Special Report: 5 Possible Outcomes of the U.S. “Fiscal Cliff”

While no one can predict which direction the economy and the investment markets will take as a result of the “fiscal cliff” facing the United States at the end of December 2012, MarketWatch.com has proposed 5 possible outcomes to consider.

The United States “fiscal cliff” was a term coined by the press to describe the circumstances of multiple economic events set to occur at virtually the same time on December 31, 2012. These events include the expiration of the payroll tax cuts, the expiration of income tax rate cuts, the forced reduction of federal spending as a result of the failure of the special committee, formed under an agreement within the U.S. Congress, to agree on debt reduction plan and other certain impacts. This impact has been estimated to lower the growth of the U.S. economy by an amount approximating 2% which many believe can create a zero growth environment in what is already a challenging economy.

Regardless of the winner of the U.S. Presidential election and the associated Senatorial and Congressional elections, the fiscal cliff looms as an immediate test. The Congress that must address this issue is a Congress that is sitting in the last two months of the term which expires in mid-January. This circumstance is often called the “lame duck” Congress since many of the members who would be required to vote have been removed from office by the voters but are required to serve until the inauguration in mid-January. The lame duck Congress must address the fiscal cliff issue since the cliff arrives at December 31, a date well in advance of the mid-January inauguration.

MarketWatch.com has described the 5 fiscal cliff outcomes at this link. However, the view of the investment market is directed more toward the stock and bond market, and at APMEX, we believed it would be helpful to provide contrasting views from the perspective of Precious Metals as such views would relate to each of these possible outcomes below. You should read the Precious Metals Perspectives below with an understanding of the “5 possible outcomes” story from MarketWatch.com.

PRECIOUS METALS PERSPECTIVE ON 5 FISCAL CLIFF POSSIBLE OUTCOMES

While it is impossible to predict what will happen under any of these possible outcomes, here are contrasting perspectives on what MAY happen under the respective possible outcome as described in the MarketWatch.com article 5 fiscal cliff outcomes at this link.

1. Over the cliff we go. From a Precious Metals perspective, the massive reduction in federal spending and the slowdown in the U.S. economy may create an even more uncertain future for the U.S. Often, increased uncertainty moves capital to more certain asset classes, and Gold has many times been the recipient of capital in uncertain moments. Fearing a recession, the dollar could fall meaning that Gold priced in dollars could rise. Presuming Gold holds value, Gold could be a safe haven relative to other investments like stocks and bonds. On the other hand, some may envision the forced reduction of Federal spending a long term benefit for addressing the U.S. debt and over time, the dollar could recover with a lower Federal debt level creating a stronger America and stronger markets for stocks and bonds.

2. Punt. Deferring the decisions, or obtaining an extension, in essence, on the fiscal cliff would push the cliff out into 2013, perhaps to June 30. Investment markets may view this as an extension to the uncertainty, thereby extending the nervous market conditions into June. Nervous and uncertain markets have often in the past moved capital into asset classes that are more certain, and Gold has often been the beneficiary of the move of capital. Regardless of the winners of the election, the Congress is likely to be very closely split, and compromise may be difficult especially considering that the increase of the debt ceiling will be required in early 2013 and will simply add to the pressure on Congress for resolution. However, many may view that the mood of Congress to work together may improve dramatically in the post-election environment after the U.S. voters make their collective views known, and accordingly, a useful and effective solution may come with the delay in the decision date. Any successful resolution of the debt, taxes and spending issues would be helpful for stocks and bonds.

3. Meet in the middle. To affect this outcome, the lame duck Congress would have to agree on a compromise, following what will most likely be a very tense election. It is unlikely that the federal spending issue would be resolved by this outcome but it is possible that the tax issues could be resolved with compromise. From a Precious Metals viewpoint, a tax compromise would most likely have no significant effect on the uncertainty in the economy over the debt and federal spending matters, which are the primary drivers of the uncertainty in the markets. On the other hand, although a tax resolution would lower the concern about a recession in the immediate horizon, most Precious Metals investors have a longer term view than one year. If there is no such compromise, there would again be no change in the long term view. Accordingly, whether or not there is a tax resolution compromise, there most likely would not be any significant effect on Precious Metals markets in the long term.

4. Grand bargain. A lame duck Congress is unlikely to reach a huge and complex agreement suggested by this possibility, regardless of the election of a particular presidential candidate. Nevertheless, if a grand bargain could be fashioned in the 4-6 weeks following the election and before the end of December, the investment markets would most likely gain confidence in the U.S. economy, and depending on the scale of the grand bargain and to the extent the grand bargain addressed the significant Federal debt and spending issues, the Precious Metals markets may be softer from a dollar perspective, even though on a global scale Gold may be a desirable hedge in other currencies. By contrast, if the grand bargain is in name only and there is no significant substance to any deal, the Precious Metals markets would most likely recognize the true nature of the arrangement and return to a continuing state of economic uncertainty and most likely a continuation of the current support for Precious Metals.

5. New deal. Although one could speculate on this particular outcome, it is difficult to project Precious Metals market reaction without some of the details. For example, if there was an agreement to the Simpson-Bowles commission report and such a “new deal” was to pass during the lame duck Congressional session, then Precious Metals markets may be softer from a dollar perspective, just as in the “grand bargain” case, even though on a global scale Gold may be a desirable hedge in other currencies. However, it is challenging to predict a Precious Metals market response to an unknown “new deal” circumstance.