What The Fiscal Cliff Means For Gold

As investors look towards the future, one impending event looms on the horizon: the fiscal cliff. With a $16 trillion national debt, U.S. lawmakers are scrambling to find a way to reduce it. Out of the myriad of options available, three main themes emerge, each with a different outcome for the gold market. The decision will determine future inflation levels, the strength of the dollar and the gold market, and the U.S.’s place in the world economy:

  • The first group of options involves coupling tax increases with spending cuts. Economists expect this option to impede growth in the economy and perhaps create a new recession. On the other hand, this option will dissolve about 50 percent of the deficit.
  • Also, lawmakers can toss out a handful of the scheduled tax increases and another handful of spending cuts. This option could cause the U.S. economy to follow the trend in Europe, while the deficit will continue to increase.
  • A third group of options leans towards limited tax increases and spending cuts, which would also create a smaller decline in economic growth.

What does this mean for gold investors and the gold market as a whole?

Investment markets across the board are reacting to the approach of the fiscal cliff differently. If the U.S. lawmakers fail to reach a sound solution, the nation will have to deal with a $600 billion explosion of spending cuts and tax increases, which could create an economic depression. This threat to the U.S. dollar causes many to believe that gold investments should spike. Although gold has historically acted as a safe house for investors, the gold market has not shown a positive reaction.

In the final week of November, Gold declined 1 percent. This was the second month in a row that gold has declined. By December 4th, gold had dropped to $1,686 from $1,700. Currently, gold has tumbled to $1,600 per ounce as a result of hedge fund liquidation. This is the lowest gold price for four months, which seems to suggest that the U.S. economy will improve.

Federal interest rates and monetary policies stand as enormous factors for the gold market. Although the current market suggests a dip in gold, the game may change shortly.

Gold coin and bullion investors are buying gold fast. American Eagle sold 131,000 units this year, compared to 41,000 units in 2011. The market trend indicates increases in both retail buying and industry selling, much in anticipation for the fiscal cliff.

Some firms expect gold to sell for $1,865 after the fiscal cliff, and decrease steadily to $1,780 in 2014. Their stance takes an optimisitic view of economic growth. This view maintains that Congress will reach a compromise and find a balanced method to reduce the deficit significantly by 2017. If this occurs, expect the strength of the dollar to increase, and the price of gold to decline.

However, not all viewpoints are so optimistic. If U.S. lawmakers fail to reach a successful compromise, the dollar will plummet. If this happens, the price of gold may double. Some hedge fund managers believe that it could reach $5,000 an ounce as a result of massive inflation.

The bottom line is this: if the U.S. economy improves, gold will fall. If the economy takes a plunge, gold prices will skyrocket.  The answers await us alongside the  December 31st  decision, which has now been postponed until the beginning of January. Some experts even believe lawmakers will push the date back until later in the month.

Plymouth Mau is an international trades stockbroker. He delivers ranging prices for precious metals to online blogs. Visit SBC Gold for gold news and up-to-date pricing.