The U.S. Presidential Election is over – thank goodness – our attention is now fixed on what’s known as, “the fiscal cliff.”
A little background on what the phrase fiscal cliff means.
In the summer of 2011, the U.S. government had approached the borrowing limit, a boundary known as the debt ceiling. At that time, lawmakers and President Obama scrambled to complete a deal to raise the limit on how much money the nation could borrow.
Part of the deal which allowed the debt ceiling to be increased, involved a combination of spending cuts and tax increases that are set to take effect January 1, 2013. These cuts in government spending and tax increases are what many in the media, the Congress and the Obama Administration refer to as the fiscal cliff.
If the $607 billion in spending cuts and tax increases outlined in the deal are allowed to take effect some say, the U.S. economy could fall back into recession. This uncertainty at the dawn of the New Year is causing much turbulence in the stock market. During the week of the election for example, the S&P 500 fell 2.4%, its largest decline since June.
Gold however, has remained steady throughout this uncertainty – the yellow metal continues to hold in the low $1700 range.
In a phone interview with Bloomberg, David Hemming, portfolio manager at Hermes Investment Management comments, “considering the concern with the U.S., it would be bearish for the dollar, gold should outperform as both a currency and a safe haven.”
And according to a report from Gold Seek, interest in gold and silver remain low with the public at large despite tremendous gains seen in these metals over the last several years. However, as investors seek a safe haven amid the chaos known as the fiscal cliff, it’s believed gold will benefit.
As of this writing (Monday, 11/19), White House and Congressional leaders are busy negotiating a deal to avert the fiscal cliff. It’s being reported that a pared down version of the fiscal cliff involving “targeted” spending cuts and tax hikes is being considered. This of course would kick the can down the road further on the government’s deficit.
If no deal is reached, it is possible gold will benefit even more since the door will be open for more monetary easing by the Fed, which in turn leads to more inflation.
One thing is certain – if the U.S. fails to address its deficits soon, debt rating agencies like Standard Poor’s and Moody’s have warned of another downgrade in the U.S. government’s credit rating. This alone will rattle equity markets and the dollar, and send nervous investors flocking to gold and silver as a wealth preservation mechanism, which is exactly what occurred when the debt rating agencies downgraded the U.S. government’s credit rating in 2011.
In all likelihood, some sort of temporary deal will be reached. While this may seem palatable politically, uncertainty will continue to plague equity markets and will likely benefit gold and silver in the long run.
What do you think will happen with the fiscal cliff negotiations?
Will lawmakers and President Obama reach a deal before the New Year?
What do you think the implications will be for gold and silver?
Let us know in the comments section below or on our Facebook page today!!
