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Fiscal Cliff gets into focus, Gold Rises on Better GDP number

Fiscal Cliff

Fiscal Cliff gets into focus, Gold Rises on Better GDP number

The so-called fiscal cliff of automatic spending cuts and tax rises set to occur on January 1 if Congress fails to act before then will be the most important issue facing the next US President after the election. The “fiscal cliff” is a term used in discussions of the U.S. fiscal situation to describe a bundle of momentous tax increases and spending cuts that are due to take effect at the end of 2012 and early 2013. In total, the measures are set to automatically slash the federal budget deficit by $607 billion or approximately 4% of GDP between FY 2012 and FY 2013, according to the Congressional Budget Office (CBO). The Fiscal Cliff: Explained in detail below.

Gold Rises on Better GDP number:

Gold & Silver futures rose as the much-anticipated data showing that the US Economy grew at a faster rate than expected in the third quarter boosted Gold’s appeal as an Inflation hedge and weighed on the US Dollar. Gold Futures also rose on the back of some short covering as the level of $1700 has not been decisively breached yet & speculators betting on lower levels had to cover short positions. November has historically been one of the strongest months for Gold Prices. Most Metals have over reacted to the recent price slide & may sharply bounce up once the much needed catalyst is in place. Multiple & massive central-bank stimulus announced in the recent past will take time to pick up momentum & once this happens, the pace of upside momentum in these metals & agro commodity prices will be drastically sharp. Following a price decline in Gold this month, it is very likely that central banks may see these lower levels as an attractive entry point for Gold accumulation.

The U.S. economy rose up in the third quarter, with GDP – Gross Domestic Product growing at a 2% pace, up from 1.3% in the second quarter and better than the 1.8% expectations. Growth would have been even stronger had drought conditions not sliced 0.4 percentage points from the headline figure. The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment rose to 82.6 from 78.3 in September. It was at its highest level since September 2007 on a final reading basis. Still, that was slightly below the preliminary reading of 83.1 and shy of economists’ expectations for 83. The European and Asian stock markets have been lower today following more disappointing U.S. earnings reports yesterday and also on a move by the S & P credit rating agency overnight to downgrade the French bank BNP Paribas, as well as lower its outlook for two other French banks, Societe Generale and Credit Agricole. The declines in Global stock markets have dragged down commodities such as Silver, Copper, Crude Oil and other Base metals also. S & P said economic conditions are deteriorating in France and southern Europe while an ECB official said Italy’s banking sector is under severe strains. Gold Prices will largely remain range-bound till the Elections & political transitions are taking place in the US & China. China could become more aggressive in stimulating its economy with the new government in place at the end of the first quarter. A QE4 can be expected from the US Federal Reserve or an expansion to the QE3 when Operation Twists finishes in two months by December end.

The pending Fiscal Cliff looms on the horizon:

The so-called fiscal cliff of automatic spending cuts and tax rises set to occur on January 1 if Congress fails to act before then will be the most important issue facing the next U.S. President after the election, Black Rock Chief Executive Laurence Fink said on Thursday, citing a “very strong risk” of another U.S. Ratings downgrade. Addressing the fiscal cliff, Fink, the chairman and CEO of the world’s largest asset manager, predicted U.S. lawmakers would strike a modest $300 million to $400 million cut in the deficit before the end of the year. After the US Presidential election in November, policymakers will have to deal with a package of scheduled spending cuts and tax increases, and political wrangling could prompt a decline in consumer confidence as sharp as the recent increase, according to the survey. “Unless the legislation is carefully managed by whoever wins, the debate could produce the same depressing effect on consumer confidence as last year’s debt ceiling fiasco,” survey director Richard Curtin said in a statement, as reported by Reuters. “While the surge in confidence will act to bolster consumer spending during the upcoming holiday season, it also means that this higher level of confidence is more vulnerable to reversal and has thus raised the stakes for post-election economic policies.” Business investment showed signs of stalling in September, an indication that worries over a possible sharp tightening in the federal budget are already weighing on the economy. New orders for capital goods outside of defense and excluding aircraft — a proxy for business spending plans, was unchanged last month at $60.3 billion, Commerce Department data showed. The reading highlighted concerns that companies are holding back investments due to fears the U.S. Congress could fail to avert sharp tax hikes and spending cuts in 2013, which threaten to send the country back into recession. The Federal Reserve on Wednesday warned about the weakness in business investment, which has contrasted with brighter economic signals from household spending. Even though businesses are ratcheting back spending plans, the factory sector still appears to be expanding slowly.

U.S. risks falling off a global cliff:

 – The Washington Post

The United States, it turns out, is a fiscal-gap serial offender by the standards of all three of these respected independent authorities, approximating an average gap of 8 percent of GDP. Compared with Germany and Canada, the United States is addicted to deficits and committed to future spending far beyond reasonable comparison. In fact, the company we keep includes Greece, Spain, Britain and Japan— a rogues’ gallery of debtor nations that have abused deficit financing for decades. A few numbers may be illustrative. The CBO’s fiscal gap of nearly 8%, for instance, suggests we need to raise taxes or cut spending by an amount equal to $1.6 trillion per year. Yet the expiration of the Bush tax cuts and other provisions included in the congressional super-committee’s “grand bargain” was a $4 trillion battle plan over 10 years, or $400 billion per year. A continuing overdose of $1 trillion or more per year in fiscal deficits will increase the gap by as much as half a percent in 2014 and result in a debt-to-GDP percentage that exceeds 100 percent, a level at which economists Kenneth Rogoff and Carmen Reinhart show has historically slowed GDP growth. This potential impact on long-term growth is the critical reason why our near-term fiscal cliff must be avoided and a long-term fiscal compromise initiated that begins to close the fiscal gap. Clearly, the ad hoc budgetary triggers set to take effect Dec. 31 are extreme and counterproductive on both the revenue and spending sides. Draconian cuts to defense and dangerous increases to middle-class tax rates are destructive fantasies spun inside closed-door Washington chambers. Instead, in late November, whoever has been elected president should focus on where the money is: higher tax rates on capital gains and income for the wealthy, and reduced long-term entitlements in Social Security, Medicare and Medicaid for all Americans. The fiscal gap must be closed from both ends. ‘Fiscal Cliff’ already hampering U.S. Economy, report says

Unemployment in Spain rises:

Unemployment in Spain continued its steady march higher & hit a fresh high, with the jobless rate in the third quarter rising to 25.02% from 24.63% in the second quarter. Spain is suffering from the collapse of a decade-long housing bubble and from deep spending cuts as the government tries to narrow its budget deficit to 6.3% of gross domestic product from well above 9% of GDP last year. Its unemployment rate is the highest in the Eurozone.

Worst Storm in 100 Years Seen for Northeast US:

Hurricane Sandy will probably grow into a “Frankenstorm” that may become the worst to hit the U.S. Northeast in 100 years if current forecasts are correct. Sandy may combine with a second storm coming out of the Midwest to create a system that would rival the New England hurricane of 1938 in intensity. The hurricane currently passing the Bahamas has killed 21 people across the Caribbean, the Associated Press reported, citing local officials. Users are reminded to not focus on the details of the track forecast late in the period, as Sandy is expected to bring impacts to a large part of the U.S. East Coast early next week, the center said. Utilities along the East Coast were monitoring the storm. Nine mid-Atlantic power companies held their first conference call Oct. 24 to discuss how crews will be dispatched to the hardest-hit areas.

What Is the Fiscal Cliff?


What are the components of the fiscal cliff?

How did it come to this?

What are the domestic consequences?

What are the national security implications?

What are the global consequences if Congress fails to act?

What are the practical policy considerations?

What are the prospects for progress over the next few months?

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