Regardless of whether a compromise is reached over the approaching lockdown of the United States ceiling and the raising of the debt, this impasse has momentous significance for holders of gold (SPDR Gold Shares (GLD)) and silver (iShares Silver Trust (SLV)). The serious weaknesses of our economic structure is exposing it as a paper tiger. Instead of seeking fiscal sanity, the inability of our leaders to agree on even the smallest of issues is reminiscent of the Roman Empire dealing out bread and circus to the masses when Rome could no longer afford the good times and the games.
Let's look at the pathetic reality. Our legislators are unable to come up with as little as 2% of a total budget measured in the trillions. While the Republicans and the Democrats are separated by only several billions, the underlying issues are ignored. This may be because we are witnessing political theater in a dress rehearsal for the 2012 election. The actual battlefields on which both sides face one another are not only fiscal, but ideological as the debate raged over Planned Parenthood funding. The media in their attempt to sell newspapers and program time sensationalize the basic issues. Simply put, we are approaching insolvency. Our ship of state is sailing straight into a sea of icebergs. Sooner or later we will have to come to grips with the urgent reality that belts will have to be tightened. If we do not sober up to the reality of our situation, the decision to keep our national vessel afloat will occur whether we like it or not.
Remember that we have to borrow forty-three cents out of every dollar that we use to pay for our expenses. To put it succinctly, 50% of our population pays no taxes. The revenues to pay our national debts are coming off of the hides of the middle class, the wage earners and the small businesses. It is somewhat peculiar that the basic truths for our survival are not mentioned. Do not be diverted by the ambient noise that tends to complicate the issue. We have been sidetracked by irrelevant issues; we are spending ourselves into a financial quagmire. This is hurting the hard-working middle class who are dealing with a deteriorating US dollar (PowerShares DB US Dollar Index Bullish (UUP)) and simultaneously carrying the load of increased tax burdens. Also long-term yields are rising and institutional investors are selling their US debt holdings raising long-term yields (iShares Barclays 20+ Year Treasury Bond (TLT)).
It would all be worthy of a Fellini farce if it weren't so sad. The situation cries out for solutions I've proposed in the heat of the financial meltdown, concentrating on precious metals and key natural resource stocks to hedge against a dollar devaluation and burgeoning debts. We have protected ourselves with gold, silver, and mining stocks (Market Vectors Gold Miners ETF (GDX)), which have soared over the past two years since the credit collapse.
What goes completely unmentioned is the role of the Fed in the entire equation. The Federal Reserve Bank is the one factor in this equation that has the unquestioned, uncontrolled power to change unexpectedly the best-laid plans. The Fed is omnipresent, omniscient and omnipotent. All this time it watches and waits. One change in the Fed discount rate, one raise in margin, one change in the direction of interest rates and quantitative easing by the Imperial Fed can rewrite the whole script. They are accountable to no one and answer to no one. They can and have, if needed, print fiat money and cheap paper to obfuscate growing budget deficits. All eyes are on QE ending in June and what will occur with long-term interest rates (iShares Barclays 20+ Year Treas Bond (TLT)). As the act continues in Washington, as the Democrats and Republicans try to show the masses that its more fiscally prudent, the reality is that the Fed will have to continue printing cheap dollars to pay off huge debts. Investors realize this and that is why we are seeing these major moves in gold (Proshares Ultra Gold (UGL)) and silver (ProShares Ultra Silver (AGQ)).
Let us keep a firm hand on the wheel and steer a sound course with the compass tuned to the North Star of our technical discipline. It is important to remember that the charts give us clues during these treacherous times and allows us to go where the smart money is moving.
We are living in extremely volatile times and the market will play on our mind and emotions. That is why it is crucial that we become stronger than the average investor who easily gets caught up with the herd mentality. These amateur investors get aggressive at overbought levels and dump their positions during sell-offs. Remember when you invest in anything you become subject to inner feelings of anxiety and greed. You need to realize that a technical system protects you from becoming subject to the dangerous, contagious emotions of the investment community. I have unfortunately learned that what takes you months to earn can be taken from you in a matter of days.
In August, I predicted a major change in the gold:silver ratio and believed silver would significantly outperform gold. On August 25, 2010, I wrote on my blog, “While I am bullish on gold, I believe investors could see a higher percentage move in silver.” The gold:silver ratio has dramatically favored silver since I wrote that. Silver is extremely volatile and has often in the past exceeded its measured targets. It is much less reliable for timing purposes than gold and could easily overshoot my late January $40 target. The US dollar is heading into new lows without showing any sort of dead cat bounce, which is quite concerning. Investors have flocked to the Euro (CurrencyShares Euro Trust (FXE)) which is quite dangerous for some countries paying back huge debt burdens and for countries that rely on exporting overseas. Do not be surprised if we see some economic weakness resurfacing in the eurozone.
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Disclosure: I own gold and mining stocks.