In the days leading up to the Christmas holiday, gold and silver have tumbled, in part due to news that the fiscal cliff negotiations between the White House and Congress have stalled, 3rd quarter GDP was higher than expected and many institutional investors of gold took some year-end profits.
The big story though remains the fiscal cliff.
Real briefly, the fiscal cliff is a combination of tax increases and spending cuts that are set to take effect on January 1, 2013 unless the Congress and President Obama agree on a deal. The spending cuts were part of a deal last summer to raise the debt ceiling, or the limit on what the U.S. government can borrow. The tax increases are part of the Bush-era tax cuts that were initially set to expire at the end of 2010, but were extended for two more years.
If no deal is reached and the fiscal cliff is realized, what will the short and long-term effects be for both the economy at large, and for gold more specifically?
Conversely, how will a deal to maintain current spending affect gold and the economy?
One analysis by Christopher Mahoney of Seeking Alpha says in the long run, it will be better for the U.S. to go off the fiscal cliff. While it’s projected this will lead to some short-term pain in terms of a mild recession in 2013, Mahoney explains how cutting budget deficits will help improve the U.S. debt situation and economy over the longer term.
It’s estimated by the Congressional Budget Office that the federal budget deficit would shrink to $641 billion in 2013. The U.S. budget deficit has exceeded $1 trillion annually since 2008.
Jumping off of the cliff could potentially have bearish consequences for gold over the short-term – many will see the U.S. government as taking the necessary steps to deal with the nation’s fiscal problems. If the government has to borrow less, the Fed will monetize less debt – and therefore print less money.
However, if there is a recession due to going over the cliff, the Fed may buy even more mortgage backed securities and take other measures to stimulate the economy, which will buoy gold.
Jon Nadler, senior analyst at Kitco.com, says the fiscal cliff has been the primary driver of gold prices in the final quarter of 2012. He comments that gold bugs would prefer to go off of the cliff as that will mean more chaos, and therefore, more interest in gold.
If a deal is reached and spending is left relatively unchanged, it could prove more bullish for gold bullion, especially in the short-term. The nation’s GDP will be higher in the near-term according to the CBO. As the strain of excessive spending begins to weigh on the nation’s balance sheet though, interest rates will rise and economic growth will be affected.
Of course, we’ll know how all this turns out as we head into next year.
Although the negotiations are currently stalled and we’re getting closer and closer to the end of the year, we still expect there to be some sort of deal struck that will at least kick the can down the road for another year or two.
What’s your prediction as to how this will all play out?
Will a deal be struck? Or will we tumble over of the fiscal cliff instead?
