The “Fiscal Cliff” is approaching on December 31, 2012, and by many reports, the issues may stretch into 2013 for months. However, according to an article published online by MarketWatch.com, a part of the Wall Street Journal Digital Network, the Fiscal Cliff is only 1 of the 4 Horsemen of the Economic Apocalypse facing the United States in 2013 and beyond. (Click here to read article.)
As you may know, the Fiscal Cliff is comprised of about $600 Billion in automatic spending cuts, a tax increase, including higher payroll taxes and other economic policy issues that all come to expire on December 31, 2012. (Click here to read white paper with more detail on the Fiscal Cliff.)
Although the MarketWatch.com article describes in reasonable detail the 4 Horsemen, what follows is a perspective from the view of an investor in Precious Metals. In order, here are the 4 Horsemen as described in the article:
3. Export Weakness
4. Fiscal Cliff
After you review the article and these comments on the precious metals markets, it may be time for you to decide how you want to position your portfolio for the events described.
Here is a brief review of each of the 4 Horsemen and how the particular economic affect may impact investments in Gold and Silver and other Precious Metals.
1. Europe – Since Central Bankers will keep interest rates low in their respective countries so that interest payments do not kill their local economies, this environment provides an opportunity for increasing demand for low holding cost investments like Precious Metals, since income bearing investments will have very low yields. Even more interesting is how the Central Bankers themselves are positioning their own foreign exchange investment by buying Gold in 12 of the last 13 calendar quarters, increasing holdings of Gold by more than $40 Billion during this period, with over $27 Billion of this total in just the last 4 quarters. Although these are indicators of demand growth for Precious Metals, weaker Euro rates relative to the Dollar may offset the gains if the U.S. economy is judged to be better than the European economies.
2. Inflation– The same Central Banks that keep interest rates low in the United States and Europe are using their currency to flood markets in order to keep the borrowing rates low. Although price inflation of goods and services has not seen high inflation rates since the monetary easing has begun, prices of investments have been on the rise suggesting that some of the excess cash is flowing into investment capital. However, with China continuing to grow as a consuming nation and bidding for more resources and food and coupled with the significant increases in money supply in both the United States and Europe, a global bidding war for key assets like energy, food and building materials may intensify causing price inflation in these areas. These price increases could also fuel increased investor demand for inflation hedge assets like Gold, Silver and Precious Metals. However, it is possible that the excess cash in the market can be controlled by the United States Federal Reserve Bank by paying interest on reserve deposits and in so doing, capture any excess cash in the market that may have been used to bid on these key assets, keeping the monetary flows more under control.
3. Export Weakness –There is a balance between countries and the prices of goods in one country relative to another based on currency values. If the Euro is down relative to the Dollar, European goods look less expensive than U.S. goods since the U.S. goods are priced in Dollars and the Dollars have gone up in value. The opposite is also true: if the Euro is up relative to the Dollar, then U.S. goods appear to be lower in cost. If Europe has more problems with their economies than the U.S., then the Euro could fall relative to the U.S. Dollar making U.S. goods appear more expensive, causing weakness in U.S. exports. This, in turn, would cause U.S. businesses to slow down since sales are reduced given the lower exports. The cure for the slower U.S. economy would be more stimulus and increased money supply, driving the Dollar lower relative to the Euro and making U.S. exports more attractive. However, this strategy, given the current and excessive U.S. debt levels would foster even more danger of permanent fiscal damage. The result of all of these factors may cause an increase in demand for Gold, Silver and Precious Metals since these assets have historically held value when the Dollar weakens and U.S. debt increases. On the other hand, if Europe has continued economic problems and the Euro weakens, and if the U.S. could hold export activity at the same levels without resorting to stimulus, then the higher Dollar would most likely result in lower Gold and Precious Metals prices.
4. The Fiscal Cliff – The Fiscal Cliff is uniquely an American issue as no other country has this same set of circumstances of sudden and sharp tax increases matched with significant and immediate reductions in federal spending. Many economists have predicted that this combination of events could cause the U.S. Gross Domestic Product (GDP) to shrink by 2% or more. If such predictions are true, and with a U.S. GDP growth currently estimated of 1.5% – 2% for 2013, the entire growth of GDP could be wiped out and the net U.S. GDP change could potentially become negative and move the U.S. back into a recession. Unlike the situation as the U.S. entered the Great Recession in 2008, the U.S. Federal Reserve Bank has very few options to substantially increase money supply nor does the U.S. Congress have the political freedom to vote for significant stimulus given the U.S. debt, now at 100% or more of U.S. GDP. In this current situation with a self-inflicted recession from the Fiscal Cliff, should there be efforts by either the Federal Reserve Bank or Congress to stimulate the economy, the results could prove to be an even more rapid deterioration of U.S. debt and cause the U.S. Dollar to plunge, raising the value of global assets like Gold, Silver and Precious Metals. However, if other countries are experiencing their own economic issues and sovereign debt crises, then relative to the other countries, the recession in the U.S. would not appear as significant and asset prices like Gold could stabilize.
Regardless of the outcome of the issues related to the 4 Horsemen, the U.S. and the major world governments seem mired in a long term economic challenge with very few “quick fix” options available. As a savvy investor, your portfolio may need some form of economic hedge or counterbalance to the effects these governments will experience in their respective economies. Perhaps now is the time to consider an increase in your portfolio allocation to Gold, Silver and other precious metals.