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U.S. Demand for Physical Gold Surges in November, While the Fiscal Cliff Looms. Or Does It?
(December 2, 2012) Although gold prices have essentially trended flat- to-down over the past few weeks, US demand for physical bullion has taken a huge leap in November. Elsewhere, gold ETFs continue to pile up the metal, for those investors who like their gold more on the virtual side. And who's afraid of the 'fiscal cliff,' anyway?
Brendan Conway, in his ETF Focus column in the December 3rd issue of Barrons, begins the article, entitled ‘The “Real” Gold Rush,’ with this:

“Gold: Perhaps it’s the only investment that lures investors away from the wisdom of Warren Buffett. Gold is up more than 9% this year on its march toward a 12th consecutive yearly gain, while the Oracle of Omaha may have recently called the metal a “bandwagon” investment (even comparing it to tulips), investors have fed nearly $8 billion into the most popular gold exchange-traded funds this year. Gold ETFs now hold an all-time high of more than 83 million ounces, according to ETF Securities. The four largest gold funds, which account for nearly 99% of assets in gold ETFs, have more than $90 billion in them.”

Meanwhile, in the US physical gold market, demand in November surged. 129,500 1-ounce gold Eagles were sold, the most since January of 2011, and nearly three times what average monthly sales had been in 2012. Although that's an impressive statistic, it substantially understates the size of the spike in US demand, as more and more US gold bullion buyers lately have been buying other bullion coins. Due to a spate of premium-slashing by some world bullion mints, quite a few price-conscious US gold investors have decided to save a few dollars by purchasing the now lower-priced gold Canadian Maple Leafs and Australian Kangaroos.

The obvious factors which lead more US buyers to gold over the past month were the national US election, and more recently, concerns about the ‘fiscal cliff.’ Whether any progress is being made on this issue is hard to tell. All we hear in the media so far is the rhetorical nonsense and insincere showboating which passes for ‘negotiations’ on the deficit issue. No wonder gold was November’s hottest investment idea. The prospect of the US falling off said cliff and into a higher income tax rate scenario, including higher taxes on dividends, gave the average investor the idea that maybe there’s something more appealing than the traditional array of ‘paper’ investments.

However, the phrase ‘fiscal cliff’ is just a metaphor, and not a very accurate one. There is no cliff - no tall, steep, nearly vertical rock surface that any thing or person is going to fall off of and therefore suffer permanent or fatal damage. What will happen if there is no agreement by January (are both sides going to quit their ridiculous posturing just because it’s Christmas?) is that then and probably only then will honest debate and negotiations begin. We hope.

Because, really, what’s the big hurry? Many times in the recent past, Congress has made changes in the tax code retroactive to the first of the year, and likely they will do it again this time. As for the ‘mandatory’ spending cuts scheduled to happen if no agreement is reached, such an exercise in forced cuts might be just what the country needs. It’s a start, anyway.

Should all efforts fail by the end-of-year deadline, we doubt there’s much to worry about, at least at first. Our guess is that we will not see a single aircraft carrier be loaded with rocks and sunk into the Mariana Trench, nor will a single food stamp recipient be allowed to go hungry.

The crisis comes down to this: our government is spending $1.60 for every dollar it receives in revenue. And we are stuck with these two opposing political sides that we somehow expect will fix this mess they got us into.

Radical solutions are called for. One possible approach would be this: Take Tim Geithner, John Boehner, Nancy Pelosi, Harry Reid, and Mitch McConnell, and lock them in a room somewhere. Somewhere far away, like Timbukto, or Bora Bora.

Meanwhile, back here in America, let's get an accountant and five or six reasonably intelligent grown-ups together, and tell them to figure something out. It might work.


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