So, nothing seems to have changed as a result of the budget and debt crisis. We simply kicked the can into next year. While the GOP took a good deal of self-inflicted damage in the standoff, this was not a victory for Democrats in terms of achieving any of their budget objectives. The deep budget cuts under sequestration remain in place and will deepen with more cuts in January. All is as it was before. But at a deeper level, there are, in fact, two significant consequences of this fiasco, having to do with the impact on the GOP and on markets in general.
In the weeks leading up to the debt crisis in 2011, gold rose $400 an ounce to hit its nominal all-time peak of $1,895. The 2011 debt crisis was the one in which we came so close to defaulting on our debts that rating agencies downgraded the nation’s credit score. But it was good for gold. As the crisis approached, gold rose spectacularly. After the crisis was resolved, it fell dramatically but retained a portion of the gain. Can we expect a similar pattern as the current debt limit standoff progresses?
An edited version of this post appeared on Institutional Investor’s Unconventional Wisdom blog. Three questions pending in Washington are poised to roil markets: When will the Federal Reserve taper quantitative easing? When will the government shutdown end? and Will Congress fail to raise the debt limit? How these issues play out is likely to have lasting […]
An edited version of this post appeared in the print version of The Wall Street Journal Asia and the U.S. edition of WSJ.com.
Misconceptions about inflation, the falling dollar, and the relentless rise in federal budget deficits are skewing gold advocates’ arguments; however, a strong case can be made for the metal without resorting to these misconceptions.
There is a fundamental misunderstanding of the role of physical gold in a balanced financial portfolio. The bull market of the 2000s has led many to think of gold as another way to increase wealth through price appreciation. This is mistaken. First and foremost, physical gold is insurance. When you think about buying insurance, you don’t think about a return on your investment. You think about protection against the unexpected. Gold’s core value proposition is as wealth protection when the rest of your portfolio is going down the tubes. Price appreciation in good times, if and when it occurs, is a bonus.
As I write this morning, gold has given up two-thirds of its gains following the Fed’s decision last Wednesday to continue its $85 billion-a-month in bond purchases under QE3. One reason for this retreat is that markets overreacted to the news, just as they did back in June when Ben Bernanke’s statement about QE3 was misinterpreted as a signal the Fed would cut back QE3 in September. Buckle your seat belts; we’re in for many more days like Wednesday in the year ahead…
In the wake of the FOMC’s decision, some analysts are lurching to the extreme, speculating that a majority of the FOMC sees the economy as weakening. We won’t know what individual members think about the state of the recovery until the minutes of this week’s meeting are released. But the Fed’s announcement makes it clear a majority of the FOMC believe the economy continues to expand. We also know the FOMC decided to wait for more data before making a decision. There are probably three primary factors that influenced this decision…
The FOMC meeting convened today with two big questions casting shadows over the Fed’s policy: what are the unintended effects of QE and what will be the consequences of unwinding the $3 trillion (and counting) in assets the Fed has added to its books under QE?
What’ll the Fed do about QE3 when it meets next week? I’ve said before the numbers to watch are those related to employment and the two forces that have driven our anemic recovery—housing and consumer spending. If those numbers indicate the economy is gaining steam, the Fed will start tapering this month. If the numbers cast doubt on the course of the recovery, the Fed is more likely to delay a decision until December.