A recent national poll from Public Policy Polling showed that Congress only has a 9% favorability rating. And 85% of voters view it in a negative light. This makes Congress less popular among Americans than cockroaches, root canals, colonoscopies, and traffic jams.1
Considering Congress doesn’t seem to get anything done these days, the results of this poll don’t surprise me a bit. In fact, it’s very likely ratings will drop even more in the coming months. That’s because we’re about to see another debt ceiling showdown in Washington.
On Sept. 9, Congress will return from a five-week break. At that point, they will have just three weeks to negotiate a new debt ceiling deal before government funding runs out. Nobody can predict the final outcome, but you can be certain of one thing: negotiations will be ugly. And this will make September a very interesting month for the markets, especially for precious metals.
Another example of government dysfunction
You can already tell negotiations will be very dramatic. On one hand, President Barack Obama and the Democrats say Congress must raise the legal debt limit with no conditions attached. On the other hand, Republicans want to delay “Obamacare” in exchange for an increased debt limit. They believe delaying the law is their best shot at trying to overthrow it altogether.
The recent drop in our budget deficit will also complicate negotiations. According to Bloomberg, since 2009, the federal budget deficit has narrowed from more than 10% of the gross domestic product (GDP) to 5.7% of GDP.2 This is the smallest gap in four years.
And the Congressional Budget Office forecasts the deficit will drop to 4% of GDP by the end of this fiscal year.3 Part of this deficit reduction comes from this year’s compromise package of tax hikes and spending cuts known as sequestration. Tax revenues have also increased because of the improved economy.
Both parties are using this declining deficit as a negotiation point. Democrats say they won’t agree to any spending cuts because annual deficits have already been sliced in half. Since the sequester spending cuts are already having a negative impact on the economy, they say there’s no room to negotiate more spending cuts. On the other hand, Republicans are using the improving deficit to make the argument that there’s no need for more tax increases.
What’s really surprising to me is that, in the midst of all these negotiations, both parties mostly ignore a far more important issue: the reform of entitlement programs, such as Social Security and Medicare. It’s those programs that will bankrupt our nation, if nothing is done to fix them.
This is bad for our nation, but good for gold
As you can see, it won’t be easy for Democrats and Republicans to come to an agreement. We’re likely to see some dramatic negotiations, including even threats that they will just let the U.S. default on its debt. This will have important implications for the markets.
Every time our politicians create a circus in Washington, they show the entire world that our nation lacks the political will to solve its debt problem. This reduces overall confidence in the U.S. dollar and Treasury bonds. While this is bad for our country, it’s good for gold and silver.
Daily Pfennig® readers saw this play out in July 2011, the last time there was a huge fight over raising the nation’s debt limit. It was the threat of default that pushed gold from $1,500 to $1,900 in that month alone.
More importantly, gold seems to have a strong correlation with the debt ceiling over the long-term. As you can see in the chart below, gold tends to have huge rallies every time Congress decides to raise our debt limit.
Another thing to keep in mind is that these debt ceiling debates have become much more frequent in recent years. There’s one simple reason for that: our debt keeps growing. No wonder gold has been in a strong secular bull market over the past 12 years.
There’s A Strong Correlation Between Gold and U.S. Debt
According to the U.S. Treasury, “Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit.”4 Raising the debt ceiling has become a national tradition. That’s why I think that, despite all the drama surrounding the coming debt ceiling debate, Congress will end up increasing the limit once again.
And this could trigger a major rally in gold. Perhaps the market has already started to price in that event. Just over the past month or so, gold has moved from $1,200 to $1,365. Silver has also started to recover in recent weeks, rallying from $19 to $23, a 21% move.
If you haven’t taken advantage of the sharp correction in precious metals, now could be a good time to jump back in. The coming debt ceiling discussions could push gold and silver even higher.
Until the next Pfennig…
Assistant Vice President
EverBank World Markets, a division of EverBank
P.S. What do you think Congress will do? Do you plan to add gold or silver to your portfolio? Post a comment below.
1. “Congress Somewhere Below Cockroaches, Traffic Jams, and Nickelback In Americans’ Esteem,” Public Policy Polling, January 8, 2013
2. “U.S. Budget Deficit Shrinks To 5.7% Of GDP,” live mint, August 7, 2013
3. “America’s Shrinking Deficit: Get Positioned For The Taper,” EFT Daily News, August 14, 2013
4. “Debt Limit,”U.S. Department of the Treasury, updated August 2, 2013