U.S. Debt Ceiling Hike Discussions

While another strong earthquake measuring a preliminary Richter Scale reading of Magnitude 6.3 struck Tokyo, Japan, shaking buildings in the metropolitan on the night of April 21, 2011 (Thursday,) there is that raising the debt ceiling issue with the Feds, that is not going away. On CNN’s “State of the Union,” Rep. Anthony Weiner (D-N.Y.) seemed willing to explore attaching provisions to a debt ceiling hike. When asked by host Candy Crowley whether he would consider some spending cuts, he replied, “Of course. I think that we need to have conversations about how we reduce spending. We also need to have a conversation about how we get some equality into our tax code again.”Federal law currently caps the federal debt at $14.3 trillion. But sometime in the next month, the United States will inevitably surpass that amount. Congress consistently votes to raise the nation’s debt ceiling, a decision it faces again in the coming weeks. Tim Geithner outlined myriad consequences should Congress decide, for some reason, not to raise the debt ceiling by June. “What will happen is that we’d have to stop making payments to our seniors — Medicare, Medicaid, Social Security. We’d have to stop paying veterans’ benefits,” he told Amanpour. “We’d have to stop paying all the other payments on all the other things the government does. And then we would risk default on our debt — and if we did that, we’d tip the U.S. economy and the world economy back into recession — depression.”

But raising the debt ceiling would have the operators more likely then unlikely, to take the long position on the dollar and short position on everything else. They would then use their money power to move the markets in the direction which would get them the maximum profit while hurting investors. While the government is nearing its borrowing limit of $14.3 trillion and risks going into a crippling default, seizing on public frustration about spending, House Republicans say they won’t lift the debt cap without more cuts. On the other hand, Obama told the AP without doubt: “We will raise the debt limit. We always have. We will do it again.” According to the analyst at Regal Assets, currently the United States is paying billions of dollars in interest on sovereign debt issues, more importantly China.

Either outcome is bullish for gold , for the simple reason that we are past the point of no return with regards to confidence in the dollar. A vote in favor of increasing the debt ceiling (which is what will almost certainly happen) will merely confirm for foreigners that the US government isn’t serious about reining in spending. This will add further impetus to official Chinese gold buying in particular. The People’s Bank of China commented last Friday that it saw “risk” in “competitive devaluations” by developed countries”, and that the US dollar was likely to trend lower over the course of this year. The People’s Bank expects gold prices to remain high as a result, and will no doubt continue to buy copious amounts.

Gold prices will be boosted as people seek to protect their savings from the inflation tax. Even as we write, gold is already trading above $1,506 and silver above $46! Once again, it’s important to remember that those who think that because gold and silver don’t pay interest, higher rates around the world would squash their bull market rallies are wrong…Instead, higher rates around the world squash the dollar, and gold and silver are being used as “dollar alternatives”…

As far as waiting for the government life support, analysts at Capital Economics, who anticipate the QE2, continue to maintain that gold prices will reach $1,600 an ounce by the end of the year and will climb to $2,000 an ounce by the end of 2012. (The firm first made that call in December of last year when prices were under $1400 an ounce.)

And, don’t forget about China, says Jim Steel HSBC precious metals analyst, that comments from the governor of the People’s Bank of China earlier this week about the country’s foreign exchange reserves have also been supportive of gold prices. “Any increase in non-US dollar assets would likely be indirectly supportive of gold, especially if it weakened the U.S. dollar’s status as a reserve currency,” Steel says. He currently sees gold prices rising to a near-term high of $1,550 an ounce.

But the future may be even brighter than that for the precious metals in the coming months. Traders in the New York gold pits say call options — bets that prices will go higher — have been extremely hot this week. “There’s been significant call buying between the $1800 and $1900 region in August and October contracts,” says Mihir Dange, an options trader and co-founder of Arbitrage LLC. “So obviously there’s a bullish bet that prices are going to go there within the next six months.”

Silver prices were exploding $1.30 to $46.20 an ounce pushing the gold/silver ratio down to the 32 level. Traders are also positioning themselves for a long holiday weekend in the U.S. and might see gold as a good place to store cash.

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