Why The Fiscal Cliff is Great For Gold - Cache Metals - Toronto

Ask any veteran investor about the 2008 financial crisis and you’ll probably hear the word “unimaginable” bandied about. From the demise of the U.S. housing market to the collapse of U.S. investment banking giant Lehman Brothers to the virtual collapse of entire countries like Greece, it was the kind of financial and economic Armageddon that most investors never really thought possible.

But while the crisis has been bad for stocks and bonds, it’s been great for gold. Since 2008, the price of the precious metal has been soaring to new highs (Figure 1). Why the steady climb? Fear and uncertainty. Gold prices thrive on both: when markets and economies are on shaky ground, investors run to what they know.

Gold is a friend in times of trouble.

Today, we find ourselves around the corner from yet another huge potential shock. The so-called Fiscal Cliff now looms large South of the border, as the U.S. faces a $7 trillion disaster of tax hikes and spending cuts set to kick in January 1, 2013. If the Democrats and Republicans are unable to agree on what to do about it, then the U.S. economy will undoubtedly be driven back into recession. And given the inability of the current U.S. government to make solid decisions, many economists say a cliff dive is inevitable.

Political gridlock in the world’s largest economy is terrible for stocks – the day after the election, on November 7, equities took their biggest one-day tumble in months, with the Dow Jones industrial average falling 2.4% and the S&P 500 falling 2.4%.

But gridlock is great for gold – the precious metal has soared in the weeks since the election, peaking at $1,731.40 a troy ounce on Election Day.

Which is why the Fiscal Cliff could be the start of another extended gold rally. And, with the third round of quantitative easing on the horizon for the U.S. (dubbed QE Infinity), some gold bulls think prices could top $2,400 an ounce by the end of 2014 and $1,900 by the end of this year.

So with the Fiscal Cliff looming large as January 1, 2013, draws closer, gold investors could just be popping some well-deserved champagne corks on New Year’s Eve. They just need to step up to the plate first.

Figure 1: Gold Prices: 2008-2012 (Source: Cache Metals)