Fed) rate cuts.

“The Federal Reserve emphasized the September move as an insurance cut,” said Sweet. “A shutdown would likely leave the central bank in a fog about the labor market, fueling support for an October cut rather than risk falling behind and having to cut more later.”

Falling US interest rates are typically a bullish signal for gold investors. But this isn’t the only reason why the US government shutdown is boosting gold prices.

How the US government shutdown is boosting gold prices

The gold price rally has been ongoing since 2024. The US government shutdown is just the latest development that is fuelling its run.

It has helped make September a standout month for gold, though. Gold prices have increased 12% from $3,476 on 1 September to their latest all-time high of $3,895 a month later.

Gold is typically seen as a safe-haven asset. Political instability of any kind tends to see investors turning to the precious metal in order to protect their wealth.

That applies double when it comes to the US, given the country’s dominant position in the global economy and the dollar’s status as the world’s reserve currency.

"The US government shutdown has increased investor uncertainty, delaying Friday’s key jobs data," said Russell Shor, senior market analyst at Tradu.com. "This has strengthened demand for gold as a safe-haven asset, while expectations of further Fed rate cuts have pushed prices higher."

The shutdown is also fuelling pessimism over the US dollar, in which gold prices are typically quoted.

“The dollar slipped again overnight,” said Emma Wall, chief investment strategist at Hargreaves Lansdown on 1 October, the first day of the government shutdown. “The outlook is not positive if previous lockdowns are any indicator.”

This latest fall in the dollar further extends one of the other longer-term drivers of the gold price rally: ‘dedollarisation’.

“Emerging markets have turned away from the US dollar as a store of reserves in order to reduce their dependence on the US, instead favouring gold,” said Wall.

While a weakening dollar inherently pushes up gold prices (as it takes more dollars to buy the same amount of gold), the recent rally has transcended this impact.

“Gold prices recently hit an all-time high in real terms, exceeding the safe-haven asset’s previous inflation-adjusted peak from 1980,” said Shannon Saccocia, chief investment officer, private wealth at Neuberger.

What the US government shutdown means for gold and other investments

While gold prices rose in the days leading up to the shutdown, the reaction of the stock market was more reserved.

The S&P 500 rose for three consecutive sessions up to 30 September, the eve of the government shutdown. At time of writing, S&P 500 futures are down 0.5% on the morning of 1 October, suggesting that these gains are about to reverse.

“Historically shutdowns have been bad for the US dollar, bad for US equities, and bad for bonds too,” said Wall.

If the shutdown becomes drawn out, it could have a negative impact on the US economy.

“The economic costs increase the longer the shutdown drags on,” said Sweet. “Our estimate is that a partial government shutdown reduces GDP growth by 0.1-0.2 percentage points per week.

“For context, a shutdown that lasts the entire quarter, which has never occurred, would reduce Q4 real GDP growth by 1.2-2.4 percentage points.”