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Gold bugs love fiscal cliff fears

November 13, 2012: 12:44 PM ET

Most investors may be fearing the looming fiscal cliff -- but not those who have loaded up on gold and other precious metals.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

If Congress and President Obama hurl America over the fiscal cliff, some fearful investors may clutch tightly to gold on the long way down.

Stocks have been hit hard since Election Day as fiscal cliff concerns dominate the daily market chatter. But it's been a different story for gold, which has rallied more than 3% in the past week.

It makes sense to a certain degree. Gold is often viewed as the classic fear trade and it's also a hedge against inflation. And gold is not the only metal that's heading higher as a bet that politics as usual will lead to economic stagnation in 2013. Silver and platinum have also moved higher in the past week.

Even if some deal is reached in the next few weeks, experts are not holding their breath for a so-called Grand Bargain that would solve the nation's debt problems for good.

Related: What's in the fiscal cliff?

The fact that President Obama won re-election and the make-up of Congress remains mostly unchanged can be viewed as a signal from voters that they are not interested in the kind of tax hikes and spending cuts that would be required to truly get the deficit under control.

"I think many people feel that the can will continue to get kicked down the road. The outcome of the election seems to show there is not an appetite for major tax increases or meaningful cuts in spending," said Christopher Blasi, president of Neptune Global Holdings LCC in Wilmington, Del. "So even if there are compromises to avoid the cliff in the short-term, the fundamentals are still there for gold to keep rallying."

Blasi thinks it is a real possibility that gold will hit $2500 an ounce -- which is nearly 45% higher than current levels -- sometime in the next two years.

And while some remain worried about the possibility of a partisan stalemate regarding the fiscal cliff, one thing seems fairly certain. The Federal Reserve, European Central Bank and other central bankers may try to offset some of the negative effects of a U.S. recession, caused by falling over the cliff, with even looser monetary policy -- even though it's somewhat hard to fathom how the Fed and ECB can ease even further.

I argued a few months ago that the Fed's QE3 could be viewed as a likely preemptive strike in case Congress and the White House screw up and end the year without a fiscal cliff deal. And even though inflation is not a problem at the present time, all this liquidity sloshing around the markets thanks to the Fed should eventually lead to a weaker dollar and more inflation. That's a positive for the precious metals.

"Central governments could step up their purchases, giving some additional lift to the prices of both gold and silver.  With interest rates continuing to remain at low levels and stimulus still being pumped into the global economy, owning an inflation hedge definitely seems prudent," wrote Chris Gaffney, vice president with St. Louis-based EverBank Global Markets, in a note to clients Tuesday.

Related: Did Ben Bernanke really coin the term 'fiscal cliff?'

Along those lines, one money manager believes that all the talk about the fiscal cliff is causing some investors to lose sight of the real positive for gold. No matter what happens with the fiscal cliff, the U.S. economy is still weak. And Obama's victory ensures that a dovish Fed led by Ben Bernanke (and his eventual successor) is going to keep printing money for the foreseeable future.

"The fiscal cliff might actually be overrated," said Axel Merk, president of Merk Investments, a Palo Alto, Calif.-based money manager that focuses on currencies and gold.

"The key thing about the election that is really boosting gold is that it provides clarity about the Fed. If Romney won, Bernanke would have been a lame duck. Even if Bernanke steps down after 2014, we'll likely have someone like him as the new Fed chairman," Merk added.

In other words, the forces that have helped lift gold from about $800 to $1730 in the past four years aren't going to change anytime soon.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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