If a deal can’t be reached on the U.S. fiscal cliff and automatic spending cuts and higher taxes are triggered, investors could see gold and the dollar rise together in a repeat of late 2008, says a strategist at a precious metals ETF provider.
Nicholas Brooks, head of research and investment strategy at ETF Securities, said the knee-jerk reaction to going over the fiscal cliff would likely be a stronger dollar and U.S. Treasuries, and wholesale dumping of riskier assets like stocks.
“There would be confusion at first and very volatile trading if we go over the fiscal cliff,” he said in a recent telephone interview.
However, longer-term, he thinks this scenario would be bullish for gold. “If we do go over, investors will ultimately focus on the negative aspects of raising taxes and spending cuts. The negative impact on economic growth could have a worse impact on the U.S. fiscal situation than spending cuts and higher taxes, because government revenues will fall,” Brooks said. [How to Use Gold ETFs]
He pointed to Greece and Spain as examples of what can happen after austerity measures. [Temporary Identity Crisis for Gold ETFs]
“If the fiscal cliff triggers a recession, risk assets will get hit badly. Investors will immediately look for safe havens. We could see a situation where gold prices rise sharply even as the dollar strengthens like the end of 2008 when they rose together,” Brooks added. “If we go over the fiscal cliff, it would lead to a strong rally in gold prices – maybe not right away, but after all the information is digested.”