Dear Reader,

Today we’re going to talk gold and debt. First, Jeff Clark will provide an analysis about where he thinks the price of gold could be at the end of the year, then Doug Hornig will give his take on what the real issues are surrounding the debt deal and why these issues will not go away. Last, I’ll come back to provide some additional links and reads.

Without further ado, I’ll turn it over to Jeff Clark.

The Price of Gold on December 30, 2011

By Jeff Clark

It’s a pretty bold statement to predict what the price of gold will be on a certain date. Naturally, I don’t think I can really tell the future, but here’s what I can do: measure gold’s seasonal behavior since the bull market started in 2001 and apply those trends to this year’s price.

Many gold investors know that the price tends to be soft in the summer and then rise in the fall. While gold has powered to record highs this summer, I can demonstrate that in spite of this atypical pattern, $1,800 gold sometime this autumn is a very reasonable target.

Here’s how: The following table records the summer low in the gold price in every year since 2001. I then list the peak that occurred later that fall, as well as the year-end price. Check out the percentage gains.

You can see this pattern has registered a healthy – and in some cases spectacular – gain every year. Even in the waterfall selloff of 2008, gold managed to climb higher from its summer low.

There are some other compelling facts about this table. First, the fall high in the gold price occurred in December 60% of the time, and in November or December 80% of the time. Second, based strictly on past price behavior, there’s a 60% chance our July 1 low of $1,483 is the low for the summer.

From this, we can make some projections. If gold were to match the average 20.7% rise from our July 1 low (assuming that low holds), we would hit $1,790 this fall, probably in November or December. And the price of gold on December 30 (the last trading day of the year) would be $1,729.

In fact, given that there’s no end in sight to the sovereign debt issues here and abroad (regardless of the resolution to the U.S. debt talks), I’d bet the average gains are exceeded. If gold matches the greatest fall and year-end increases, we’d see $1,980 and $1,925, respectively. That may look like an aggressive move from here, but consider that those levels are still far below any inflation-adjusted price from the 1980 peak. Even the smallest climb, 10.6%, would leave us at $1,640, meaning current levels aren’t the high for the year.

Here’s the same data for silver:

You can see that, as expected, silver is more volatile. Yet, other than 2008, the general trend still holds. The metal recorded higher prices every fall, and those highs occurred in November or December 80% of the time.

If silver were to match its 34.6% average autumn rise, we’d hit $45.56 sometime this fall (assuming the July 1 low of $33.85 holds), and end the year at $42.41. However, given that we’ve already exceeded these prices this year, and that silver is increasingly being used as a monetary metal, I think we’ll see higher levels. A 50% rise would take us to $50.77, and matching last year’s biggest jump of 76.8% would get us to within a few pennies of $60. Either way, assuming no major reversal, $40 silver shouldn’t be the high for the year.

But these are just numbers. In the big picture, I believe gold and silver must move higher. Fiat currencies – especially the euro and U.S. dollar – haven’t seen the full impact of their devaluation. The debt-and-deficit dilemma plaguing many countries can’t be rectified overnight. In my view, there’s a long way up for precious metals for the simple reason that there’s a long way down for most currencies.

Regardless of where the prices of gold and silver end up later this year, I suggest denominating your savings in the time-tested assets that will preserve your purchasing power. The gains in these charts mean nothing if you don’t actually buy some gold and silver to protect your assets.

[Using this kind of analysis, BIG GOLD editor Jeff Clark was able to boost his mom’s IRA by 90%. You can do the same thing!]

Debt Deal, Then What?

By Doug Hornig

With two of government’s three branches embroiled in a fight over raising the federal debt limit, the accusations are flying fast and furious. One thing both sides seem to agree on, however, is that defaulting on the debt would be some sort of financial Armageddon that would plunge not only our economy, but the world’s, into chaos. A “compromise” deal may have been struck late yesterday, but this is an issue that is not going to go away.

Neither the Congress nor President Obama is interested in acceding to spending cuts – real ones, that is. In order to understand that, one need only note that the president has proposed spending “reductions” that will come about as a result of the winding down of our wars and are not new cuts at all. Or that the Boehner plan, trumpeted to include $1.2 trillion in cuts, upon examination did not do anything of the kind. In fact, it increases spending every year from 2012-2021, as Cato analysts found.

Because neither side is willing to do what is necessary, we’ll reach the point of default on the debt. If not this year, then next. Or the one after. And then the world will end.

Or will it?

The fact is, despite all the protestations that this is an historically unique possibility, we’ve defaulted before. Most notable is the default of 1933. In the aftermath of World War I, the U.S. needed to raise some cash, so it issued the Liberty Bond, dated October 24, 1918. It was a $7-billion-dollar, 20-year, 4.25% issue, payable in gold at a rate of $20.67 per troy ounce.

By the 1930s, though, it was obvious that the government was approaching the point where it wouldn’t even be able to meet the interest payments, much less repay the principal in a few years, so Roosevelt defaulted by refusing to redeem in gold to Americans and devaluing the dollar by 40%. As a little bit of icing, he added a prohibition on Americans privately holding gold.

The world didn’t end… although there was a rather severe Depression.

Since our present currency is not redeemable in anything, we don’t face the same kind of crisis that FDR did. But what do we face? Our “leaders” say that if the government doesn’t get to borrow more money, there will be a debt default, i.e., some people expecting to be paid some amount of money won’t get it. Social Security recipients are trotted out as examples.

Trouble is, it’s nearly impossible to figure out what – if any – debt is going to be defaulted on, because the details are buried in endless pages of fine print. But the important point is that reaching the debt ceiling simply means that Washington may not borrow. Henceforth, expenditures must be met only through revenues, not further debt.

With something like $200 billion per month coming in, and debt interest being less than 10% of that, there remains over $180B to disperse.

That won’t be enough, or there would be no need to raise the limit in the first place. But some difficult decisions will have to be made. Spending cuts will no longer be optional. They’ll be forced, and that’s surely a good thing. “Nonessential” discretionary spending will quickly go on the chopping block, as it should. A reduction in the federal workforce, which would be widely popular, could follow. Social Security is likely safe, for now.

Not defaulting on the actual debt, accompanied by a budget that balances or even provides a small surplus, is the sane way to go here. Consequently, the idea has no chance. Sanity will never trump political posturing.

What we are more likely to get is some kind of deal in which the debt ceiling is temporarily raised… so that we can continue to address our debt problem by incurring yet more debt.

And that’s not even the worst-case scenario.

If the administration feels that its back is truly against the wall and wants to do something more or less out of the public eye, it has the another option. The Fed could conjure more fiat money out of thin air and use it to buy up blocks of Treasury “debt.” Then, since these Treasuries aren’t held by real investors, it could do whatever it wanted with them. Like default. Just set fire to them in some basement furnace. In this way, the can could be kicked down the road indefinitely.

That probably won’t happen. But it might – and chances are the public wouldn’t care. It’d seem like business as usual… no worse than when the Fed was paying inflated prices for all the toxic waste the banks could shovel its way.

Most people don’t think such shenanigans affect them directly. Few make the connection between monetary inflation and the cost of food and gasoline. But consumer price inflation – potentially quite serious – is what we’re looking at if this kind of end run around the debt limit is attempted.

The Fed has already committed major monetary inflation. More of the same simply adds to the explosive forces pent up beneath the CPI. Let’s hope they don’t go there.

Additional Links and Reads

Insiders Selling at Unusually Fast Pace (MarketWatch)

Insiders tend to know more about their companies’ prospects than the rest of us. And while there are a number of reasons an insider might sell his or her company’s stock, the fact that one measure of selling activity shows that insiders of NYSE- and AMEX-listed companies were recently selling at the fastest rate since data began being collected in the early 1970s is an ominous sign for bulls.

Support Your Local Pizza Guy (LewRockwell.com)

Have you ever considered your pizza delivery guy a public servant and an example of all that is right about capitalism? This article makes a compelling case for why you should. Be it rain, sleet, or snow, the pizza delivery guy braves numerous risks to get you your pie hot and on time. And – unlike the police – he will never show up and harass or threaten you while you’re minding your own business; and, when you need him, chances are he’ll be there in an hour or less.

The Facts About Spending Cuts, the Debt, and the GDP (Reason Foundation)

Dispelling some myths about the right way to get the U.S. back on track to fiscal sanity.

And that, dear reader, is that for today. We hope you enjoyed today’s missive. As always, thank you for reading and subscribing to Casey Daily Dispatch.

Chris Wood
Casey Research, LLC