Lear Capital: Budget War Puts Gold and Silver in Win Win Situation

2010_01_05_17_53_260001As certain as the day will end and another begins, the budget battle that now rages will come to an end.  No party will emerge the clear winner.  No heroes will win a medal for bravery, cunning or personal sacrifice.  A truce is likely the outcome and will come at the expense of taxpayers who will sacrifice their financial futures as well as their children’s.  Rising debt will surely be the outcome.  Don’t believe otherwise.  We have already been told, the debt ceiling must be raised, if for no other reason than to cover money already spent.  Never mind new spending.

If the debt ceiling is not raised, default will wreck havoc with the dollar and your savings and retirement accounts.  In the words of Warren Buffett, a default would be as catapocolyptic as a nuclear bomb.  Actually, Mr. Buffett did not use that word – I made it up.

Default, however, is unlikely.  Or, is it?  I have always said, a weak dollar is not something feared either by the Fed or by American industry.  Rather it will be embraced.  As the dollar weakens, the ability to pay debt strengthens.  While the theory may be counter-intuitive, the rationale is strong.  To borrow money today guarantees future repayment will be made in dollars worth less.

As for American industry, a weak dollar boosts profits.  If 3M sells a roll of tape for one Euro, the less the dollar is worth relative to the Euro, the more dollars 3M gets for its sale.  For nearly 5 years now, the world’s currencies have all been competing in the ugly pageant.  In the end, the dollar has the best chance of being the ugliest currency.  As the world’s reserve currency, the Fed need only print more to weaken the dollar to its level of choice.

Of late, however, the Fed has been under pressure for printing so much.  Hence, the taper caper wherein the Fed intimated a reduction to the $85 billion monthly spend on Treasuries and Mortgage Backed Securities.  In all, at my last count, the Fed has bought in excess of $2 trillion in mortgage backed securities.  Despite all this printing – and this is but a portion of what the Fed has printed – the dollar has only slowly weakened.  So ask this question: If the goal is a weaker dollar and dollar printing to date has not flushed its value down the sewer, then what could?

Now do you get it?  Default!!

At the first sign of U.S. default, on any debt, the dollar could get wiped out.  Just ask Warren.  The rhetoric would have us believe this will be avoided at all cost.  But who knows?  Maybe this is the briar patch into which the Fed is begging to be thrown.  While we all fear the prospect of default and believe we must avoid it at all cost, maybe one little default is worth a trillion printed dollars.  Bingo, the Fed wins.  The dollar crashes without having to lift another ink roller.

Don’t get me wrong, I am not predicting a major default.  On the other hand it may not take a major default to accomplish a devalued dollar.  We already hear tragic stories of service men and women dieing with no death benefit paid. That’s a default. I am sorry for the families of those who have suffered the loss of their loved ones in battle.  I believe that death benefit will be restored once the truce is announced.  But, it should never have happened.  Even more so, it should not have been used as a political tool to fight the budget battle.

Social Security and Medicare payments are also at risk if the shutdown is prolonged.  Think of all the foreign aid paid over the years as our own suffer.  If one Social Security payment is missed, watch out!  That is a default at the expense of those who have already paid and earned the benefit.  So, don’t think a default is out of the question.  It would definitely have the same effect as money printing on the value of the dollar.

As the value of the dollar goes, so goes the purchasing power of dollars saved.  Your savings and retirement accounts could be gutted faster than Br’er Rabbit got stuck to the Tar Baby. Indeed, stocks have reacted to the rhetoric.  The Dow is down several hundred points since the battle began.  The uncertainty is more than investors can bear.

Does this mean, one should run out and buy stocks when the budget battle ends?  Upon hearing the news, we will likely see stocks respond higher.  But, ask yourself how stocks have fared since a steady stream of printed money has slowly eroded the value of the dollar?  We hear they have doubled since they tanked.  Put into perspective though, from pre-crisis highs, they have done nothing.

So, which investment stands to win regardless of the budget battle outcome?  Gold and Silver!  Since pre-crisis times, Gold has doubled and Silver has performed even better.  Both have far outperformed stocks.  If the debt ceiling is raised, more printed money will weaken the dollar further and drive gold and silver prices higher.  If we default, the dollar weakens fast and gold and silver prices rise again.

Look what happened when Nixon defaulted on dollars.  At the time, dollars were backed by gold and gold ownership by American Citizens was illegal.  Then Nixon abolished the gold standard and declared dollars held by foreign investors in particular, were no longer backed by gold.  At the same time, gold ownership was made legal by American citizens.

Subsequently, the gold price rose from $35 an ounce to over $850 an ounce in just 8 years.  Clearly, that was a default on the value of the paper money held by investors who thought they were holding the equivalent of gold.  Such is the power held by one who controls the world’s reserve currency.

Whatever the outcome of this budget battle, no medals will be won by those who fought.  But metals will win regardless of the outcome.

As always, this is just my opinion and many may think I am full of bullion.  But, numbers don’t lie.  If you agree with my oipinion, I would be honored to have you follow me @DaveTheGoldDr

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