Bloomberg's BusinessWeek magazine for the week Aug 6-12 had a great article titled The Cliff We All Saw Coming by Brendan Greeley. You can read the full article here.
According to Mr. Greeley, the fiscal crises the country faces today were predicted 10 years ago because they were built into the Bush tax cuts. Experts arguing against the tax cuts at the time predicted $1 trillion deficits in 10 years, and, that is exactly what happened. Greeley's proof was year-by-year deficit data, which I have summarized in this chart:
Tracking the Year-by-Year Fiscal Deficit (2001-2010)
Major Policy Enacted
Economic Growth & Tax Relief Reconciliation Act
Jobs & Growth Tax Relief Reconciliation Act
Working Families Tax Relief Act
Tax Increase Prevention & Reconciliation Act
Tax Increase Prevention Act
Emergency Economic Stabilization Act
American Recovery & Reinvestment Act
These are OMB numbers and hard to refute. It is clear from the table the fiscal deficit went from a $128 billion surplus (the so-call "Clinton surplus") to a $1.2 trillion dollar deficit in a 10-year span beginning with the Bush tax cuts implemented in 2001. The charts below show how these fiscal policies affected the price of gold and silver.
The total returns for gold and silver from the period Jan 1, 2000 to the present are summarized in the table below:
Gold & Silver Returns (2000-present)
Jan 1, 2000
Aug 18, 2012
By contrast, the S&P500 over the same time frame returned -1.62% yet Vanguard Energy (MUTF:VGENX) returned +172.13%.
Clearly precious metals and energy were the place to be over the past 12 years.
There was a great quote in another article of that same issue of BusinessWeek. David Stockman, President Reagan's budget director, advises investing in "ABCD", which he translates to "Anything Bernanke Can't Destroy". Stockman suggests such a strategy would include "gold, canned beans, bottled water, flashlight batteries, and maybe a mountain cabin."
It would appear as though the Romney/Ryan ticket is prescribing more of the same "fiscal conservative" policies that put the country in the fix it is in today: more tax cuts for the wealthy and a promise to cut spending. If the duo are successful in the November election, what will that mean for the price of gold over the next 10 years? If the deficits rise unabated as in the previous 12 years, and gold responds accordingly, gold could easily reach $6,000/oz. If cooler heads prevail (and I am not saying Obama wins, just that Congress begins to act more responsibly), gold could still reach half this total, or $3,000/oz.
These price estimates may look big, but who would have thought when the fiscal conservatives took office in 2000 that gold would be up almost 400% ($823) as they left office? On the other hand, the Obama administration have been no better. They extended the Bush tax cuts and the deficit spending has continued at an accelerated pace. Gold has doubled since Obama entered the White House.
These are not political statements, they are just the cold hard facts of American fiscal policy - regardless of which party has been in office over the past 12 years.
What is an American investor to do?
Looking at the deficit spending for both Republican and Democratic administrations, and the respective charts for gold and silver, precious metals seem to be excellent investments regardless of who wins in November. Gold and silver bullion would work great. For those who don't like the hassle of owning the coins, perhaps the silver (NYSEARCA:SLV) and gold (NYSEARCA:GLD) ETFs are a more convenient way to protect your assets.
As many of my readers know, my belief is the American fiscal situation cannot possibly be fixed until we first fix our #1 economic problem: our addiction to foreign oil imports and the resulting flow of American wealth out of the country. My suggestion has been, and still is, to adopt natural gas transportation to significantly reduce foreign oil imports by 5 million barrels/day within 5 years. Obviously the U.S. government disagrees. Pragmatic guy that I am, this means oil prices will continue to rise. As noted, the Vanguard Energy Fund (VGENX) has vastly outperformed the S&P 500 over the past 12 years and I certainly expect that out-performance to continue going forward. If you don't like funds, you might consider dividend paying oil companies like Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and Exxo nMobil (NYSE:XOM), paying 3.2%, 4.6%, and 2.6%. Good luck with your investments and with your vote in November. My investment advice won't change one iota regardless of who wins.