As ongoing ‘ Fiscal Cliff ’ negotiations in Washington continue to storm the headlines, gold and silver have experienced volatility which is likely to continue in the near future. While the shaky price action of the next weeks will surly distract near-term minded speculators, it exposes the severity of the fiscal and monetary issues plaguing our economy, only reinforcing the fundamentals to the long-term bullion investor.
The Fiscal Cliff (a series of tax increases and spending cuts scheduled to kick in on January 1st) has stirred a great deal of debate among legislators, as analysts estimate that going over the cliff would plunge an already weak US economy into recession.
Yet, despite the high level of political contention, an actual resolution couldn’t be further, as whatever outcome results from the cliff is certain to extend the problem rather than resolve it. Tax hikes, government spending, and debt ceiling increases will create a greater problem in the future.
Can a crisis caused by excessive spending and lax credit creation be solved by the same measures which produced it? The thought alone is absurd.
In addition, beside Congress lies Ben Bernanke’s Federal Reserve, who has assured to be ready to reinforce any government shortfalls through further easing. The FED’s most recent commitment to print an unlimited amount of currency was a ‘point of no return’ in its journey toward complete debasement.
Any resolution of the “fiscal cliff” would only entail the perpetuation of the deficit, now more likely to be financed by the FED’s non-sterilized purchases of Treasury securities. With the expiration of Operation Twist (consisting in the purchase of long term bonds financed by the sale of those with shorter maturities) the FED has hinted it will likely to introduce measures to offset the termination of the program in a more aggressive fashion, prompting a QE3 “Reloaded” estimated to Debase At $85 Billion A Month.
History is marked with countless episodes under which governments have exploited their ability to create currency. In every instance the consequences have devastated entire populations, effectively transferring wealth away from the majority. The result is a tremendous rush into tangible assets such as gold and silver, driving their prices to bubble-like proportions.
All in all, governments must ultimately understand that the creation of currency is not equivalent to the creation of wealth. In the meantime, the savvy investor should realize this and be ready to capitalize off the cyclical nature of this phenomenon.
In summary, the market’s perceived nervousness on complications over Republican and Democratic negotiations are certain to spur additional volatility. While the details of the outcome will be insignificant in the long term, this “Short Term Noise” is certain to detract the public from the broader long term implications. In the long term, markets have already priced this in as the country, political leaders, and the FED follow a now inevitable trajectory toward currency debasement.
In Mike Maloney's words, “History always repeats itself. When a civilization debases its currency supply, all that currency will once again come chasing into that same tiny pile of metals, and gold and silver will revalue themselves measured in those currencies. This will happen in the United States, just as it did to every empire in history. Those who recognize this stand to become wealthy beyond belief.” ( p. 97 Guide To Investing In Gold & Silver)
yesterday was to drive big daddy liquidity indicator the gold-silver ratio down from the EMA 50, to which it had been clinging. To all the other indicators we are watching, an over sold RSI on the GSR will be added.
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