1/8/2013
By David Urani

The theme so far this new year is government debt, and at $16.4 trillion we all know how obscene it is. The question is though, which way is the debt going to go from here? Caught in the middle of this is gold, which over the past few years has really thrived on our nation's irresponsibility with its finances, but traded relatively tamely in 2012 (up approximately 3%). The next few months may really set the stage for the long term direction of US deficits and gold as the issue of spending is confronted seriously again after a long stretch of emergency spending and quantitative easing post-recession. 

Of course, we got that big decision on Fiscal Cliff taxes earlier this week that stopped us from encountering a crippling tax increase on everybody. But like it or not, the Fiscal Cliff would have really cut down on the deficits. As it stands, the tax deal that passed on Tuesday is actually projected to increase the federal debt by $4 trillion over 10 years and that of course goes opposite of the entire reason Congress put the Fiscal Cliff there in the first place; to fix the deficit.

But gold and the dollar thus far have seemed undecided about the Fiscal Cliff deal, and that's because the budget fight really isn't over yet. Spending cuts have been delayed for a couple of months, to be discussed later. And that's likely to coincide with the pending debt ceiling that we will hit late next month or early in March. It's quite a relief that we got the tax increases (for the non-rich, at least) out of the way, but will the government actually agree on spending cuts that finally put a dent in the Federal debt or will the can get kicked again?

And then there's the Federal Reserve who has had the printing presses on turbo charge for years now along with rock bottom interest rates. Well, yesterday we got the latest FOMC minutes, which suggested there are ‘several' members that would rather not see QE 4 (a.k.a. QEternity) continue through the end of 2013. Some members think it should stop now. Certainly, there's a strong chance that Fed policy maxed out with QE 4, and will only become tighter from here. Following that news from the fed, gold has sunk approximately 3%.

Call me a hopeless optimist, but I'm seeing a scenario here where the government, from the White House, to Congress, to the Fed, may well become more hawkish on deficits and spending this year as we finally wind down stimulus to counteract what happened in 2008. And for the gold bugs out there, it may be time to consider whether the party is winding down after generally outperforming stocks significantly over the past several years. In the last five years, the Dow is approximately flat, while gold is up more than 80%.

Then again, this is the government we're talking about here.

David Urani
Wall Street Strategies