If you are fed up of hearing about the ‘fiscal cliff‘ you’re not alone.
It’ll go for months yet, and we’ve already had a gutful of it!
If you’re not familiar with it, the fiscal cliff is the US government equivalent of the terrifying moment that a morbidly obese person realises that day one of the diet has arrived – and that it’s about to hurt!
So on this New Year’s Eve, old promises of cutting the annual deficit with spending cuts and higher taxes will come home to roost.
Politicians are now predictably running around Washington terrified at what this unwelcome dose of financial reality will do to economic growth.
Is this the US’ version of the European austerity that is eviscerating that continent? Will it turn the US into recession…?
Don’t Get Distracted by the Sideshow
After firing up QE3 to support the economy, the US government will likely pull yet another fiscal rabbit out of the hat – and defer the pain of living within their means (yet again).
But the fact is that all the fuss over the fiscal cliff is merely a sideshow.
The real problem here is the US debt.
Even if government has the gumption to keep riding towards the fiscal cliff, the US annual fiscal deficit would still only be halved.
That is instead of adding one trillion dollars to the total US debt level, it will increase by half a trillion.
It’s like the fat man fighting to eat a whole chocolate cake – but grumpily settling for just half of the thing instead!
Either way, the waistline of the US debt level keeps ballooning.
And the fiscal cliff is just the tip of the iceberg!
So while the market gets worked up about the fiscal cliff, you’d do well to look further out at the debt level. This has dropped off the radar, but it’s about to hit critical condition again.
Because the next set of headlines in coming months will be focused on the fact that the US government is almost back up to its debt ceiling.
This is the country’s ‘credit card limit’. Beyond this, the government will have to legislate to be able to borrow more money.
At the moment the limit is set at $16.4 trillion.
You’d think a lazy 16.4 trill might be enough…but no.
The US will reach that level in January 2013. That’s less than two months away.
Cue more fuss, months of tedious negotiations, and an inevitable increase in the debt limit…again. And maybe another downgrade from one of the ratings agencies like last time. It’s all depressingly familiar.
But the question is – where is the trade in all this?
The Clear Winner Would be Gold
As the debt ceiling rises, the US debt level fills it like expanding foam. For all the talk of fiscal prudence, the US government has as much self-control as a fatboy with the keys to the Tim Tam cupboard.
And where the US debt level goes, so does the gold price. The two have moved very closely with each other: as the value of the US dollar erodes with greater debt, the price of real, hard assets goes up.
With this in the background, gold is at a very powerful technical point right now.
The Golden Cross
Almost two months ago, the gold chart traced a golden cross. This is where the short term trend moves above the long-term trend. You can see it here. In the last ten years it has been a reliable indicator that gold is starting its next move up.
Last time it saw the start of a bull-run that doubled gold.
The only catch is that after a golden cross, the first thing it tends to do is pullback first – to get locked and loaded.
For example, after the 2009 golden cross that set gold up to double, gold first pulled back and fell for the first 50 trading days or so. You can see this in the blue line below.
And so far, after the recent golden cross (Sept 19 2012), we have followed a similar path. This is the red line below.
After a golden cross, how long does gold take to start its rally?
If history repeats…gold should start its next multiyear rally within the next few weeks.
With fiscal cliffs, debt ceilings, as well as QE3, Chinese demand, and central banks buying – it’s not hard to imagine gold rallying from here.
To get set for this, I’ve tipped gold stocks to Diggers & Drillers readers in the last few months. It’s only early days with this strategy, but so far the five new gold stocks are on average gains of 14.3%.
But I’m not the only one. My colleague and pal Nick Hubble is also seeing opportunity in gold stocks.
In fact he has just tipped one of my favourite gold producers. But for a different reason – Nick’s strategy is all about dividends. And with good reason in this case. As he says:
‘Even without dramatic inflation, there’s no reason why XXX’s dividends won’t quadruple in coming years as the gold price continues its steady rise. If it does, an annual payout on a $10,000 investment today could reach:
- $1000 annual cash payout after 7 years
- $2000 annual cash payout after 10 years
- $10,000 annual cash payout after 17 years’
I’d be the first to admit it can be easy to get caught up in the thrill of the chase. But it’s important to step back.
In Nick’s newsletter he takes a more holistic view of using the market to achieve your goals:
‘But never forget that financial decisions and their results are a means to an end. Whether you want to move to Malta, road trip around Australia, improve your golf handicap or spoil your grandchildren, your retirement is about money for life.’
Sounds good to me! Dividends may not give the adrenaline jolt of seeing a share price double, but if peace of mind if what you want, rather than thrills and spills, then you’ll enjoy Nick’s work.
And if you want more proof that hunting for dividends is a good strategy, remember that dividends accounted for 99.76% of the income for the richest man in the world – Warren Buffet.
Dr. Alex Cowie
Editor, Diggers & Drillers
From the Port Phillip Publishing Library
Special Report:
Retire Rich, Happy and Free From Money Worries
Daily Reckoning:
This Trifecta Means You Should Be Following the Gold Story
Money Morning:
The Hong Kong Dollar: If This Red Flag Goes Up, Buy it
Pursuit of Happiness:
Good News for Freedom
Diggers and Drillers:
Five Reasons Why Gold Stocks Are Set to Rebound
