Gold And The Fiscal Cliff

As we roll into December, the clock is ticking on the time bomb that is the fiscal cliff. For the most part, markets seem confident that Congress will either reach an agreement or come up with some kind of measure to buy them more time to debate. But recent talks seem to be going nowhere, and many investors are starting to get worried. One of the most talked about assets in relation to the cliff is gold [for more gold news and analysis subscribe to our free newsletter].

Some feel that the precious metal will soar to new highs in the coming weeks, while others think that the commodity will fall along with everything else. Either way, it appears as though the yellow metal will be a pivotal point to watch in the coming weeks.

The Bull Case

This one is pretty straightforward, as there a number of scenarios in which analysts are calling for gold to rise. The first, and possibly most popular, argument for gold is the fact that it tends to outperform in times of uncertainty or market panic. Going over the fiscal cliff, whether it will have a marked long-term impact on our economy or not, will no doubt send markets into a frenzy. Many think that this kind of fear will drive assets right into gold as it climbs its way back towards 2011 levels [see also Investing In Gold: The Definitive Guide].

A more fundamental approach shows that the U.S. dollar will likely be weaker in the coming years, no matter how the fiscal cliff situation turns out. If we do go over the cliff, many feel that spending cuts as well as tax increases will send the economy into a recession. While this would initially damage just about everything in its path, gold will have the ability to outshine, as investors start to move out of the greenback and into their favorite safe haven. If we do not go over the cliff, then the market’s focus falls back to how a continuous QE will debase the dollar, and inevitable inflation will help push the metal higher.