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Some analysts are contending that the uncertainty bobbing on the horizon because of the debt crisis will help sustain gold and silver prices into the summer. They must be predicting that the battle will not be one grand D-Day, but a series of skirmishes more along the lines of Lexington and Concord in 1775. That's the only way the crisis can be strung out that long.
We actually have a battle between two economic philosophies that, when pared down to the bone, are actually pretty similar and come clad in armor stamped "Republican" at one point, "Democratic" at another.
The two sides differ not so much about if the debt and yearly deficit should be cut, but how. Republicans seem willing - some even eager - to cut what are unfortunately call "entitlements." Democrats are loath to do so and instead want to cut defense and use enforcement methods to stop entitlement chiselers.
This bears on gold and silver in a number of ways. Short term, we feel the economy can't take another shock at this point and cutting too deeply will deflate the slowly and carefully inflated balloon of the last few years. Economy deflates, precious metals deflate.
However, leaving the debt alone is a non-starter. We need more money in the private sector, although some would argue that too much tax money ends up in the private sector in the first place. So, as precious traders we want more money flowing into start-ups, innovation and infrastructure so we get more people working and more inflation. But cutting government too deeply might have an opposite effect.
Cutting the defense budget seems to be one way for the parties to begin a dialog, but neither wants to appear too dovish and and do the dirty work of shaping a less belligerent country, one that is less of a nosy-body. This is perhaps because our defense policy hasn't been re-articulated since the "War On Terror" began after 9/11. Ordinary citizens and our allies know that America can't be all things to all countries at all times. In fact, citing his country's intervention in Mali, the French Defense Minister said that he felt the U.S. needed a break from the roll of ombudsman for western military power projection.
If the U.S began honestly cutting the defense budget by 10% it would save $1 trillion over the next 6 or 7 years. If we can find $1 trillion in entitlement fraud over that period and another trillion in efficiencies, other cuts can be minimal. A good chunk of the debt can be inflated away. And, if the U.S. were to grow faster economically, another chunk of the debt could be accounted for by increased tax revenues without actually raising taxes much more.
A strong, rapidly growing United States is critical to higher prices in gold and silver. Less than 2% growth per year is simply not cutting it. (Yet still gold is making gains.) It's a tall order for Congress and the President.
Welcome to your second term, Mr. Obama. Let's get it done.
As always, wishing you good trading,
Gary Wagner
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