"The best thing for gold is raising the debt limit" - Wealth Managers

Deal to avoid default -- if it happens -- will only fuel America's addiction to budgetary red ink

Gold settled near $1,270 Friday after a massive sell order on the futures market -- estimated to be equal to about 2 million ounces of bullion -- ignited a wave of automated selling in its wake in a market already anticipating a potential resolution to the debt-ceiling crisis.

"If there is a temporary stop-gap measure to avert a disaster of U.S. default, it will lead to gold market going even lower,''Sica Wealth chief Jeffrey Sica told Reuters.

Most likely, lawmakers will raise the debt ceiling because the details and decisions involved in any other course of action would be too politically and socially unpalatable to pull off. Indeed, the U.S. government, like the Federal Reserve, is caught in a trap. It must raise the debt ceiling now to avoid a catastrophic default, yet that means continuing the disastrous spending polices that have helped drive the debt limit to an astounding $16.7 trillion.

If President Obama and the Republicans strike a deal -- which is still very much in doubt, though progress was made this week -- they will only have kicked the can down the road. And that's great news for continually rising gold prices, which have risen in lockstep with the debt ceiling for the past decade.
"The best thing for gold is raising the debt limit," Euro Pacific Capital head Peter Schiff told CNBC on Friday. "Raising the debt limit means more inflation, it means more deficits. Bigger government. That's bullish for gold. What would have been bad for gold was to not raise the debt ceiling and to instead deal with our problems in America, deal with our debt. But by kicking the can down the road, that's good for gold, yet the price of gold is going down anyway. So in the long run it's a great buying opportunity, but in the short run, people who don't understand the gold market are selling. … People should be buying gold; they should be buying commodities, because this sale won't last. Eventually the people who are doing the selling are going to figure out they've got the economy wrong, that the U.S. economy is not recovering, that the Fed is about to do more, not less." 

Contrarian bounce could lie ahead
Although gold is technically weak in the short term, sentiment is now so negative that investors could see a bounce next week, argued Weeden & Co. strategist Michael Purves:
"It is important to recognize that gold has been a decidedly unloved asset over the last several weeks: The gains from the surprise no-tapering in September were quickly given up, the (Larry) Summers and (Janet) Yellen news had virtually no impact on gold price. The anxiety from debt ceiling issues moved T-bills and other assets, but not gold. All these 'non-moves' on the one hand are indicative of a poor sentiment and confirm the bearish positioning and sentiment that has defined gold for much of the year. On the other hand, the fact that gold did not move up substantially on the debt ceiling/[Summers]/Yellen news also means there is not a lot of long exposure; if we get very good news out of Washington D.C., there is much less gold longs which need to head for the exit door. This to my mind suggests that this move may be more of a quick flush out followed by a quick bounce when the bears past the ball to the bulls."
Long-term gold drivers
Despite current weakness, gold's fundamentals remain stronger than ever. All gold needs to run higher is a burst of inflation, the long-awaited correction in stocks -- or a wrong turn on the road the resolving the debt-ceiling crisis. Looking further out, John Hathaway the Tocqueville Gold Fundsees plenty of reasons to be bullish long-term:
"Firstly, worldwide fiscal and monetary policies have been directly and indirectly subsidizing asset values, which make financial assets especially vulnerable to permanent impairment when supports inevitably end. Secondly, continuous and unconstrained monetary emissions are fraught with unintended consequences, which have historically included debasement of paper currencies via inflation or devaluation and sovereign debt crises. ...

"In summary, we believe the gold market is set up for a major advance, but recognize that the timing of a turn has been elusive and frustrating. Identifying the catalyst for a new advance is a speculative exercise at best. The current government shutdown is on the one hand an unfortunate headline-grabbing side show, which drives aimless short-term speculative trading activity. On the other hand, regardless of how it plays out, we regard this very divisive process as a fissure in U.S. credit. We also believe persistent questions about economic recovery in the U.S. and Europe could provide a catalyst in the form of a draw-down of equity market valuations or as a further undermining of Fed credibility. What is certain to us is that market reversals of the kind we anticipate require a tolerance for the pain that it takes to be invested at the low, and that money on the sideline will be paralyzed and unable to act until metals and share prices have advanced strongly." 
Today's dip a drop in long-term bucket
Gold could see further short-term weakness, but the factors are in place to reward long-term buy-and-hold investors with eventual rising returns. Do invest in stock, bonds, real estate, and other asset classes. That's what staying diversified is all about, and such a prudent philosophy also assumes an allocation to physical gold.

As Schiff has noted: "While unfortunate timing may have cost some gold buyers short-term losses, the difference between $1,300 and $1,800 for gold will look less important when it is trading at $3,000 or $5,000."

Though gold isn't likely to hit those heights in the next year or more, breaching the $2,000 level to set a new all-time nominal high is still in the medium- to long-term cards. And gold would need to reach about $2,300 just to equal its 1980 high of $850 when accounting for inflation. Remember, in the investment world, nothing goes up in a straight line, and most bull markets in history burn out like rockets rather than just fizzle out. Historic bull markets go out with a bang, not a whimper. With gold's big price explosion likely still to come, today's price dip is another buying opportunity along the the way.

More information can be found online at http://www.goldbullionadvisors.com