The term “fiscal cliff” describes a moment in early January, A.D. 2013, when certain cuts in federal government expenditures and increases in federal taxes are mandated by law to occur. The purpose for these spending cuts and tax increases is to reduce the current federal budget deficit.
However, many fear is that if the government spends less and taxes more, the net effect will be to slow the economy and push us deeper into recession.
Therefore, some propose that before the end of this year, government pass new laws to invalidate or modify the old laws that mandate the “fiscal cliff”. Whether government will avoid the coming “fiscal cliff” remains to be seen, but the “fiscal cliff” will be the subject of many articles over the next six or eight weeks.
For example, MarketWatch published an article about the fiscal cliff entitled “Gold rallies as ‘cliff’ optimism weakens dollar”. According to MarketWatch:
“Gold prices have been subject to volatility as U.S. political leaders made efforts to reach a deal to avert the ‘fiscal cliff,’ an event that threatened to drag the economy into recession. Gold often drops on the dollar’s strength, but also tends to gain during times of uncertainty, as the metal is widely regarded as a store of wealth.
“‘Unless there is a clear agreement between the Democrats and Republicans on the solution to the so-called U.S. fiscal cliff, the short term direction is bullish for gold,’ said Chintan Karnani, chief analyst at Insignia Consultants.”
Mr. Karnani makes me wonder if it’s more important to have a “clear agreement”—or an effective agreement?
I expect that before the end of this year, government will produce a “clear agreement” that may be symbolic but will otherwise have little or no effect on the federal deficit or on our economy. The deficit won’t be significantly reduced. The economy won’t be significantly suppressed or stimulated.
Even so, President Obama and Congressman Boehner will shake hands and celebrate in front of the cameras as if they’ve accomplished something monumental. In fact, they will have only kicked the can a little further down the road. Their “clear agreement” may be briefly celebrated in the mainstream media, but their resulting failure to act effectively will only diminish confidence in the government, the economy and the fiat dollar. That loss of confidence should translate into increased demand for gold and rising gold prices.
But, I could be wrong.
Who knows? Maybe government will reach an effective agreement on the “fiscal cliff” that cuts spending, raises taxes and makes meaningful headway on reducing the deficit. If so, it’s true that confidence in the government, economy and fiat dollars may briefly rise—and thereby bring down the price of gold. But it’s also true that by reducing government spending and raising taxes, the economy should be weakened and we should slide deeper into a recession and/or depression.
And, through it all—regardless of whether government allows or prevents the “fiscal cliff”—government’s Number 1 objective should persist: inflating the fiat dollar so as to reduce the national debt.
My conclusion is that, no matter what government does relative to the “fiscal cliff”, the long-term prospects for gold are up, up, and . . . umm . . . up.
The reason gold is going up, up, up is that government’s attempt to deal with the deficit and fiscal cliff are only dealing with superficial issues. How the government handles the fiscal cliff may have a short-term effect on the price of gold. But, whether government barely cuts entitlement programs or raises taxes modestly won’t have much long-term effect on gold because government can’t do very much without causing more recession.
More, less entitlements and more taxes will not address the three fundamental problems that are pushing the price of gold higher:
1) Our fiat dollars will inevitably be shown to be worthless. As the fiat dollar loses value, the price of gold will rise.
2) The national debt is too big to ever be repaid in full. Those holding paper debt instruments will eventually lose their assets—causing the demand and price of gold to rise.
3) The government will persistently inflate the fiat dollar in order to shrink the national debt by paying off with “cheaper” dollars. As inflation increases, so will the price of gold.
The price of gold will continue to rise so long as our currency is a fiat dollar, the National Debt remains unpayable, and government insists on inflating the fiat dollar as a device to evade the National Debt.
In essence, the price of gold will continue to rise so long as we have fiat dollars.
Do you see anyone in Congress or the White House who’s expressed a credible interest in eliminating the fiat dollar and replacing it (inevitably) with a gold- or silver-based currency? If and when you see the government advocating the abandonment of fiat dollars, you may want to rethink whether you should invest in gold. But, so long as the fiat dollar remains, the price of gold is going up.
Want some evidence? The last time we had a dollar backed by gold (at least internationally) was A.D. 1971. The price of gold was $35/ounce. Today the price is $1735/ounce. The price of gold has increased by 50 times—5,000%!—in the past 41 years. That sort of price increase will continue—until our government abandons fiat dollars.
The “fiscal cliff” is not a fundamental issue—it’s just so much white noise. I don’t care what they do with the “fiscal cliff,” it will no long-term effect on the price of gold. The price of gold is determined by fundamental issues like fiat currency, unpayable debts and inflation.
Unless government addresses those fundamental issues, the price—and especially the purchasing power—of gold will continue to rise.