Just as you thought it couldn't get any worse, here comes some more bad news. The United States government is about one month away from another debt crisis. Gold investors: Keep your eye on the ball.
In case you're wondering...yes, this is the same political and economic quagmire that we just waded through a couple months ago. For the duration of last summer, the United States government was operating without knowing if it could raise funds in the bond market to finance the out-of-control budget deficit. The self-imposed (and farcical) debt ceiling had been breached on May 16th putting a halt to Treasury issuance. Until the debt ceiling was again raised on September 22, the US government resorted to short term "accounting adjustments" to stay afloat. Without the increased debt ceiling, the US government would have eventually been forced to choose between domestic spending and debt service payments.
While the economic crisis unfolded, US politicians tossed around political rhetoric as they jockeyed to be the 'bigger man' - just in time for the 2012 elections. Meanwhile, economists and market sages used phrases like "economic Armageddon" and "catastrophe" to describe the markets if the US could no longer pay its bills. Resolving the crisis, on September 22 the debt ceiling was raised to $15.194 trillion.
It now appears that the September 22 debt ceiling increase only bought the US government 3 months. As at December 1, 2011 the public debt subject to the debt ceiling limit hit $15.045 trillion. As shown in the chart below (by the yellow sliver) the US is a mere $149 billion from breaching the debt ceiling again.
Does $149 billion sound like a lot of money? Well, it's not. The next chart below shows the monthly budget deficit for the US government over the past 36 months. Depending on which length of time you use, the average monthly deficit is between $104 billion and $110 billion. That means the debt ceiling will probably be breached as early as January 2012.
Last summer, while the debt crisis certainly wasn't the only act in town, it sure took center stage with the European debt crisis providing backup vocals. Investors fled risk assets and piled into gold, both bullion and various ETFs (e.g. SPDR Gold Trust (NYSEARCA:GLD), ETFS Physical Swiss Gold Shares (NYSEARCA:SGOL)). As illustrated by the chart below, the S&P 500 (NYSEARCA:SPY) plummeted while gold prices soared.
Today, the economic situation today is worse. The European debt emergency has spread, US growth may be slowing and China is looking rocky. This time around, another US debt ceiling crisis like the last could send world markets into cardiac arrest.
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Disclosure: I am long SGOL.
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