The Debt Ceiling and the Price of Gold

As I predicted, it looks like the politicians in DC have "compromised".  Although it isn't yet official as I write this, it looks as though the Republicans are set to once again throw their constituents under the bus.

The "plan" that will be passed will have less than $1 trillion in cuts with possibly another $1.2 to $1.5 trillion determined later.  The current budget deficit is around $1.5 trillion per year.  But there is a problem.  The 1 trillion dollars in cuts is over 10 years.  That works out to just $100 billion per year in cuts, which is less than 10% of just the yearly deficit.  Even if there is a total of $2.5 trillion in cuts, that still works out to an average of just $250 billion per year.

Then there is another problem.  Most of the projected cuts take place in the future.  I heard that there is really only about $30 billion worth of cuts for the next budget.  The Congress cannot control what is actually spent in 2 years or 10 years.

Then there is still yet another problem.  These supposed cuts are not actually cuts.  It is based on the projected baseline budgets for the next 10 years.  The budget is projected to increase substantially over the next 10 years.  So this "cut" of 1 trillion dollars is really not a cut at all.  It is simply a reduction in the increase that was projected to take place.

I heard Rush Limbaugh on the radio last week.  I am not usually a fan, but he made an interesting point.  He said that if a deal was reached to just hold spending the same over the next 10 years, then according to the Congressional Budget Office (CBO), this would be considered a cut of $9.5 trillion.  If this is true, this just points to the absurdity of this latest deal.  I am not sure of the accuracy of his figure, but the amount is certainly several trillion dollars.  Again, the Republican politicians in DC have once again proven to be absolutely horrible.

As for gold, the price fell a little on the news, but it is still holding well above the $1,600 mark.  Peter Schiff has written a piece about the prospects for gold given different scenarios.  You really only need to pay attention to his "bullish gold case #2".  This is the scenario of having the debt ceiling raised with symbolic cuts in spending.  He is right that this is bullish for gold.

I am actually baffled that investors could see the latest deal making in DC as bad news for gold.  It should be quite the opposite.  With a massive increase in the debt ceiling, it means there are no immediate plans to cut any significant spending.  It means that the debt will continue to grow.  It means that the Fed will continue to buy government debt.  It means that the monetary base will continue to go up.  It means that the dollar will get weaker and gold will go higher.