"U.S. Government Shutdown" Trading Guide: Duration Is Key, Gold and Silver Are Safer Havens

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The U.S. federal government is experiencing a "shutdown" again for the first time in nearly seven years, and financial markets are facing new uncertainties.

According to data from renowned prediction market Polymarket, nearly 70% of users believe that the earliest the government shutdown could end is October 10, and 41% believe it will last at least until late October.

According to Chase the Wind Trading Desk, Citi analyst Vinh Vo and his team stated in their latest report that the duration of the shutdown is the key factor determining asset performance, and the market may be pricing in this shutdown too optimistically, overlooking the significant impact a prolonged deadlock may cause.

Historical data shows that a prolonged shutdown will trigger a distinct divergence between stocks and bonds and increase market volatility. In such scenarios, precious metals such as gold and silver are more reliable safe haven assets than the U.S. dollar.

The report also noted a new variable in this shutdown: the Trump administration has instructed agencies to consider permanent layoffs, which may have a more disruptive economic impact compared to the previous practice of furloughing government employees and retroactively paying salaries, although specific details remain unclear.

Although the government shutdown brings many uncertainties, Citi believes this event is unlikely to reverse the current momentum of U.S. stocks and bonds. The report says that the "strong optimism" around artificial intelligence, combined with a more accommodative monetary policy stance from the Federal Reserve, are key forces supporting the market.

On the Eve of a Prolonged Shutdown: U.S. Stocks Down, U.S. Bonds Up

Citi's research, by reviewing the ten historical government shutdowns, found that the duration of the shutdown is the key factor determining asset performance.

The report classifies shutdowns shorter than five days as "short-term events" (six times), and those longer than five days as "long-term events" (four times).

Historical data shows that during a prolonged shutdown, the U.S. stock market usually begins selling off even before the event occurs, and bottoms out and rebounds 10 to 15 trading days after the shutdown starts.

By contrast, U.S. Treasury bonds show the opposite trend, with a clear safe-haven rally before the event.

In comparison, short-term shutdowns have little notable impact on the stock market, and Treasury bonds show only small fluctuations around the shutdown. Citi points out that current market trends align more with expectations of a short-term shutdown.

Volatility Rises, Risk-Exposed Stocks Under Pressure

Government shutdowns are almost always accompanied by increased market volatility. The report shows that in long-term shutdowns, the VIX index—a measure of stock market volatility—steadily rises and only gradually dissipates after the shutdown ends. In contrast, the rise in bond market volatility is shorter-lived.

For certain stocks, companies with direct or indirect revenue ties to the government will face greater pressure. Historical analysis shows that, during past shutdowns—especially the prolonged shutdown in December 2018—the basket of stocks with direct government business performed significantly worse than the S&P 500, only rebounding after the deadlock was resolved.

The report states that although the current price action of related stocks is relatively choppy, without a clear downward trend, prolonged shutdowns could pose notable downside risk.

Safe Haven Asset Choice: Gold Preferred Over Dollar

When seeking to hedge shutdown risk, investors may need to reassess traditional choices. Citi points out that in situations where prolonged shutdowns fuel market concerns, gold and silver have historically proven to be more reliable hedges than the dollar.

Data shows that during prolonged shutdowns, as uncertainty rises, gold usually receives buying support, with an average rise of 2%, and remains strong after the shutdown ends. Silver performs similarly but with higher volatility.

In stark contrast, the dollar index often weakens around the start of a shutdown, probably due to the "U.S.-centered" nature of the crisis. Only after a prolonged shutdown is resolved does the dollar reverse its downturn.

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The above highlights come from Chase the Wind Trading Desk.

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Risk Warning and DisclaimerMarkets have risks, investment should be cautious. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article fit their specific circumstances. Investments based on this are at your own risk. ```