Gold Higher On Set Back To Health Bill

The Market Gage - Dillon Gage's Precious Metals Newsletter

We see the price of gold higher this morning after the Fed Chairwoman’s comments about rich asset valuations and the set back in the President’s health care bill.

Also helping the price of gold this morning are comments from European Central Bank President Mario Draghi who talked about the strength of the Euro Zone which in turn raised the Euro and pushed the dollar index to a new year low at 96.14.

The gold market is looking for a weaker dollar and a pullback in the equity markets before taking its next step up in the price.

Over The Pond

Italy will inject 17 billion Euro into its country’s largest bank rescue ever to clean up two failed banks.

We have been reporting on the Italy Banking Crisis for some time now and just this past Sunday Finance Minister Pier Carlo Padoan called for an emergency meeting with its cabinet members in Rome.

The two banks needing assistance are Banca Popolare Di Vicenza and Vento Banca. The intervention was needed because depositors and savers were at risk. These two banks were located in the two most affluent areas in Italy and their failure would have hurt the local economy there as many small and medium size businesses count on them for support.

The government tried to keep these two banks afloat, but after seeing the impact it would have on the local community they had no choice but to turn the matter over to the Single Resolution Board in Brussels for assistance.

Europe’s banking crisis isn’t confined to just Italy, as just a month ago Spain had to organize an orderly sale of Banco Popular and Banco Santander as a so-called precautionary recapitalization was needed to keep those two institutions afloat.

As I reported in Monday’s “Market Gage,” the Federal Reserve reported our banks here are in great shape after the Dodd / Frank regulation put them on the right track. As an average investor in a global economy, we really have no idea how failed banks over the pond can affect our economy. For the time being, it seems that the European Community is willing to inject cash into whatever institution is in need of help to keep them afloat. The question remains, how long can the EU keep throwing money at Greece and Italy and whoever else needs assistance before the inevitable happens: An EU financial crisis? And that would lead to a financial tsunami that’s capable of reaching our shores.

I guess the EU has adopted our slogan and has put it to the test. These institutions are “Too Big to Fail.”

Now on to Washington

For years Washington has overspent revenues, wasted billions of dollars on questionable programs and gave trillions of dollars to various countries. Now we sit here with uncontrollable debt, runaway entitlement costs and a healthcare plan that can, if you socialize it, consume EVERY SINGLE PENNY the government will take in.

And you want to cut taxes? Come on, even the most talented magician can’t pull this one off.

And I think no one will argue that in the history of this great nation we have NEVER been so politically divided.

Now the federal government wants the Medicaid costs to become a totally state-funded program? If that happens, these costs will have the potential to wipe out every state budget, putting them into potential bankruptcy status.

So how do we fix it?

OK, I’m putting both hands over my ears, one second. Here it is: We have no choice but to raise taxes!

You heard that correct.

There is no other option. The slogan we all heard was “drain the swamp.” Well it’s not that easy when the swamp is saturated with toxic substances and now is considered a toxic waste land. It’s going to cost a lot more than expected to turn this swamp into a beautiful park.

The solution is, something needs to be done BEFORE this country is forced into implementing austerity measures, and you can be sure that will be more painful than just raising taxes. All you have to look at Greece to see how popular that was there.

The U.S. will have to use austerity measures to avoid a debt crisis. That happens when creditors become concerned that the U.S. will default on its obligations. That occurs when the Debt to GDP ratio exceeds 90 percent. That means that the U.S. debt is almost as much as the U.S. economy produces in a year. Some economists say if Washington doesn’t get its act together the government will have no choice but to start considering what austerity measures it will have to impose.

Let me move on to just covering some of the austerity measures the government will have to impose if things get out of hand. They include:

  • Reduce government wages benefits and hours
  • Privatize all government-owned businesses and temporarily furlough most government employees
  • Limit the term of employment benefits
  • Cut many programs for the poor
  • Extend the eligibility age for retirement and healthcare benefits
  • Lower or eliminate the minimum wage
  • Raise income taxes
  • And much more

These are very serious, life-changing decisions that at all costs need to be averted. Not to mention the potential for civil unrest.

If the austerity measures are put into place you can be sure you won’t see politicians on Capitol Hill holding a sign on a street corner protesting what just happened. They will be on every news channel blaming the other guy for this mess, when they are ALL to blame.

It doesn’t matter what political party you call home. All our lives will be effected one way or another
unless we stop this madness and come together as Americans. This country has a big problem that has to be addressed NOW or it will be too late.

Back to the market

For the ones who are left with some money to invest, where do you think all the money will be headed? Where will the equity market be? I don’t think the Dow will be experiencing a strong bull market in this environment, do you? What product do you think will shine in this environment?

I don’t care if you are not currently a gold bug, but I assure you if this happens you will be.

I’m done.

By the way I will be on vacation starting tomorrow and will return July 10th.

Please, whenever you see anyone in the military or a first responder always thank them for their service, because without them we would not have the freedom we enjoy today. Hang the American flag proudly every day and especially the Fourth of July.

Have a wonderful Wednesday.

Disclaimer: This editorial has been prepared by Walter Pehowich of Dillon Gage Metals. This document is for information and thought-provoking purposes only and does not purport to predict or forecast actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security, commodity or course of action. Opinions expressed herein are current opinions as of the date appearing in this editorial only and are subject to change without notice and cannot be attributable to Dillon Gage. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not come to fruition, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No part of this editorial may be reproduced in any manner, in whole or in part, without the prior written permission of Dillon Gage Metals. This information is provided with the understanding that with respect to the opinions provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. You may not rely on the statements contained herein. Dillon Gage Metals shall not have any liability for any damages of any kind whatsoever relating to this editorial. You should consult your advisers with respect to these areas. By posting this editorial, you acknowledge, understand and accept this disclaimer.