America’s fiscal health is becoming unsustainable. Sooner or later there will be negative economic and financial market ramifications from this situation. When that occurs, only gold investments will provide safety for investors.
The approaching fiscal cliff and the probability of higher taxes could prompt an end of year sell-off in the stock market. Investors should prepare by diversifying into assets which are not positively correlated with stocks. Gold investments in particular are well-suited for this purpose…
Wall St Week Ahead: “Cliff” worries may drive tax selling
Investors typically sell stocks to cut their losses at year end. But worries about the “fiscal cliff” – and the possibility of higher taxes in 2013 – may act as the greatest incentive to sell both winners and losers by December 31.
The $600 billion of automatic tax increases and spending cuts scheduled for the beginning of next year includes higher rates for capital gains, making tax-related selling even more appealing than usual.
Americans are increasingly worried about the outlook for the economy, largely due to the fiscal cliff which is only about a month away.
In contrast, historically, hard assets, particularly gold investments, have appreciated during periods when Americans are worried, providing a degree of protection against bad times.
Bank of America/Merrill Lynch economist Ethan Harris is warning that the game politicians in Washington are playing ahead of the “fiscal cliff,” is dangerous and could amount to an “economic heart attack.”
Letting the country careen over the fiscal cliff as part of a bargaining strategy to push through fiscal reforms would serve as a dangerous game politicians would be playing with the economy, said Bank of America Merrill Lynch economist Ethan Harris.
At the end of this year, tax hikes are scheduled to kick in at the same time government spending cuts take effect, a combination known as a fiscal cliff that could tip the economy into a recession next year if left unchecked by Congress and the White House.
Some lawmakers have suggested Jan. 1 can come and go without a deal and address the issue by putting one another’s feet to the fire or punting on deadlines as tax hikes and spending cuts take root.
Even talk of such strategy can damage the economy.
“One of the most dangerous ideas circulating in Washington is that it is okay to go over the cliff temporarily,” Harris said a note to clients, according to CNBC.
“Threatening or actually going over the cliff will likely do serious damage to economic and market confidence. What some people are calling a ‘bungee jump’ could cause an economic heart attack.”
Investors, meanwhile, are growing increasingly nervous.
“The focus is on what goes on in Washington. The market will be volatile. You’ve got to be very well-hedged given that the market is so much headline-driven.”
The best hedge against uncertainty in the stock market has historically been gold.
The Weekly Standard reports that Senate Minority Leader Mitch McConnell burst into laughter while he was attending a briefing by Treasury Secretary Timothy Geithner on the administration’s plan to avert the impending “fiscal cliff” that threatens the US economy and financial markets.
This is certainly no laughing matter for investors. Not only might large amounts of our wealth be taken away by higher tax rates and closures of so-called tax “loopholes,” but we are also threatened by fiscal policies that could continue the devaluation of the US dollar and even accelerate what many see as inevitable high inflation. What may be even worse is that the impact could send the US economy into another recession in the process.
That combination of recession and high inflation is called “stagflation,” a phenomenon that we have written about from time to time. The last time the US was inflicted with serious stagflation in the mid-1970s, the stock market fell 45% in 21 months, the price of gold tripled and a broad index of rare coins appreciated by some 1,000%