The Cliff Agreement And Gold

Includes: GLD
by: Dave Kranzler

America will endure until the day Congress discovers that it can bribe the public with the public's money - Alexis de Tocqueville

I had forecast that the Fiscal Cliff would be resolved and the issues involved would be postponed to a later date back in November:

The truth is that not only will the fiscal cliff scenario be kicked down the road like the proverbial "can" but the increasing chasm between expenses and revenues will have to be filled with even more Treasury debt issuance. Tautologically, this means more QE (TruthInGold).

Obviously by now everyone has seen the CBO estimate that the latest deal will increase the Government spending deficit by $4 trillion over the next decade: Fiscal Cliff Deal If you read my entire post linked above, you'll see that I said that an eventual Cliff deal will lead to higher deficit spending and more debt, which will lead to a lot more QE.

Because I believed that my view was correct, we scaled out of our bullion and mining stock hedges over the course of December. We removed the last leg of our silver bullion hedge (via ZSL) on Monday, because I believed that a deal would happen and the metals would go nuts. Lucky for me (or my investors), I guess.

With regard to the quote at the top by de Tocqueville, the public's money is essentially the money that is printed by the Fed and spent by the Government, leaving the debt burden with the taxpaying population. What makes this "theft" more insidious is that fact that money printing causes an invisible devaluation of the dollar.

In fact, using the London daily p.m. price fix of gold, as of December 31, 2013, the U.S. dollar has lost 82.5% of its value vs. gold. How do I calculate that? On December 30,1999, gold closed at $290.25. In other words, $290.25 would buy 1 oz. of gold. On December 31, 2012, it took $1664 to buy an ounce of gold. That's an 82.5% decline in the value of the dollar vs. gold (Kitco London Fix data).

If you are wondering why, all you need to do is look at the growth in the money supply since the start of the new century:

This chart shows just M2, because the Fed stopped reporting the data for M3 in early 2006. The M3 chart would no doubt be a lot steeper. M3 is/was the most comprehensive measurement of the money supply. The United States is the only major industrialized country that does not report M3. I wonder why...

Per my thesis above, the Fiscal Cliff deal will now lead to a much higher Treasury debt limit ceiling - if not the complete elimination of it, which has been proposed by Obama - and a much higher level of QE. How do you invest knowing this ahead of time?

The answer is in gold. Gold has already given an 82% reward to those who started buying back in 2000. I don't think anyone's stock portfolio has appreciated 82% since 1/1/2000. Gold has at least another 82% reward ahead of it vs. the dollar. This chart shows just how bullish the set up is for gold to move a lot higher right now:

As you can see, a massive pennant has formed in combination with the standard momentum indicators turning up from a deeply oversold level. As I wrote about previously, the big bullion banks have spent the better part of December covering a big portion of their short position in Comex and gold, while luring the "momentum chasing" macro hedge funds to increase their shorts. Historically this dynamic has been a technical set up for a big move higher in the price of gold.

Just to add one more point, if you research all the times over the last 12 years that price of gold has dropped below its 200 day moving average, you'll find that in each and every instance it was extremely rewarding to buy more gold and hold it.

If you don't own any physical gold (silver), I would highly recommend that you go buy some in an amount that is at least 5% of your investible net worth. GLD does not count, because GLD is a piece of paper that has its value "derived" from the gold in the trust that GLD represents. GLD is a derivative - it is unequivocally NOT the same as owning physical gold in your position.

Once you take care of that, then you can turn your focus onto buying some good mining stocks. For as oversold as is gold, the mining stocks are even more oversold and represent extraordinary value right now. As mentioned previously, over the next couple months I will be writing about some mining stocks that I find to be of particularly good value and some which could have the potential for huge gains. Stay tuned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.