Robert Vaughn10
Regular
308 messages
joined Feb 2019
How does the fiscal cliff look to everyone right now? Under the most optimistic forecasts, we might cut the deficit in half—down to about $550 billion—which would shave roughly 3% off the GDP. The same analysts predicted a 4% growth rate for 2014, which seems unrealistic once you factor in actual inflation. In my view, you need to add at least 1-2% to those GDP numbers and another $100 billion to the deficit, bringing it to $650 billion. That’s still a massive deficit, and the economy will likely sink by a real rate of 3% to 5% of GDP. That is a serious recession. According to the Government, it might look like 0% if they use even more liberal inflation metrics. On the flip side, a smaller deficit should strengthen the dollar from a government spending standpoint. Then there is the question of how long they will persist with Qe given all the other pressures. With the fiscal cliff looming, unemployment will likely rise by at least 1%, and since inflation will be somewhat masked, the Fed will have a free hand to continue monetizing as much as they want because they won't hit their target benchmarks for unemployment or inflation...
The bottom line: taxes are going up for the middle class in various forms. The middle class is going to get squeezed hard. The entire economy will feel it too.
It’s a dangerous cocktail of deflationary and inflationary pressures. It makes things incredibly difficult for small investors; losing some ground feels almost inevitable. If the deficit drops significantly as forecasted, gold might correct below $1,500. Maybe Jim Rogers actually has a point there. Sure, that is still higher than my entry price, but when I account for inflation, I haven't really come out ahead...
Silver could potentially drop below $25 in that scenario. If the ratio falls below 60, or especially if it climbs above 65, I’m buying. Looking at a 7-10 year horizon, I don't see precious metal prices being significantly lower in terms of these volatile currencies. Eventually, they'll be begging for more stimulus and more money printing. I won't even get started on healthcare and pension costs. Those two alone drive the deficit, not to mention defense spending, which most Republicans refuse to touch.
We ought to be cutting and taxing aggressively to protect the dollar's long-term value. This is serious, but it isn't enough. It is impossible to meet all current obligations and debts using today's purchasing power of the dollar...
However, if they want to stretch things out and temporarily blunt the loss of purchasing power, they can. That might mean gold loses its momentum to break above $2,000 in the near term... When calculating gold's trajectory, you absolutely have to factor in Europe. Deflationary pressures and austerity have been brutal. Greece, Italy, and France are slashing spending, and Spain is doing something similar; they are all struggling with official unemployment rates north of 25%. Right now, it doesn't look like gold is headed much higher. The only exception is if the crisis deepens and tax revenues tank, making deficits larger and the need for printing even greater. I doubt they'll allow the contraction to exceed 5% in either the US or Europe; they'll aim for a mix...
It is also anyone's guess how the market will react to an announced US downgrade if no deal is reached. Gold might be viewed as a safe haven, but I wouldn't bet the farm on it. It is more likely that stocks will take a hit since they are sitting at very high levels, especially in the US, while the dollar should strengthen regardless of what the agencies say. Logic dictates that, though predicting the short-term movement in this mix is tough. As I mentioned, logic doesn't always apply to this market.
Of course, all this speculation becomes moot if Washington actually reaches a deal. Otherwise, Obama will have a hard time explaining to his middle-class constituents why so many taxes are being hiked. But then again, who cares when he doesn't have to face reelection...😉