SPDR Gold Trust (ETF) (GLD), Barrick Gold Corporation (USA) (ABX), Goldcorp Inc. (USA) (GG): Will the Sequestration Deal Hammer Gold?

Page 1 of 2

Last week, the Senate passed a sequestration deal that will lock in the $85 billion of government spending cuts slated for this fiscal year. While many of the measures are hugely unpopular, when President Obama signs the resolution into law this week – as he is expected to do – it will keep the government from completely shutting down. It is difficult to predict whether Congress will continue to work towards further compromise that might address some of the cuts, but given the blunt instrument that sequestration represents, addressing blossoming issues would be appropriate.

Meanwhile, gold, as represented by the SPDR Gold Trust (ETF) (NYSEARCA:GLD), is already down roughly 4.5% this year. In certain respects, the cuts have the potential to bring a further measure of stability to the economy by forcing discipline. On the other hand, various projections from the Congressional Budget Office, or CBO, suggest that the cuts may be costly for the economy, making gold a reasonable place to protect your wealth. Ultimately, gold looks attractive at current levels and deserves an allocation.

The sequestration deal
While the current version of the legislation provides flexibility to specific departments, the overall level of the cuts remains at $85 billion and flexibility is limited. Those departments that have been given wiggle room include:

The Food & Drug Administration

The Department of Homeland Security

The Department of Defense

The Justice Department

The State Department

The Department of Veterans Affairs

The Commerce Department

Congressional Democrats pushed for greater flexibility, but Republicans held firm, insisting that without further negotiation on reductions, the widespread cuts were needed. Other smaller measures passed with bipartisan support that did not require a vote. For example $55 million was transferred to the Agriculture Department’s Food Safety and Inspection Service from other internal accounts.

Sen. Roy Blunt of Missouri explained the importance of the measure: “Without this funding, every meat, poultry, and egg processing facility in the country would be forced to shut down for up to two weeks. That means high food prices and less work for the hardworking Americans who work in these facilities nationwide.” Rhetoric aside, meat inspection is a vital party of the America infrastructure the lack of which would be felt immediately and profoundly across many industries including retail, restaurants, and discounters.

Macroeconomic impacts
In a recent study by the CBO, the imposition of the sequestration cuts is expected to cost the U.S. as much as 1.5% GDP growth. This reduction was acknowledged in Federal Reserve Chairman Ben Bernanke’s remarks after last week’s FOMC meeting. While Bernanke massively downplayed the projection – talking out of both sides of his mouth with typical Fedspeak – he did ultimately admit that the cuts will “slow job creation.” Assuming that the Fed sticks to its stated policy initiative, this means that the central bank will continue to pump capital into the market at the rate of $85 billion per month as a part of the current course of quantitative easing. While there are other factors that have given Bernanke a breather in terms of inflation, if he keeps printing money, at some point inflation must be a concern.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!