Wall Street's rally has tarnished gold's allure, but that could all change over summer, when politicians go to war over the debt ceiling, particularly if Fitch makes good on their downgrade warning. Below are three serious issues that could stall out Wall Street, sending shares plummeting, and investors racing back to gold. After I discussed gold on Fox Business on May 28, the Dow Jones Industrial Average dropped 450 points (but has since partially recovered).
Significant Summer 2013 Events in the U.S. Economy
1. Debt ceiling was breached May 19, 2013
2. Fitch downgrade? (Fitch issued warning in Jan.)
3. Dismal second quarter GDP report.
Debt ceiling was breached May 19, 2013
The debt ceiling was breached on May 19, 2013, and the Treasury Secretary is currently using "extraordinary measures" to pay bills. Secretary Lew's ability to pay bills without Congress lifting the debt ceiling ends around Labor Day.
Fitch Ratings has been clear that the company will resolve the "negative watch" on the U.S. credit in 2013 -- either up or down. On February 27, 2013, Fitch indicated that $3 trillion in additional budget savings over the next decade, above and beyond the sequester cuts, would be necessary to place the U.S. debt on a "firm downward path." That must be done without killing GDP growth, which might have already happened. (See below.)
Dismal 2Q 2013 GDP Report
After the sequester cuts went through, the 2013 GDP growth was revised downward, putting even further pressure on the U.S. credit rating. Fitch is estimating 1.9 percent growth (down from 2.3 percent), while the Congressional Budget Office predicts that the U.S. economy will stall out to 1.4 percent. That means that the next three quarters should be much lower than the 2.4 percent GDP growth that was registered in the first quarter of 2013. The advance estimate for the second quarter GDP growth will occur on July 31, 2013, and if it's ugly, investors will lose confidence in Wall Street (again).
In July of 2011, the U.S. hit the debt ceiling. Politicians raised the ceiling, but didn't find enough budget savings to appease Standard and Poor's, who downgraded the U.S. credit on August 5, 2011. Gold shot through the roof, rising to a high of $1,895 an ounce by Sept. 5, 2011. Gold and stocks are inversely correlated. When investors love gold, stocks suffer. When investors are infatuated with Wall Street, gold loses its luster.
ETF investors and high-frequency traders, not stable governments, are responsible for the gold sell-off.
1. The largest gold ETF, State Street's Gold Shares Fund (symbol: GLD) is down 18 percent this year from. Russia and Turkey have been buying gold. No top 20 government has sold gold (source: The World Gold Council).
2. Gold ETFs hold 4th place on the world stage in terms of holdings (2,369 tones), behind the U.S. (8,1335 tones), Germany (3,391.3 tones) and the International Monetary Fund (2,814 tones).
Should you Buy Gold Coins, ETFs or Miners?
So, how do you play a gold rally? You could purchase gold coins, however, this is riskier and more expensive than you might realize. Be sure to read my article, "Gold Investors Beware," from the April 2012 ezine (vol. 9, issue 4) before you shop for numismatic or semi-numismatic coins.
The State Street Gold Trust (symbol: GLD) is the largest gold ETF in the world, ranking at number six on the top holders of gold, in a top 10 list that includes the U.S., Germany, the International Monetary Fund, Italy, France, (GLD), China, Switzerland, Russia and Japan. The fund is down 28 percent off its high on August 22, 2011. The trust holds gold, according to the State Street prospectus.
Gold miner ETFs, and stock in individual gold companies, are another way to invest in gold. These have been beaten up in the latest gold rout. Many are trading for less than 1/2 of their 2011 share price highs.