Gold is a Short Sale on Congress
Published: Tuesday, 10 May 2011 | 11:37 AM ET
By: Ivory Johnson
Scarborough Capital Management, Inc
Last week’s commodity rout reinforced the notion that gold could be the next bubble. It’s become quite the bad habit, consistently renouncing the precious metal the way some parents excuse their troubled child’s behavior. Who amongst us has any confidence that our elected officials will solve the country’s debt problem, or for that matter, allow private enterprise to do it in their absence? Intrinsic value is irrelevant; gold positions serve as a short sale on Congress.
There can be no serious plan to reduce the deficit without a reduction of entitlement spending which consumes 40 percent of the United States’ budget. In an effort to streamline future costs, Rep. Paul Ryan authored legislation to trim the price tag of Medicare, only to discover that three-quarters of Americans, many of whom fervently protested against government spending, prefer to have their cake and subsidized health care too.
A one percent increase in FICA taxes would have completely eliminated the social security shortfall, yet our elected officials chose to cut payroll taxes by two percent in the Bush tax cut compromise. Capitol Hill could moderate defense spending, currently 20 percent of the budget, although the military provides almost five percent of the nation’s GDP, creating jobs in favored congressional districts that otherwise wouldn’t exist.
In response to unrealistic expectations from the public, our politicians have pursued unsustainable economic policies that preserve their relentless tenure in Washington, all at the expense of national solvency. While our esteemed leaders sold patriotism on television commercials, they pawned the American flag to foreign investors, and they did it star by star, stripe by stripe.
Gold is the only incorruptible form of wealth, as the Federal Reserve repeatedly dilutes the value of the dollar to preserve America’s mirage of prosperity. With all due respect to baseball, the accumulation of massive government debt has become a national pastime over the course of just three decades. The price of gold has not doubled in the last four years; we just need more of our depreciated currency to buy the same ounce of gold. (Track Gold Prices Here.)
Investors understand that unless Congress demands sacrifice from an unwilling public, our foreign creditors will require higher interest rates to compensate them for receipt of payment in a currency that’s lost significant value. As it already stands, the government will spend $5.5 trillion on interest payments over the next decade if the cost of borrowing escalates gradually – a dramatic rise in rates would be problematic.
The inveterate Alan Greenspan wrote in 1966 that “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation … Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.” Years later, he presided over a dramatic surge in the money supply, a practice currently disguised as sound economic policy.
Responsible legislation and collective sacrifice are in great demand these days, although the recent news of light rail technology is refreshing. The United States is not without options, only a series of politically viable solutions immune to petty grievances. Detractors of gold fail to realize that fewer investors are willing to bet on Congress, that instead of upgrading our utility grid, we debated birth certificates.
America might very well be headed towards a fiscal cliff, but it’s that enduring bridge to a 21st century economy and a balanced budget that’s in disrepair. Those girders look worn and the rivets are rusty – gold is just a parachute to safety.
Ivory Johnson is the director of financial planning at Scarborough Capital Management, Inc. He is a Certified Financial Planner, a Chartered Financial Consultant and a frequent guest on CNBC. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance.