Gold remains defensive early in the New Year, below the 1721.61 midpoint of the $1920.74/$1522.48 range that has dominated since late 2011. While the yellow metal was confined to this range throughout 2012, it did nonetheless record a respectable 7.1% annual gain. It was the twelfth consecutive positive year for gold.
I submit that the underlying factors that drove gold from less than $300.00 a dozen years ago to that record peak of $1920.74 are still very much in place and are destined to grow far worse before they ever start getting better. The most obvious being the global explosion on debt. Since 2000, global debt has surged 160%, from $19.1 trillion $49.7 trillion.
THE NUMBERS
In 2000, the national debt of the U.S. was a rather quaint $5.7 trillion (57% of GDP). Today we are butted up against the latest debt ceiling of $16.4 trillion (104% of GDP). However, as I pointed out in my commentary from December 13, that figure grossly underestimates the true liabilities of America.
WARNINGS FROM CHINA
China, the financier of much of our debt in recent years, stated the obvious via it’s Xinhua news agency last week; the U.S. “simply cannot live on borrowed prosperity forever.” And yet Washington seems determined to try…
At the eleventh-hour Congress averted at least the tax hikes associated with the fiscal cliff, once again punting on the really important fiscal issues, which will be rehashed all over again in just a few short weeks as another hike to the debt ceiling is debated. Much like it was in 2011, a government shut-down, our sovereign debt rating and yes, the possibility of default, will hang in the balance. It is worth remembering that the debt ceiling debate in the summer of 2011 led to a surge in the price of gold that culminated with that 1920.74 record high on September 6.
ZERO POSSIBILITY OF DEFAULT
The possibility of default will be used as leverage, but given the Fed’s ability to print an endless supply of dollars, it is an unlikely outcome. Former Fed chairman Alan Greenspan reminded us of this in a now rather infamous Meet the Press interview from August 2011. “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default,” said Greenspan, as a rather uncomfortable looking Austan Goolsbee, the chairman of the White House’s Council of Economic Advisors at the time, looked on.
LOOKING AHEAD
One thing is all but assured, the debt ceiling will be raised and the U.S. will continue to go deeper into debt. And there has never been a debt ceiling that we couldn’t ultimately reach and exceed.
Additionally, the short-term fix on the fiscal cliff is widely expected to sap one to two percentage points from U.S. GDP in 2013. So when all is said and done; the debt goes up, the economy weakens (with a likely negative impact on employment), revenues probably fall and our sovereign debt rating may be downgraded anyway. Another job well done by Congress.
If this is indeed how things unfold in 2013, a complicit Fed will be obliged to keep rates near zero and continue to expand its balance sheet. In fact, the Fed has already committed to this path, pledging via new guidance revealed in December to maintain a super-easy policy stance until the jobless rate falls to 6.5%.
NEW TONE FROM FOMC
At the same FOMC meeting that resulted in this dramatic shift in guidance and a pledge to buy $85 bln in Treasuries and agency debt per month, a seemingly more hawkish bent by some members emerged. This was revealed when the minutes of the December meeting were released last week, driving gold deeper into the range. However, it’s important to note that none of the “several members” mentioned actually voted against the policy decision. The lone dissenter remained Richmond’s Jeffrey Lacker.
I suppose it’s not surprising that some doubts are beginning to creep into the minds of some FOMC members, given the ineffectiveness of QE1, QE2 and Operation Twist in reinvigorating the economy. Nonetheless they recommitted to this path in the form of QE3, and 6.5% unemployment is unlikely to be reached before 2015 based on the Fed’s own central tendencies. Another change in guidance now would heighten market uncertainty, undermining the very thing the Fed was looking to accomplish by tying policy to the unemployment rate.
A contentious political fight over the debt ceiling will once again bring to the fore some of the key underpinnings of the long-term secular bull market in gold, which is likely to be supportive to the yellow metal. While the range doesn’t appear to be in any immediate jeopardy, nor does the long-term trend.
