Fiscal Cliffhanger for Gold and Silver

There are two schools of thought regarding the reaction of precious metals to the eventual resolution (or non-resolution) of the current negotiations on the U.S. fiscal cliff. If the two sides can reach agreement before the January deadline, some analysts think that gold and silver prices will fall as demand for a safe haven declines.

On the other side, some analysts think failure to reach an agreement will cause precious metals prices to fall too. Their reasoning is that precious metals are now an asset class, and just like every other asset class prices will fall as investors turn to cash.

One scenario that could raise the price of bullion is an extension to the Fed’s Operation Twist, or its replacement with an unsterilized long-term bond repurchase program. The implied threat here, of course, is inflation.

The SPDR Gold Trust ETF (NYSEMKT: GLD) is down about 2% in the past 12 months, but since hitting a peak of $173.61 in early October, shares have dropped nearly 4%. Silver, which has more industrial uses than gold, has fallen only about 2% as measured by the iShares Silver Trust (NYSEMKT: SLV). Gold mining stocks, as measured by the Market Vectors Gold Miners ETF (NYSEMKT: GDX), have dropped more than 10% in the same period.

For the miners, lower prices for their gold coupled with ever-increasing costs are a recipe for lower stock prices. Barrick Gold Corp. (NYSE: ABX), Kinross Gold Corp. (NYSE: KGC), and Newmont Mining Corp. (NYSE: NEM) have all fallen farther than bullion, with Barrick down the most, 17% since early October.

As long as the fiscal cliff debate continues, gold prices should remain within their current narrow trading band. Once a resolution is reached, however, more signs point to a falling price for gold and gold miners than do signs of a rising price.

Paul Ausick