The deadline to raise the national debt has arrived. In a last minute vote Monday, the House of Representatives passed a bill by a vote of 268 to 161, which institutes spending cuts while raising the debt ceiling by approximately $2.5 trillion. The Senate has approved the bill today, sending it to the President to be signed into law. So after all the grandstanding and media hype, it looks as though the looming catastrophe has been diverted, and that the US won’t default after all.
In the background however, another story is being quietly told. Although headlines show America is breathing a sigh of relief, the markets are showing no relief at all. Stocks opened lower this morning and gold, believe it or not, is up nearly $20 per ounce to a fresh all-time high. In and of itself, this is not really a surprise. In the context of what’s happening with the debt negotiations however, it’s really quite extraordinary that gold is not seeing at least some selling pressure.
We argued last week that it was unlikely that gold would see a significant correction, even if a debt deal was reached. Many other analysts thought there would be a sharp selloff. There was some agreement that a good portion of the price increases above $1550 per ounce were due to risk premium attached as a result of the US debt debate. As it stands today however, gold has pushed to a fresh high above $1640 per ounce even as a solution to the crisis has been found. This signals one of two things: Either that the price of gold has been driven up by other global concerns, or that the problem with the debt debate here in the US hasn’t really been solved.
I believe that the truth is some combination of the two. Unlike the strong upswings in the gold market that occurred during the aftermath of the financial crisis in 2008 and 2009, this rally is being broadly supported by numerous factors that are occurring independent of each other. While the debt debate here at home certainly damaged investors’ long term confidence in the greenback, there’s also the European fiasco to consider. Collectively, the two largest economies in the world are simultaneously bleeding to death under massive debt loads. Even as one makes menial progress, the long-term global picture does not significantly improve.
Keep in mind that though our debt ceiling deal may have averted a US default in the short term, the nightmare of over $60 trillion in unfunded liabilities still plagues our future. For all the backslapping that will surely be done on Capitol Hill today, the deal they have struck does nothing to increase long term revenue and does not touch a penny of the entitlement spending which makes up the vast majority of our nation’s obligations. So what’s the solution they have drummed up? Just small cuts in discretionary spending and more borrowing power. That’s a bit like getting a foreclosure notice on your house, and being proud that you’ve switched to generic brand soda and applied for another credit card. Maybe it’s a step in the right direction, but it can barely be called progress.
The simple fact is that the value of the dollar is not sustainable. Though there probably won’t be an overnight collapse, there is simply no way our currency can continue to hold value in the face of these massive debt loads in the hands of a severely dysfunctional political system. So what’s important to understand about this whole disaster with the debt ceiling and soaring gold prices is that it is merely a symptom of a broader currency meltdown. Just this morning, the Bank of Korea announced that they have purchased over 25 tons of gold over the last two months. This amounts to over $1.24 billion, and is the first time the central bank has purchased gold since 1998. It’s a good bet they didn’t invest over a billion dollars in gold because they think $1600+ per ounce is too high.