Federal Reserve Interest Rate Hikes and US Debt Ceiling Crisis: Is Now the Perfect Time to Invest in Gold?

The debt ceiling in the United States is $314,000, and the original deadline for reaching the debt ceiling was August. However, analysts now suggest that the deadline may be as early as June, which increases the risk of debt default and may have a huge impact on the global economy. To avoid a debt default, the U.S. Treasury Department has developed two response plans (whichever plan is passed first will be implemented):

• Increase the debt ceiling by $1.5 trillion.
• Suspend the debt ceiling calculation until March 31 of next year (midterm presidential election when the two parties battle over the debt crisis).

Either plan would cause a crisis of investor confidence in the U.S. economy, leading to a decrease in investment in the U.S. and capital outflows from the market, and a reduction in local demand and prices. Normally, the increase or decrease in the debt ceiling has no direct relation to the Federal Reserve's interest rate hikes. However, the debt ceiling may impact the U.S. economy and financial markets, affecting the Federal Reserve's monetary policy.

The logic is roughly as follows:

• The Federal Reserve lowers interest rates, increases market liquidity, stimulates consumption, raises prices, and stabilizes the economy and financial markets.
• The Federal Reserve raises interest rates, tightens monetary policy, causes sustained price declines, capital outflows, and greater volatility in the U.S. economy and financial markets.

Currently, the market believes that there is an 85.4% chance that the Federal Reserve will raise interest rates by 25 basis points at its May 2-3 meeting, which would accelerate the U.S. debt crisis and trigger an "economic and market disaster."

We can refer to the historical data of gold prices during the first two debt crises in the United States:

• The debt crisis in July 2011 had a significant impact, and the gold price reached a high of around $1,900 afterwards;
• The gold market had a small fluctuation in October 2013, but the price trend continued to rise after that;

Meanwhile, I saw a chart of the U.S. 3-month overnight index swap rate and the U.S. Treasury bond yield spread on a website. The chart shows that the current spread is below the zero axis. Normally, the overnight index swap (OIS) rate should be higher than the Treasury bond yield rate, but the chart shows that the OIS rate is higher than the bond rate (the spread was also not below zero during the 2011 debt crisis). This indicator indicates that investors in the market are facing increased funding costs and economic activity is slowing down. Therefore, although the market reaction may have some lag, it may already be starting to cool down, which may also indirectly indicate that market expectations for the Fed's future interest rate cuts/pause are rising.

In summary, I personally feel that this is a good opportunity to enter the gold market at the moment. After a short-term decline in the gold price (affected by the interest rate hike), it is expected to increase significantly.

Firstly, in the short term, the trend of gold prices in May. If the Fed announces an interest rate hike at the beginning of May, the U.S. dollar will strengthen and gold will decline.

If the timeline is extended from mid to late May to October or longer, the interest rate hike leads to a debt crisis, the market's confidence in the U.S. dollar will decline, and gold will rise.

Forecast chart:

The current stochastic indicator and RSI indicator are both in the overbought zone, but the K line of the stochastic indicator is showing an upward trend, and the RSI line and MACD line are still slowly rising. However, note that the MACD line is above the zero value, but the bullish histogram has started to decline. Therefore, I personally feel that before the interest rate hike news is released, the gold price should briefly rebound and then begin to decline until the upper limit crisis erupts, and investors begin to buy gold as a safe haven, thus pushing the gold price to a new high. The support level is 1917.18, and the resistance level is 2205.93.

Reasons for the rise in gold prices (as of April 27):

On April 27, the United States will release important data such as the first-quarter GDP, price index, and initial jobless claims. The GDP forecast is lower than the previous value, while the initial jobless claims and price index forecast are higher than the previous ones. Regardless of whether the actual values are higher than the forecast values, the overall trend indicates that the U.S. economy in the first quarter is in a state of recession, which is negative for the U.S. dollar and positive for gold. In addition, since the market reacts in advance to information, the gold price may have an upward trend before April 27.

From a technical standpoint, the current support level for gold is at 1985.31, with resistance at 2002.16. The strong support level is at 1977.43, while the strong resistance level is at 2007.33. Among the key indicators, the Stochastic line shows a downward trend, the RSI is oscillating, and although the MACD line is above the zero point, the bearish histogram is still growing in the downward direction, indicating that short-term prices will continue to decline, but the decline will slow down, suggesting that gold may enter an adjustment period, but there is still potential for an upward trend.

Therefore, I am prepared to make a bullish trade at a limit price of 1994, with a stop loss at 1989.10 and a take profit at 2001.38, with a risk-to-reward ratio of 1.52.

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