Will the Debt Ceiling be Good for Gold and Silver?

Investors preparing for Washington's budget battle need to know: Will the debt ceiling be good for gold and silver?

Thanks to recent legislation passed in the U.S. House of Representatives Wednesday, the debt ceiling could be extended until May 19. The bill now moves onto the Senate where it is expected to get the green light, then should be signed quickly by U.S. President Barack Obama.

That gives investors time to prepare for what any budget decision - or indecision - out of Washington will do for their investments.

While the bill leaves the government without a long-term budget strategy, investors ought to have a plan in place.

One thing they can plan on is higher silver and gold, and here's why.

What a Poor Debt Ceiling Deal Would Do for Gold and Silver

The most likely scenario is Congress will come up with some compromise on spending cuts ahead of the next debt ceiling deadline, May 19.

But if lawmakers in Washington can't come up with a good enough budget deal to rein in spending and get the country's runaway deficit under control - while not derailing an economic recovery - another credit downgrade is highly likely.

In a recent report, Fitch wrote, "In the absence of an agreed and credible medium term deficit reduction plan that would be consistent with sustaining the economic recovery and restoring confidence in the long-run sustainability of U.S. finances, the current Negative Outlook on the AAA rating is likely to be resolved with a downgrade later this year even if another debt ceiling crisis is averted."

Should Fitch strip the U.S. of its coveted triple-A rating as recently warned, and Moody's follows suit, precious metal markets stand poised to rally.

When Standard & Poor's made the unprecedented move of downgrading U.S. credit in August 2011, gold gained about 10% in a month. Silver also enjoyed gains, rising to $41.70 by month's end, gaining about 5%.

If We Do Hit the Debt Ceiling, What Happens to Gold and Silver?

Falling off the debt cliff, or hitting the debt ceiling, means the U.S. government can't borrow any money. Scores of payments would immediately stop.

Failure to pay obligations would immediately devalue the dollar. As a result, gold and silver become increasingly more attractive as investors lose confidence in the greenback and equities.

Gold and silver are flocked to as safe havens from fiat currency. Meanwhile, the U.S. dollar can be printed in copious amounts and liberally pumped into the economy.

Even concerns over hitting the debt ceiling can boost gold and silver.

As Goldman Sachs strategists pointed out in a recent report, in six instances between 1996 and 2007 when the country hit the debt ceiling and the Treasury responded with "extraordinary measures" to keep the country afloat, half of those times gold rallied nearly 10%.

Gold and Silver Demand Already Soaring

The uncertainty triggered by the debt ceiling has already pushed investors into silver and gold in 2013.

The U.S. Mint has been forced to suspend sales of its 2013 American Eagle silver bullion coins for a few weeks after running out amid soaring investor demand for the shiny silver coins. Interest in this year's coins has been particularity robust not just from collectors, but from worried investors seeking refuge from the U.S. economic uncertainty.

Demand for gold is also strong.

Global gold demand continues to grow as central banks worldwide increase stores of the yellow metal.

And in a recent interview about his decision to stock up on physical gold instead of "worthless" dollars, economist and author and publisher of the "Gloom Boom And Doom" report Marc Faber reiterated his support for gold in this environment.

He told Yale economist Robert Shiller, "I'm prepared to make a bet. You keep your U.S. dollars and I'll keep my gold. We'll see which one goes to zero first."

Faber continued, "In the worst case scenario, in the systemic failure that I expect, [gold] would still have some value." When the financial system "goes down and only plastic credit cards are left, maybe then people will realize and go back to some gold-based system or such."

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