Rage Against The Machines

292
Fri, Nov 30, 2012 - 10:15am

In a world dominated by momo-chasing HFT computers, sometimes you've got to step back and use actual intelligence and not artificial.

As we've been discussing here for months, America is racing toward the dreaded "Fiscal Cliff". Earlier this year, the common term for this event was Taxmageddon but, apparently, Fiscal Cliff sounds more dramatic when accompanying the MSM "BREAKING NEWS" alert at the top of every hour. So, what the heck is this Fiscal Cliff stuff and why do the metals seem to trade up and down based upon whichever way the wind is currently blowing?

In its simplest terms, the Fiscal Cliff is this: If no legislative action is taken before January 1, 2013, a whole host of current tax breaks will expire. The resulting tax increase will dramatically slow the U.S. economy as tax-planning uncertainty will combine with this massive transference of wealth from the private to the public sector, making even 1% GDP growth unlikely in 2013. Additionally, Congress must once again to raise the debt ceiling from its current $16T+ level to something like $18T. Yikes!

So why is it that rumors of a "deal" tend to make gold go UP and rumors of "no deal" make gold go down? It's the WOPRs, silly. Many are programmed to buy and sell off of headlines, and for some reason, these computers are selling on every headline that suggests "no deal". But this is completely, 100% wrong and I need you to use actual, human intelligence for a moment. There are four, possible scenarios here. Let's take them one by one.

  1. No deal at all. America heads over the Fiscal Cliff. Massive tax hikes hit on 1/1/13 and, more importantly, the U.S. reaches the debt ceiling and is unable to borrow any additional funds at auction. This is wildly bullish for gold (and silver). The collapse of the U.S. economy guarantees huge, additional QE and the dollar will decline steeply in value. Lack of funding for government spending ramps up the requirement for even more dollar printing by The Fed. Gold demand also surges as countries, central banks and individuals around the world seek "safe haven" from the storm.
  2. A deal on the debt ceiling but no deal on Taxmageddon. This is also bullish for gold as The Fed will, undoubtedly, be standing by with massive QE liquidity injections in an attempt to blunt the economic slowdown brought forth by the tax hikes. Additionally, no deal on Taxmageddon means that no spending cuts were initiated. This lack of "austerity" combined with the $2T+ debt ceiling hike will almost certainly lead to another round of downgrades to the U.S. credit rating and, as we saw in August of 2011, downgrades of the U.S. are quite bullish for gold.
  3. A deal postponing Taxmageddon and no deal on the debt ceiling. This scenario plays out simply because The Congress decides to "punt" the issue and head home for the holidays, instead. They figure that Tiny Tim will figure out a way to cook the books until March or so, thereby leaving the problem for the new Congress to tackle in January. This complete disregard for the seriousness of the issue leaves S&P et al with no choice but to downgrade the credit rating of the U.S. which, as noted above, is a situation that has proven in the past to be extremely bullish for the metals.
  4. A complete deal where taxes are raised, real spending cuts initiated and the debt ceiling increased. Even this is bullish for the metals. Why, you ask? Once again, raising the debt ceiling by $2T+ is bullish. The link between U.S. debt and the price of gold is indisputable. And, again, from where will this money come? QE∞, of course. The tax increases with spending cuts is also a plan for higher gold prices as this will almost certainly slow the U.S. economy into recession and, as we know, the only monetary policy left to combat economic slowdown is the overt printing of new dollars.

So, do you see where I'm headed here? It doesn't matter! Next month, ignore the headlines and the endless MOPE and SPIN emanating from Washington and New York. Just buy gold (and silver, too). Physical precious metal continues to be your only financial protection from the true Economic Armageddon we are facing.

TF

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Key Economic Events Week of 6/27

6/27 8:30 ET Durable Goods
6/27 1:25 ET Jul22 Silver option expiry
6/27 10:00 ET Pending home sales
6/28 10:00 ET Consumer Confidence
6/28 10:00 ET Richmond Fed
6/28 12:30 ET Goon Daly
6/29 8:30 ET Q1 GDP final guess
6/29 9:00 ET Chief Goon Powell
6/29 11:30 ET Goon Mester
6/29 1:00 ET Goon Bullard
6/29 1:25 ET Jul22 Silver off board
6/30 8:30 ET PCE and Core PCE
6/30 8:30 ET Pers Inc and Cons Spend
6/30 9:45 ET Chicago PMI
7/1 9:45 ET S&P Manu PMI
7/1 10:00 ET ISM Manu PMI

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