Fiscal Cliff Talks Put Gold Prices In Focus

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December 4, 2012 2:21pm NYSE:GDX NYSE:GDXJ

Jared Cummans: 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.

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.

The Bear Case

Though fewer fall under this camp, there are still those who have a bearish outlook for the coming fiscal cliff scenario. Going over the cliff will likely send the U.S. into a recession, something that is widely agreed upon. Many feel that gold will be unable to hold onto its shine if markets turn south again, as everything would take a hit. Though it could outperform, it would be a game of how much gold lost in comparison to equities, as opposed to how much it gained by the same metric [see also 3 Metals Outshining Gold].

Not going over the cliff could renew bullish sentiment for markets, which would increase the appetite for riskier assets. This could mean that gold will face selling pressures as investors are more comfortable with equities and other holdings for their portfolios.

Where do you all think gold is headed? Let us know in the comments below.

Related: SPDR Gold Trust (NYSEARCA:GLD), iShares Gold Trust (NYSEARCA:IAU), iShares Silver Trust (NYSEARCA:SLV), Market Vectors Gold Miners ETF (NYSEARCA:GDX), Junior Gold Miners ETF (NYSEARCA:GDXJ).

Written By Jared Cummans From CommodityHQ  

CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.

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