Gold has taken a bit of a beating over the last six months. Since late 2011, concerns about the future of the euro have combined with a relatively stable US economy to send the dollar sailing sky high. As a result, gold has seen a lack of investment interest as it has essentially become a risk-on asset. Until gold resumes its role as a hedge against risk and starts moving opposite equity markets, it’s unlikely to break free of the broad trading range between $1500 and $1750.
What’s so strange about the current market situation is that gold should, by all logical measures, be acting as a risk hedge. After all, it has done so for thousands of years. It’s really only broken that traditional pattern for the last several months. The rampant manipulation of the bond and currency markets on the part of the Fed has turned naturally functioning free markets on their heads. Investors’ addictive lust for quantitative easing has created a paradigm in which all markets essentially move together, and opposite the dollar. When we think they’ll ease, everything goes up. When we think they won’t, everything falls.
Over the long haul this model is not sustainable. Unless the Fed wants to keep the market on life support forever, they will eventually have to back away from the controls and let the markets correct themselves. To an extent, this is already happening, as the language coming out of the Fed’s Open Markets Committee meetings has been less and less aggressive over time. Now we have to ask what’s on the horizon that could significantly change the current market paradigm. Unfortunately, we don’t have to look too far.
As it stands now, our economy is hurling toward a fiscal cliff that we will reach on January 1st 2013. “Taxmageddon” as it’s being called is a combination of massive tax increases (over $450 billion) and deep, across-the-board spending cuts that will automatically occur on the first day of next year unless Congress is able to reach an agreement to avoid the disaster. A tax increase/spending cut combination of this magnitude has only occurred one time in post war America and it sent the economy into instant recession in early 1970.
This doomsday scenario is nothing new. We saw a very similar dynamic in the lead up to the debt ceiling deadline last year. The seemingly innocuous discussion about raising the debt ceiling essentially turned Congress into pro wrestling show full of ridiculous threats and wind-bag rhetoric. What happened? They kicked the can down the road another year (again), set the stage for an even bigger showdown, and drove gold up by hundreds of dollars an ounce in the process.
You see, the world has temporarily forgotten how dysfunctional our legislature truly is. At the moment, we are all enamored with Europe’s spectacular demise and we’ve forgotten that the real future of the dollar will depend on what happens here in the fall. The cold hard reality of US deficits and political gridlock may be hibernating at the moment, but believe me, it’s not dead. There’s nothing like war in the halls of Congress to point out how unstable the dollar truly is. There is nothing like an unstable dollar to move gold prices. As such, a bet against gold in the long run is essentially a bet that the boys and girls on Capitol Hill will suddenly learn to play nice. Is that a bet you would take?
Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to email@example.com.