A Debt Limit Agreement Will Confirm Gold's Long Term Bullish Fundamentals

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Bullion Bank Analyst sees gold's divergence from the Fed's balance sheet as a great buying opportunity.

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The recent lack of correlation with the Fed's balance sheet will eventually correct itself, and likely overshoot, forcing gold's price much higher than its $1,900 high just a few years ago.

Over the last 2 years, gold has lost its luster in the eyes of the public, and this is why right now is a great opportunity to gain some exposure to the precious metals sector, as fundamentals continue to offer a bright future for the monetary metal.

The Federal Reserve has doused the market with liquidity, driving up most asset prices as investors are forced out of low yield bonds into equity and housing markets. This liquidity has caused distortions in global financial markets, making bonds seem fundamentally safer than they really are and providing a short term boost in "animal spirits" allowing economic actors to feel wealthy. In the mean time this positive sentiment has tainted the markets taste for safe havens like gold.

Until the last two years, recent history has shown gold has been highly correlated to the balance sheet of the Federal Reserve. Investors feared a growing balance sheet foreshadowed rising money supply and future inflation. Due to the Fed paying interest on bank reserves, the money supply growth has been largely muted thus far. The market has begun to drink the Kool-Aid and has lost fundamental analysis of current financial markets. They have become satiated with easy money and are riding the winds of rising asset prices and low rates. For this reason gold price has diverged from the Fed's balance sheet recently.

As the debt ceiling debate draws near, and its likely raising becomes more imminent gold investors should remain positive for long term gains. Immediate reaction to a higher debt limit may cause positive equity market reactions and lower gold prices, which would further bolster the fundamentals behind purchasing gold, although making the purchase much harder to stomach.

The recent lack of correlation with the Fed's balance sheet will eventually correct itself, and likely overshoot, forcing gold's price much higher than its $1,900 high just a few years ago. This dangerous monetary policy runs parallel with an ever increasing government budget and debt. The lack of fiscal restraint will not be corrected without a crisis. The Fed will continue to expand its balance sheet driving rates down, and enabling growth of the US Government's debt. This will be the main fundamental driver for high precious metals prices in the next few years. Raising the debt limit may be the catalyst that causes loss of confidence in the Governments ability to ever pay back its debt in real terms.

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Nick Spohn
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