Money Printing, Debt Ceilings, and the Future of Gold

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The reasons to be bullish on gold are not only prevalent, but have now been significantly strengthened by recent events. The fiscal cliff fears are only the beginning. 

Debt Ceilings are a Political Tool, Not a Preventative Measure?

Tim Geihtner thinks we should solve our nation's economic problems by doing what? According to Tim (in reference to what the current administration in the White House needs to do) we should, “Make sure we do some things up front that help the economy, avoid damage to the economy, lock in some up-front savings that help restore fiscal sustainability, and set up a process for reaching agreement on the additional savings that we’re going to need.”

Mr. Geithner, in an apparent self-contradiction, also stated that we should scrap the debt ceiling, which seems to be a move that suggests that he is an advocate of the opposite of restoring "fiscal sustainability." He elaborated to Bloomberg, claiming that when it comes to our preventative debt ceiling, "It would have been time a long time ago to eliminate it... The sooner the better." His reasoning? "Only once, last summer, did people decide to use it to threaten default on the American credit for the first time in history as a tool for political advantage... And that's not a tenable strategy for the country."

So basically, according to Tim Geithner, we should eliminate the debt ceiling to eliminate gridlock in Congress that prevents us from spending our way out of more debt, which will allow us to kick the can down the road further. That way maybe an economic crisis can be averted now and someone else will be to blame later when our debt escalates even more. Or maybe I'm wrong. Helicopter Ben can always save us.

Seemingly Endless QE

Ben Bernanke, after speaking about the fiscal cliff, said that, "We will want to be sure that the recovery is established before we begin to normalize policy." This means that rates will remain low (until 2015 currently) and "quantitative easing 3" will most likely continue until we see a "recovery." This also means that the Federal Reserve, under Mr. Bernanke, will continue their policies of purchasing $40 billion in mortgage-backed securities a month. Money printing, therefore, seems to be cemented in our future. Now add the elimination of the debt limit if Geithner gets his wish, and we have a formula for explosive inflation, coupled with currency debasement from excessive Federal printing policies. 

What are the Big Boys Doing?

The SPDR Gold Trust (NYSEMKT: GLD) is the largest gold ETF. George Soros recently upped his stake in the trust by 49% (now holding 1.39 million shares total) in the third quarter according to U.S. Securities and Exchange Commission filings. John Paulson, the largest holder of GLD, also increased his holdings. According to Bloomberg, a median of 16 analysts predict the yellow metal will rise every quarter of next year, to a price of $1,925 an ounce. Central banks around the globe have bought gold for 19 consecutive months through August. This is the longest streak since 1964, according to the IMF. 

Conclusion

Senior strategist at RidgeWorth Capital Management, Alan Gayle, summed it up nicely when he stated:

“It looks as though global monetary stimulus is likely to continue, particularly in the wake of growing fiscal austerity... That puts pressure on the monetary authorities to stimulate the economy and that will debase the currencies and put a bid under gold.”

To hedge against coming inflation and get exposure to gold, the easiest way is to purchase GLD or buy physical bullion. Another way is to purchase the Market Vectors Gold Miners ETF (NYSEMKT: GDX). Purchasing shares in individual mining companies, such as Newmont Mining Corp. (NYSE: NEM) or Barrick Gold Corp. (NYSE: ABX), is also an option. Mining stocks have been badly beaten down and many feel they have become undervalued. They also have potentially bright prospects.

Data compiled by Bloomberg expects Barrick to report a 41% gain in profit next year. Newmont is also expected to achieve record profits next year as well, according to many analysts. Dedicating space in an investor's portfolio for gold or even gold mining companies may be a successful strategy for hedging against inflation and upcoming events (such as the fiscal cliff and Euro problems), and now may be a good time to consider investing in the yellow metal. 

While the elimination of the debt ceiling seems unlikely, money printing by central banks is here to stay. This should be extremely bullish for gold and gold-related companies. During the first two rounds of the Fed's Quantitative Easing (where they purchased a whopping $2.3 trillion in debt from late 2008 to June of 2011), gold rose 70%


Jharry1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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