by Ned W. Schmidt, CFA, CEBS
Schmidt Management Company
September 16, 2009
Well, the U.S. has another debt problem in the making. This one has been visited before on a regular basis. The U.S. is running out of the ability to issue new debt. So much debt has been issued that the U.S. is bumping up against the statutory debt limit, which is set by Congress. That limit, now don’t laugh, was intended to keep the U.S. government from being a runaway debt machine.
|U.S. DEBT SITUATION
|TRAILING 12 MO. DEFICIT||$2.100|
|TRAILING 12 MO. % CHANGE||+22%|
Data: Barron’s Market Lab
In the table above is listed the current statutory debt ceiling of the U.S. Second line is the currently outstanding public debt of the U.S. government. At $11.8 trillion, it is just slightly below the statutory limit. Admittedly, having Congress set the debt limit is the equivalent of the patients being in charge of the asylum keys. The Obama Regime has already requested that Congress raise the statutory limit. As the U.S. Congress votes like lemmings, we expect it to be raised. So presumably we should not fear running out of U.S. debt. We are, however, more optimistic as at least one member of Congress has been willing to speak up. Now, if we could only get the other 534 to do so.
More shocking are the last two lines in that table. The real deficit of the U.S. government over the past twelve months has been $2.1 trillion. Forget the silly number released by the U.S. Treasury, as that is the unified budget deficit. That concept was invented to hide the real deficit from the public. The unified budget deficit includes the current surplus of funds going into the Social Security System. Those funds, rather than remaining available to pay future benefits, are then invested in U.S. government debt. A true daisy chain of government finance if ever there was one.
That $2 trillion dollars must be financed in one of three ways. The debt can be bought by either U.S. savers, foreign central banks, or monetized by the Federal Reserve. With the failing and fading Obama Regime now starting a trade war with China, monetization looks increasingly necessary. With a trade war likely to reduce Chinese purchases of U.S. debt, monetization may be the only choice. That means longer term the dollar falls in value, and $Gold rises to more than $1,700.
But, Gold Bugs also have to live in the short-term. After the excitement in the Gold and Silver markets of the past two weeks, we may feel a let down if Gold does not keep steaming upward. Gold Bugs have been waiting, craving, and calling for $1,000+ Gold for a long time. Do they know what to do now that it has arrived? Remember, we only have three choices, buy, sell or hold.
An analyst has a two fold assignment. One is to determine what should happen in the markets. Second task to acknowledge and interpret that which has happened in the markets. The latter is perhaps the easiest, as it simply is the regurgitation of history.
Should the month of September continue in a positive fashion we would have a serious indication, perhaps confirmation, of the beginning of Wave V. However, that does not mean the move will be straight up as every major wave has subwaves. Further, quite simply too much optimism has been generated in too short of time. The emails and web sites are full of the kind of talk that exudes emotion rather than analysis. Wild rumors have been rapidly disseminated. A favorite is the secret plan by the G-20 to eliminate the dollar as a reserve currency by the end of the year. Hello, the G-20 could not agree on a pizza order by the end of the year.
While a raging long-term Gold bug, a question arises. Why is Gold going up? None of the traditional reasons seem to exist. No financial crisis exists. The terrorists seem quiet. AfPak is a problem, but the insurgents probably will not get control of the nuclear weapons there till next year. Inflation seems non existent.
We do, however, have the Obama Regime continuing on a determined path to destroy as much U.S. wealth as possible. A growing lack of confidence in U.S. leadership could indeed be a factor in the fall of the dollar, and the consequent rise of Gold. As an indication of the falling popularity of the Obama Regime, a non rigorous review of the 180 magazines on display at the public library was made. Of those 180 magazines, only one was observed with Obama on the cover.
$Gold should be rising if, one, lots of U.S. dollars were being printed, or, two, if the investing public was making a major asset shift to Gold from other investments. As we will again explain in the coming issue of The Value View Gold Report, quantity of U.S. dollars is not expanding. If quantity of U.S. dollars is not expanding, U.S. inflation should not rise and the value of the dollar should not fall.
As $Gold is rising without readily apparent fundamental support, we must assume that technical and momentum driven buying are at the heart of this move. As that is the case and $Gold is extremely over bought, as shown in the above chart, investors should step aside till calm returns to the market. In the case of Gold stocks, many have been driven to over valued levels. That condition is especially true among the smaller Gold companies. Investors may want to consider reducing these holding, and buying the stocks back perhaps 25% lower in price.
While highly excited about the recent move to more than US$1,000, we would await the next period of price weakness before adding to holdings of Gold. When emotions are running rampant best to take the hand off the mouse, and relax. A better buying opportunity in the long march to $1,700 will arrive. Your Gold has already allowed your wealth to compound at a far greater rate than the returns produced by almost all Street investment managers. That was accomplished by careful analysis and patience, rather than emotional buying. Remember, the secret is to buy low, and never sell in a bull market.
© 2009 Ned W. Schmidt
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a joyous mission to save investors from the financial abyss of paper assets. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive these reports, go to
GOLD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. For a subscription, click here.
Please remember that no method is perfect nor is the one
running the model.
All estimated returns are for the model portfolio and do not reflect those earned on actual portfolios.