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Is ObamaCare Good for Gold?


Why health-care reform could boost gold to new highs.

The pending health-care overhaul might be out of favor with many Americans, but it could prove very popular for fans of the yellow metal.

The Wall Street Journal is out with a poll today, which shows opinion solidifying around the health-care legislation, with 48% calling it a "bad idea" and 36% viewing it as a "good idea."

At the same time, the Wall Street Journal emphasizes, core Democrats -- the folks that the party needs to show up and vote in November -- strongly favor the legislation pushed by President Barack Obama, especially blacks, Latinos, and self-described liberals.

The final act in this drama might be coming soon: The New York Times reports that Democrats are aiming for a vote by the weekend that would approve both the bill that the Senate adopted on December 24 and a package of changes in an expedited budget reconciliation bill.

If ObamaCare is indeed passed by the House over the weekend, the long-term deficit outlook will only worsen, says Dr. Ed Yardeni of Yardeni Research, despite assurances by its promoters that the legislation is deficit neutral.

"That's because its neutrality over the next 10 years is contrived by raising taxes immediately, while postponing spending increases for four years," the noted strategist writes.

This will benefit the price of the yellow metal, Yardeni reasons, as gold works as a hedge against governments with no fiscal discipline. If the bill really does pass, he argues, the price of gold will probably rise to record highs and the dollar may very well turn weaker again.

The relationship between the price of gold and the US federal deficit and the amount of US public debt outstanding is an interesting one, which we detailed in our article, Why Gold Could Still Triple From Here.

Yardeni points out that the price of gold has tended to lead the US federal deficit since the 1990s. The 12-month deficit peaked during the previous decade at $332.1 billion during April 1992. It then turned into a surplus of $277.8 billion during April 2001, on a 12-month basis.

During the previous decade, the price of gold peaked at $414.80 on February 5, 1996. It fell to $255.95 on April 2, 2001. The price of gold then took off, as the surplus evaporated and turned into a structural deficit, Yardeni points out.

(For an alternative take on health-care reform, check out Paul Krugman's recent op-ed in which, counter to its critics, he contends the proposed legislation isn't fiscally irresponsible.)

For his take on this relationship between ObamaCare and gold, we also checked in this morning with Bill Fleckenstein, president of Seattle-based Fleckenstein Capital, for a brief chat.

Fleckenstein generally agrees with Yardeni's thesis. "I think it is another log on the fire, so to speak," the hedge fund manager tells us. "It is more of the same, where we see governments spending more than they will ever take in. All these policies everywhere undermine confidence in the colored paper called money."

He adds, "This is a continuation of what we've been seeing and adds to reasons for why one would want to own gold."

But Fleckenstein also argues that, ObamaCare or not, gold will continue to shine.

"ObamaCare is just a symptom," he says. "The colored paper is worthless. It has no value and it isn't connected to anything. The deficit is hopelessly out of control in this country."

Fleckenstein owns physical gold, gold futures, and various mining stocks. He has been increasingly bullish on the miners, specifically Goldcorp (GG), Newmont (NEM), and Agnico-Eagle Mines (AEM).

It should be noted for investors that, while he's bullish on gold, Yardeni emphasizes that he is no card-carrying Gold Bug, in part, he says, because he likes assets that have earnings, dividends, and interest.

Lance Lewis, president of Lewis Capital and a registered investment advisor, counters that gold vastly outperformed the S&P 500 over the past nine years, even after dividends.

"The proof is in the math," Lewis says. "Every asset has its day and right now gold is having its day in the sun."

Lewis is a particular fan right now of Newmont Mining, which he sees as dirt cheap. He isn't a particularly big supporter of vehicles like the Market Vectors Gold Miners ETF (GDX), which includes holdings like Barrick Gold (ABX), Kinross (KGC), and Randgold (GOLD).

"Just like any ETF, it has garbage in it," he says. "Some of these gold stocks are ones you don't want to own."
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