The big question that is circulating through the PM minded blogosphere is: 'What will happen to the price of gold and silver if the US debt ceiling is raised along with spending cuts?'
In my humble opinion, if a bill is signed into law containing provisions for a 2 trillion dollar ceiling increase along with 2 trillion dollars in spending cuts over 10 years, I think the metals will at first react negatively, but shortly there after trend positively. Let me explain why I think so.
First, such a budget deal is small potatoes, effectively kicking the can down the road, punting the football and other euphemisms. Spending cuts of 2 trillion dollars over 10 years equates to only 200 billion a year. I wouldn't be surprised to learn that the entire federal government spends the same amount in toilet paper each year ( real toilet paper, not the less comfortable green-backs). Now I would prefer that government employees still use toilet paper, don't get me wrong, that could be a messy and disturbing situation, they will have to cut else where. Raising the debt ceiling is inflationary (upfront), cutting spending over 10 years is deflationary over time. Giving the FED another 2 trillion to play with would likely pump cash into the system rather quickly in comparison.
Metals have two modes, especially gold. One mode functions as a hedge against Systemic Financial Upheaval (SFU), such as default. The other mode functions as a hedge against the printing of fiat. Both have helped propel the price of gold to the heights we see today. However, these modes can often be at odds with each other for shorts periods. There is a certain contingent of the gold market that buys to hedge against systemic financial upheaval, there is another group that buys to protect against inflation, while yet others are holding 'long and strong' seeing the greater picture.
If and when a budget deal is passed, it will likely be heralded as a 'Historic bill, saving the US financial system from collapse'. You can't see this, but my eyes are about to pop out of my head because they are rolling so hard. None the less, the 'system' will seemingly get a reprieve, and the specter of systemic financial upheaval will be put to rest for a time. This may cause those interested in PMs for that reason to sell their positions in the short term, causing the price of gold to sink temporarily. For you see, another 2 trillion dollars will be available to Timmy G and Benny too. I fully suspect in the days following into August, perhaps at the base of the Grand Teton mountains, in a town with the appropriate last name of 'Hole', the long anticipated QEIII will be born into existence, another opportunity for the markets to suckle off the greatest of nanny states. Look up the meaning of 'Teton', coincidence?......I think not.
Such events should spur the inflation minded buyers of PMs into action, as likely hundreds of billions of more toilet paper is printed ( the more uncomfortable green-back version). Though PMs may drop a bit transitioning from SFU to QEIII, I suspect that such a dip will present only a very nice buying opportunity.
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