Gold And The Fiscal Cliff

As we roll into December, the clock is ticking on the time bomb that is the fiscal cliff. For the most part, markets seem confident that Congress will either reach an agreement or come up with some kind of measure to buy them more time to debate. But recent talks seem to be going nowhere, and many investors are starting to get worried. One of the most talked about assets in relation to the cliff is gold [for more gold news and analysis subscribe to our free newsletter].

Some feel that the precious metal will soar to new highs in the coming weeks, while others think that the commodity will fall along with everything else. Either way, it appears as though the yellow metal will be a pivotal point to watch in the coming weeks.

The Bull Case

This one is pretty straightforward, as there a number of scenarios in which analysts are calling for gold to rise. The first, and possibly most popular, argument for gold is the fact that it tends to outperform in times of uncertainty or market panic. Going over the fiscal cliff, whether it will have a marked long-term impact on our economy or not, will no doubt send markets into a frenzy. Many think that this kind of fear will drive assets right into gold as it climbs its way back towards 2011 levels [see also Investing In Gold: The Definitive Guide].

A more fundamental approach shows that the U.S. dollar will likely be weaker in the coming years, no matter how the fiscal cliff situation turns out. If we do go over the cliff, many feel that spending cuts as well as tax increases will send the economy into a recession. While this would initially damage just about everything in its path, gold will have the ability to outshine, as investors start to move out of the greenback and into their favorite safe haven. If we do not go over the cliff, then the market’s focus falls back to how a continuous QE will debase the dollar, and inevitable inflation will help push the metal higher.

The Bear Case

Though fewer fall under this camp, there are still those who have a bearish outlook for the coming fiscal cliff scenario. Going over the cliff will likely send the U.S. into a recession, something that is widely agreed upon. Many feel that gold will be unable to hold onto its shine if markets turn south again, as everything would take a hit. Though it could outperform, it would be a game of how much gold lost in comparison to equities, as opposed to how much it gained by the same metric [see also 3 Metals Outshining Gold].

Not going over the cliff could renew bullish sentiment for markets, which would increase the appetite for riskier assets. This could mean that gold will face selling pressures as investors are more comfortable with equities and other holdings for their portfolios.

Where do you all think gold is headed? Let us know in the comments below.

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Disclosure: No positions at time of writing.

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  • Thomas H. O’Brien

    I have read that Gold is about to take a hit. I have read that Dent believes that it may tumble to $750. Then Dent also writes that the Dow will collapse to 6000 to 7000 before settling at 3300 in the last part of this decade. His argument is compelling. Others write that Gold will tumble in early 2013 to recover a massive upswing in late 2013. Those arguments also have merit.

    While I have no crystal ball but I do think that Gold can dramatically decrease in price as the Fiscal Cliff contraction happens. If the Fiscal Cliff removes 10% of the economy then it will not surprise me if Gold will lose 10% also. That will be reasonable. But the correlations of price to the size of an economy do not happen necessarily in a linear correlation. So it can lose a lot more than that in an over correction.
    We will see.