Washington to "Gobble Up" More Taxes; Gold/Silver Rising
As Americans prepare for Turkey Day, the threat of Washington "gobbling" up more in taxes could continue to weigh on markets. The upshot is that precious metals appear to be resuming their role as a safe haven in this politically treacherous environment.
Gold and silver have shown remarkable resilience to adverse equity market conditions seen since the election. Over the same period that the S&P 500 has fallen roughly 5%, precious metals have traded modestly higher.
Last week, gold and silver relinquished some of the prior week's big gains, but have been building a strong base for a likely rally into 2013. For the week, gold fell $17/oz (-1.0%) to $1,715. Silver lost $0.30/oz (-0.9%) and finished at $32.37. Both gold and silver are up substantially this morning.
Platinum and Palladium dodged the negative sentiment impacting most asset markets and put on some gains. Platinum rose $6/oz (+0.4%) to end the week at $1,564. Palladium – the best performing precious metal during the week – jumped $20/oz (+3.3%), closing at $631/oz.
Resolution of Fiscal Cliff Won't Stop the Deficits
Much hope for restraining government and cutting taxes was pinned on the Tea Party and related movements that made some headway in the 2010 Congressional elections. But now Republican Party leaders appear anxious to compromise with President Obama in the areas of both taxes and spending.
Investors must come to terms with the reality that government spending reform and a return to fiscal discipline are simply things of fairytales. And we don't expect the much-ballyhooed "fiscal cliff" debate to result in anything but a few marginal changes to taxes and government spending.
Count on the Federal Reserve to be the unspoken plan for dealing with $1 trillion annual deficits.
Zero Appetite for Fiscal Discipline Anywhere in the World
When government policy fails, expect the bureaucrats to double down. In Japan, the front runner in next month's election for a new Prime Minister is calling for the Bank of Japan (BOJ) to do more to promote economic growth.
Shinzo Abe suggested that the BOJ, which has already been aggressively printing money and maintaining exceptionally low interest rates for more than two decades, should take the gloves off and set negative interest rates. That's right – he wants the BOJ to pay member banks to borrow money!
Rob Arnott, founder of Research Associates, indicated in an interview last week that Japan is perhaps most at risk for the next great hyperinflation.
Despite the complete lack of success these policies have produced thus far, the prescription remains the same virtually everywhere in the world. Increased government spending, higher taxes, and more central bank accommodation (i.e. currency debasement) are the order of the day and for the foreseeable future. Plan your investments accordingly.
Some Investors See a Window of Opportunity for IRA Cash Outs
Some sophisticated investors recently contacted Money Metals Exchange to explore what many would consider a radical leap with their retirement investments. They have seven figure IRA accounts, and the re-election of Barack Obama has them seriously considering the liquidation of their IRAs to buy precious metals outside of their accounts.
Mainstream financial advisors would blanch at the thought of making such a move, and might even label anyone considering that sort of leap downright crazy. But if you set conventional wisdom aside and consider the investment and political landscape over the next several years, these investors may be crazy like a fox.
- Tax rates are almost certain to be moving higher very soon – especially for the wealthy. The Bush Tax cuts expire at year end, and those with even moderate wealth have very few friends left in Washington, D.C. Deferring taxes in an IRA account may make less sense if you expect rates to be much higher down the road, when you are ready to begin drawing on the account.
- Washington, DC politicians and bureaucrats are eying retirement accounts and licking their chops. Money Metals has reported on measures already being considered whereby Congress would regulate what kind of investments can be held in retirement accounts... for your own good, naturally. Many in D.C. look at the trillions of dollars in retirement accounts as an untapped resource. If they mandate that a portion of retirement accounts be "invested" in government debt, for example, it would help prop up the bond market and further enable deficit spending.
Cashing out on some or all of your IRA account and buying (and taking delivery of) physical precious metals outside of the account certainly involves some upfront pain. You will be taxed on the full amount of the distribution at your marginal tax rate (which would be pushed higher because of the distribution), and younger investors will pay an additional 10% penalty for early withdrawal. However, for investors older than 59-1/2 and "wealthy enough" to be in the crosshairs of leadership in DC, moving out of an IRA and into the safety of precious metals just may be the best way to defend yourself. If you feel such a move would be wise in your situation, you'll need to act quickly. Come January 1st, it may be too late to take advantage of current lower tax rates. If you are not eager to liquidate your IRA and pay the taxes, however, at least put some of the funds into physical precious metals within your retirement account so that you can enjoy greater gains without the counterparty risk that comes with traditional securities.