Economic Outlook: Betting on a crisis

By ANTHONY HALL, United Press International  |  Jan. 21, 2013 at 9:55 AM
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Google "debt ceiling crisis" and the first article to pop up is one on how to profit from a continued stalemate in Washington.

Now, you gotta love a banker, right?

Last week, House Republicans agreed to a three-month extension of the U.S. debt ceiling under conditions that a budget be approved within that period. Negotiations for that start with a fairly healthy $110 billion in spending cuts but that's also 110 billion reasons to start an argument.

Every argument created uncertainty on Wall Street, which means short bets and forced mergers and all kinds of fun for the ice-water-in-veins crowd. The price of gold alone is reading like a psychological thriller -- more plot twists than an Agatha Christie novel.

Here's the setup: A man walks into court with the left half of his head shaved, the right half of his mustache shaved and the left half of his beard shaved. He is to be sentenced to death and the question before the court is whether he is sane enough to be given the death penalty.

The psychiatrists ruled that the man knew his too-obvious ploy to appear insane would work against because only a sane man would pretend to be insane with his life hanging in the balance. Therefore, by pretending to be insane, he was, in fact, insane, because he knew that would point to the death chamber, which made his ploy a suicidal gesture, which makes him insane.

This is how bets on gold are made. Gold is a standard safety net because it does not lose its value -- never has and never will, at least within reason. If the debt ceiling issue escalates again into a crisis, investors will give up on equity markets and run to gold. So buy gold now.

But gold is also a hedge against inflation. As such, the value of gold escalates when the economy is doing well because only a healthy economy suffers from high inflation. Adebt ceiling crisis would be a serious economic setback, which means a debt ceiling impasse would eliminate demand for gold as an inflation hedge, and less demand for gold would be a price deterrent, so don't buy gold now.

In Japan, the new government brings with it the promise of monetary-easing programs that will devalue the yen, making its exports more affordable around the world. But Japan does not export gold. So, the price of gold, which dropped 5.5 percent in the fourth quarter -- its worst quarter in years -- has risen more than 4 percent in Japan since the new year. In Japan, this month looks like a good time to sell gold.

Elsewhere, it is a good time not to sell.

Higher taxes will slow the economy, so buy gold now, because the price is relatively low and equities will likely be sluggish given the tax increases recently passed in Washington. On the other hand, forget that, because higher taxes slow inflation.

On the other hand, not to be alarmist, but the United States going into default would be a catastrophic setback of global proportions. You could buy a lot of gold and hope for the worst or buy a little gold and hope for the best. Your choice.

In international markets Monday, the Nikkei 225 index in Japan shed 1.52 percent and the Shanghai composite index in China gained 0.48 percent. The Hang Seng index in Hong Kong lost 0.05 percent and the Sensex in India added 0.31 percent.

The S&P/ASX 200 in Australia rose 0.13 percent.

In midday trading in Europe, the FTSE 100 index in Britain added 0.25 percent while the DAX 30 in Germany gained 0.39 percent. The CAC 40 in France climbed 0.34 percent nd the Stoxx Europe 600 rose 0.15 percent.

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