The stalemate between Democrats and Republicans regarding a vote to lift the U.S. debt ceiling is giving gold a boost, and if an agreement is not reached before the August 2 deadline, many market watchers believe there would be a rush to buy gold and other hard assets. Economist Michael Szenberg discusses the potential impact on financial and commodity markets if the U.S. cannot raise its debt ceiling.
The bickering between the Democrats and Republicans over raising the debt ceiling has been bullish for gold.
Even if the debt ceiling is not raised, the U.S. would have money coming in to pay some obligations, but it would have to make choices on who gets paid and who doesn’t. That’s why it is considered a technical default.
Michael Szenberg, chair and distinguished professor of finance/economics at Pace University’s Lubin School of Business, said he believes that yields would likely spike under a default situation, but points out the rise is relative, noting that in the 1970s and early 1980s, bond yields were hovering around 20%. “The American economy is dealing with tremendous fragility, but this (debate) might take us in the direction we need to go,” Szenberg told Kitco News, a precious metals website which gets ONE MILLION hits a day.
“Gold is a gift; not an investment” advises Lubin Professor Lewis J. Altfest in an editorial appearing in the March 14 issue of The Wall Street Journal.
“Gold does look beguiling when the world is full of fear or concerned about a coming bout of inflation,” writes Altfest. “To some, that may sound like today’s difficulties. To me, that is rearview-mirror investing.”
“It’s hard to beat a solid gold piece of jewelry as a gift,” writes Lubin Professor Lewis J. Altfest in a Wall Street Journal editorial on March 14.
“And if you want to escape a country in turmoil with closed borders, a gift of a few ounces of gold will work wonders. Fundamentally, the problem of gold as a portfolio investment is that it isn’t a real investment. Real investments are stocks, bonds, income-producing real estate and private businesses, all of which, except for bonds (which produce interest instead), produce profits. These are paid out as income in the form of dividends or are reinvested and grow.
“In contrast, bullion just sits there hoping to look attractive. Since the price of gold is not supported by anything other than the mood of investors, its value can plummet just as quickly as it soared.”
Lubin professor Jorge Pinto appeared on CNN en Español Economía y Finanzas to discuss the state of the economy in the US and Latin America, noting that gold prices reflect investors’ speculation about the economic future, and that high budget deficits are fueling fear about the value of the dollar.