Turn on the TV and this is what you'll hear: The US
budget is heading for a fiscal cliff. If a deal isn't reaching in Congress by
the end of this year, a combination of automatic tax hikes and budget cuts
will sink America into economic depression. There is no escape.
Of course, my readers know that the fiscal cliff is merely an example of the
piper having to be paid. The problem isn't the bill, but that we ran it up so
high in the first place. Any deal to avoid the cliff by borrowing even more
money may allow the piper to keep playing a while longer, but when the music
finally stops, the next fiscal cliff will be that much larger.
My readers also know that there are several ways for investors to avoid the
cliff altogether. Perhaps the most secure is buying precious metals. However,
given what we know, it may seem confusing that the spot prices of gold and
silver have been moving sideways.
headline prices have largely concealed a more important indicator: physical
bullion sales are booming.
The figures are astounding. For US Gold Eagle coins, mint sales are up some
150% from the QE3 announcement on September 13th. Despite what the spot
prices show, there has been a tremendous surge in people buying physical
But why hasn't this translated into
higher spot prices?
It seems clear that the spot prices of both gold and silver are being driven
right now by a large pool of institutional capital moving into and out of
instruments like commodity ETFs. The movements have been predictable: When
there is a sign of a deal coming out of Washington, the spot prices move up.
If negotiations are faltering, there is instead a major selloff.
Physical bullion investors are a different breed. We are in this market for
the long haul. When I increase my physical gold and silver holdings, I do it
because I see the long-term fundamental picture for the US getting worse.
a Read on the Bullion Bull
While the ETF speculators are trying to anticipate the market's
- and each other's - immediate reaction to whatever 11th hour deal is struck,
I believe physical bullion investors are sending a clear signal: this whole
debate is out of order.
A J.P. Morgan study concluded that 82% of the hit to GDP if we go over the
fiscal cliff would be related to tax increases, not spending cuts. And if the
legislators reach a deal? It will only result in more tax increases and much
fewer spending cuts. These guys just don't get it.
Looking back to the debt ceiling debate
of August 2011, we saw big movements into physical gold there as well. What
investors are concluding as they hear these grand debates is that whatever
the result, the budget, the dollar, and the taxpayer will lose.
They are deciding to get off this runaway
train. Because the real fiscal cliff isn't coming on December 31st - it is
coming when there is a global flight from the US dollar.
The Real Fiscal Cliff
The Democrats are complaining that the fiscal cliff imposes too steep demands
on those who receive entitlements. Republicans are trying to protect the
military budget. What no one seems to want to address is what happens as
foreign creditors increasingly decide to stop financing this bonanza.
To a large extent, this is already happening. China has already become a
net-seller of Treasuries and is diverting more of its reserves into gold. The
Chinese government recently approved banks holding gold as a reserve asset
and made it easier for banks to trade gold amongst themselves.
While Japan and other Keynes-drunk governments have filled some of the gap
with increased purchases, a supermajority of new issues are being bought
directly by the Fed. That was the idea behind QE3 Plus, as described in last month's commentary.
Because of the
acute trauma in Europe and certain institutional mandates to hold Treasuries,
much of this new inflation is being absorbed. This has caused what may be the
most dangerous of situations. It has allowed the inflationists
to paint people like me as the boy who cried wolf. It seems to them that no
matter how irresponsible Congress and the Fed are, we are immune from
In reality, all this money printing is like pulling back a spring. Pent up
inflationary forces are building, and when they are unleashed, the debate
will be over faster than they can say "oops."
Only Way to Win Is Not to Play
Those buying into physical gold and silver see this inevitability and are
getting prepared. We believe there is no sense playing Russian roulette with
our savings. Every time Washington raises that debt ceiling or announces
another stimulus, it's like one more click of the trigger.
When the global markets finally wrap their heads around the scale of US
insolvency, the response will be as fierce as it is rapid. In such a
once-in-a-century scenario, physical gold and silver are among the few assets
without counterparty risk. From the looks of the physical bullion sales
charts, I'm not the only investor who has figured this out.
Peter Schiff is the CEO and Chief Global
Strategist of Euro Pacific Capital, best-selling author and host of
syndicated Peter Schiff Show.
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