Tuesday, August 2, 2011

Gold And Silver Cast Their Vote On The Debt-Ceiling Deal

In the post Deal Or No Deal: Gold And Silver Will Continue To Rise I pointed out that the price of Gold and Silver will rise along with the debt ceiling.  Many called for a sell-off in the Precious Metals upon the announcement of a deal by the knuckleheads in D.C. that raised the debt ceiling...too many in fact.  When everybody expects one outcome, the opposite is likely to occur, as that outcome becomes priced into the market via the fear of the prevailing supposition.  Gold has done anything but go down since the "final deal" on raising the debt ceiling was announced Sunday afternoon reaching successive new All-time highs on Monday and again today.

From Zero Hedge
A simple correlation rule of thumb allows us to predict that gold will be at $1,950 by the end of the year if it simply retains it close correlation to the debt ceiling. Should Bernanke announce that he will additionally need to monetize some or all of this incremental debt amount, we anticipate that gold will be well over $2,000 by the end of the year, courtesy of yet another round of accelerated dollar debasement, which also means that real gains in US stocks will be negated courtesy of the devaluation of the currency in which they are priced. The same, however, does not apply for gold, which with every passing day is priced in nothing but itself.

The assumptions made by the fools in Washington about "spending cuts" and "avoiding default" are too numerous to mention here, but one point must be made, and made clear:  If these boobs think that the cost of servicing the GROWING debt of the USA is not going to rise along with the debt, they indeed bring a new definition to the term fool.  Paying the interest on the debt today may be ONLY 20% of revenues, but as the debt rises, that percentage of revenues that must be spent to pay the interest on the debt alone will rise right along with it...if not faster.  Clearly, the threat of a debt downgrade by the always late to the party ratings agencies, is far more troubling for the government than simply "defaulting" on the debt payments.  But then, the cost to service the country's debt is going to rise regardless of any debt downgrades.  This is a huge boon for the price of Gold and Silver:

By Byron King
06/13/11 Pittsburgh, Pennsylvania – There is a dark shadow hovering over the US dollar and the ability (or, rather, inability) of the US federal government to pay its way in the future.
Below is a chart that shows the percentage of US government income that goes to pay interest on the national debt. It also shows the historical price of gold in real terms.

Silver would appear to be victim of the growing fears of an economic slowdown, despite the euphoria in Washington that the economy has been saved by raising the debt ceiling, as it has been somewhat lagging Gold.  Oil has been pressured by the "fears of an economic" slowdown as well.  Foolish reactions both!  The physical demand for commodities will mean little to the prices of them, as the value of the US Dollar continues to fall, the prices of all commodities will rise regardless of physical demand for them.

Silver is also being held back in price because of the increase in margin rates back in May.  It is very expensive to play in the Silver Market now.  Until the risk/reward ratio improves, big money may stay on the sidelines until Silver breaks out.  A breakout in Silver that should force a massive short squeeze, and attract new money, is either just around the corner at $41, or just on the horizon at $43.

Let's blame the poor economic data the past few days on the "debt stalemate".  Hey, they have to blame the poor economy on something...

Markets worry about US economy despite debt deal
LONDON (AP) -- Stocks fell further on Tuesday as worries over the state of the U.S. economy capped any relief to the news that U.S. lawmakers have finally agreed to a package of measures to raise the U.S. debt ceiling.

A weak manufacturing survey from the Institute for Supply Management Monday raised fears that the world's largest economy is slowing rapidly. The survey provided evidence that the tortuous debt talks in Washington have hurt economic confidence. A raft of U.S. economic data this week, which culminates with Friday's closely-watched payrolls figures for July, will be monitored in that context.

Indicators last week showed that the U.S. economic recovery has slowed down dramatically, with annualized growth of only 1.3 percent in the second quarter. The worry in the markets is that growth will slow even further in the second half, at a time when China and Europe appear to be stalling, too.

Data showing that U.S. personal income rose by only 0.1 percent in June and that personal spending unexpectedly fell 0.2 percent did little to calm investor jitters.

Worries about growth have more than offset any relief over a debt deal in Washington. The House of Representatives comprehensively passed a bill to increase the debt ceiling on Monday and the Senate is expected to follow suit later, just in time to prevent a damaging debt default, though possibly not to avert a credit rating downgrade.

BusinessWeek ‎
Manufacturers had their weakest growth in two years in July, a sign that the economy could weaken this summer. The Institute for Supply Management, a trade group of purchasing executives, said Monday that its index of manufacturing ...

DETROIT (AP) -- Car shoppers worried about the U.S. economy last month and that kept sales in a funk.

Maybe they don't have any more money to spend, and their debt limit has been capped...

WASHINGTON (AP) -- Americans cut their spending in June for the first time in nearly two years after seeing their incomes grow by the smallest amount in nine months. The latest data offered a troubling sign for an economy that is adding few jobs and barely growing.

But never fear, the rising debt ceiling is here!  ...and all of the economies troubles will now be solved and the recovery can continue!  If it were only that simple...

Obviously, the Precious Metals don't seem to agree that raising the debt ceiling fixes the economy...and it doesn't.  Gold and Silver are the Truthsayers.  And the truth is, this debt deal is no deal at all.  There are no winners in this deal, only losers:  The American Citizens.

Let's give Congressman Ron Paul the last word today:
By: Dr Ron Paul
No plan under serious consideration cuts spending in the way you and I think about it. Instead, the "cuts" being discussed are illusory, and are not cuts from current amounts being spent, but cuts in projected spending increases. This is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda. But this is the type of math Washington uses to mask the incriminating truth about their unrepentant plundering of the American people.

The truth is that frightening rhetoric about default and full faith and credit of the United States is being carelessly thrown around to ram through a bigger budget than ever, in spite of stagnant revenues. If your family's income did not change year over year, would it be wise financial management to accelerate spending so you would feel richer? That is what our government is doing, with one side merely suggesting a different list of purchases than the other.

In reality, bringing our fiscal house into order is not that complicated or excruciatingly painful at all. If we simply kept spending at current levels, by their definition of "cuts" that would save nearly $400 billion in the next few years, versus the $25 billion the Budget Control Act claims to "cut". It would only take us 5 years to "cut" $1 trillion, in Washington math, just by holding the line on spending. That is hardly austere or catastrophic.

A balanced budget is similarly simple and within reach if Washington had just a tiny amount of fiscal common sense. Our revenues currently stand at approximately $2.2 trillion a year and are likely to remain stagnant as the recession continues. Our outlays are $3.7 trillion and projected to grow every year. Yet we only have to go back to 2004 for federal outlays of $2.2 trillion, and the government was far from small that year. If we simply returned to that year's spending levels, which would hardly be austere, we would have a balanced budget right now. If we held the line on spending, and the economy actually did grow as estimated, the budget would balance on its own by 2015 with no cuts whatsoever.

We pay 35 percent more for our military today than we did 10 years ago, for the exact same capabilities. The same could be said for the rest of the government. Why has our budget doubled in 10 years? This country doesn't have double the population, or double the land area, or double anything that would require the federal government to grow by such an obscene amount.

In Washington terms, a simple freeze in spending would be a much bigger "cut" than any plan being discussed. If politicians simply cannot bear to implement actual cuts to actual spending, just freezing the budget would give the economy the best chance to catch its breath, recover and grow.

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