While the economy didn't technically go over the fiscal cliff, the problems that fell under that umbrella term are far from behind us. The debt ceiling is still barreling down on us, and while delayed, sequestration cuts have not been cancelled. Congress and the White House are still having the same fight on the same playground with the same lack of maturity and the same perilous result -- a backdated deal was the saving grace. The scenery has changed and the playoffs have begun, but the economy faces the same issues that it did a few weeks ago.
Against all of this uncertainty -- and remember that QE3 is still churning out the greenbacks -- an investment in gold, such as through SPDR Gold Shares (GLD +1.80%), is a great way to protect yourself against the coming storm.
Same nonsense, different day
The pure absurdity of the situation requires some humor to keep perspective, because Congress has clearly not woken up to the fact that its entire bipartisan membership is behaving irresponsibly. Stephen Colbert explains: "It's like Congress put a gun to the economy's head and swore it will pull the trigger if Congress doesn't put its own gun down." This was how he characterized the fiscal cliff -- and this is how we can now understand the debt ceiling.
Recently, Jay Carney, a White House spokesman, said: "The president and the American people won't tolerate congressional Republicans holding the American economy hostage again simply so they can force disastrous cuts to Medicare and other programs the middle class depend on while protecting the wealthy. Congress needs to do its job." Apparently, Carney is unaware that as inept as Congress may have been of late, its job is not to blindly follow the will of the White House. Congressional Republicans have insisted on significant spending cuts in exchange for raising the debt ceiling. The White House has made vehemently clear that it will not negotiate.
"There are only two options to deal with the debt limit," Carney said. "Congress can pay its bills, or it can fail to act and put the nation into default." While at one level it is certainly that simple, the ramifications of going even this far up against the wall are dangerous. The last time the country faced this situation -- about a year ago -- the political dancing led to this first downgrade of U.S. debt. Ever. In history. As in, it had never happened until the political egos involved became more important than the business of the nation.
The inflation backdrop
The actions of the Federal Reserve, specifically the ongoing efforts toward quantitative easing, have created an inflationary environment, despite Ben Bernanke's apparent state of denial. Last week Esther George, president of the Kansas City Federal Reserve Bank, said "a prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the FOMC's [Federal Open Market Committee] 2% inflation goal in the future." The Fed chairman responded to the concern of the hawks in a speech at the University of Michigan: "I don't believe significant inflation is going to be the result of any of this." Well, I'm convinced.
As of last December's FOMC meeting, the Fed upped the amount of cash it would pump into the economy each month from $40 billion to $45 billion. At this rate of "stimulus," inflation is simply an eventual inevitability, not a mysterious possibility. This is the backdrop in front of which the debt ceiling and other challenges must be evaluated.
What does this have to do with gold?
In an inflationary environment, hard assets like commodities, particularly precious metals, are particularly attractive because they are seen as a great store of wealth. If the sequestration cuts and other fiscal cliff issues that were only delayed should resurface and not be resolved, the recession that was feared in December may arrive. A recessionary environment also favors precious metals, which would help metals to continue their long-term win streak. The combination of inflation pressures and the real possibility of economic weakness should combine to be bullish for gold.
In a recent piece, Iain Butler extols the virtues of ETF investing as a great way for investors to gain exposure to gold and avoid some of the risks on buying individual miners such as Barrick Gold (ABX +3.46%) and Kinross Gold (KGC +4.92%). He points out that in addition to the pressures put on miners by swelling production costs and regulatory hassles, there has been a pervasive "growth-at-all-cost" attitude among most miners. Each of these companies has spent significant capital on bringing a major mine online and faced cost overruns. For Barrick, the Pascua Lama mine was the problem; Kinross was forced to take a $2.5 billion writedown in its Tasiast mine after acquiring it for $7 billion.
While I believe that Barrick, the largest gold miner on the planet by volume, has adopted a new attitude of discipline, miners are still companies that face the pressures of both a recession and inflation. This makes a direct gold investment, including an ETF investment, a nice fit in the current environment. Overall, the global economic pressures that are facing the gold market make it an ideal place to deploy capital in your portfolio.
