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Gold and the Fiscal Cliff

Written By Christian DeHaemer

Posted November 8, 2012

On August 2, 2011, the Budget Control Act of 2011 is passed. The system goes online December 31, 2012.
Human decisions are removed from strategic defense, the tax code, and deficient reductions.

The fiscal cliff begins to learn at a geometric rate. It becomes self-aware at 2:14 a.m. Eastern Standard Time, January 20…

In a panic, they try to pull the plug.

— Terminator 5: Against the Cliff

Yesterday we awoke to the news that Obama was still president, the Republicans still control the House, and the Democrats remain in control of the Senate.

The voters proclaimed a mandate for the status quo.

If past is prologue, nothing will happen for the next two years. Gridlock returns to the nation’s capital.

There are many people out there who root for the red team or the blue team, and their hopes or paychecks are tied to one or the other…

Here at Wealth Daily, we don’t really care. We believe it is our mission is to help you make money regardless of the political fray.

Two days ago I told you gold would rally and the S&P 500 would fall after the election…

I was dead-on.

Gold went up from $1,680 to $1,733 and hit a two-week high; the S&P fell to 1,388 from 1,433.

The More Things Change…

Gold is up because Federal Reserve Chief Ben Bernanke will continue with his monetary easing — despite the fact that it hasn’t worked.

One would think all that money being pumped into the system would show up somewhere, and it has: in medical costs, tuition hikes, gasoline, gold, and corporate balance sheets.

According to Thomson Reuters, there is $900 billion in cash sitting at companies on the S&P 500, up 40% since 2008. Companies are hoarding cash because they don’t see investment opportunities.

Profits and revenues fell in the third quarter. This is not a time for capex spending in plants and equipment.

Cliff Diving for Fun and Profit

Now that the media attention has finished for the election, look for a few days of victory laps before the next national concern leads the news…

The “fiscal cliff” is a handy term to describe the effect of the Budget Control Act of 2011.

It will go into effect on December 31, 2012.

The result will be the end of the payroll tax cut, which equals a 2% tax increase on workers, or about $1,000 per median family per year.

The cliff will also end the Bush-era tax cuts from 2001-2003 and implement new Obama taxes for the health care law. Furthermore, spending cuts agreed upon as part of the debt ceiling deal of 2011 will go into effect.

According to Barron’s, over 1,000 government programs — including the defense budget and Medicare — are in line for “deep, automatic cuts.”

In reality this is a good thing, but you won’t hear that from the mainstream media.

The government has three choices:

  1. It can let the tax increases and government cuts happen.
  2. It can kick the can down the road again, which will increase debt and reduce the amount of money going into Social Security.
  3. It can reach a compromise that will moderate the effect on the GDP.

Right now, given the divided nature of the political class, there is a good chance the fiscal cliff will happen.

According to the CBO, this will reduce the deficit by $560 billion and take four percentage points off of GDP in 2013. This will also result in the loss of two million jobs.

This shock to the economy will start a new recession.

There are no easy answers. It’s pain now… or more pain later.

Good for Gold

The last time the political class debated the debt ceiling, gold rose 9.7% in nine weeks. At the same time, the S&P 500 and the U.S. dollar sold off heavily.

Over the next eight weeks, the full fury of the bickering classes will turn the heat up on this one topic. Both sides will stoke the fear of economic Armageddon.

No one knows how this will be resolved, or when…

The most likely scenario: a middle course will be taken and applied retroactively after the inauguration.

Gold and silver will move up while Wall Street and Washington spin despair and jack up angst.

Buy gold.

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.