If you’re scratching your head in search of a reason why gold prices surged again yesterday, reaching nearly $540 an ounce, try reading the latest Monthly Treasury Statement for inspiration. Among the numerical revelations imparted in this accounting of government finances is the news that the federal budget deficit last month was the largest ever for a November, David Resler, chief economist at Nomura Securities in New York, wrote in a research note to clients yesterday.

In fact, the longer you scan the Treasury Statement with data through November, which was released yesterday, the more it looks like the government’s mountain of red ink is set to deepen. Again citing Resler’s numbers, cumulative fiscal receipts for fiscal 2006, which begins in October, are up just a bit more than 6% this year vs. FY 2005–the slowest rise since October 2004.
But no one should have any illusions that a slowdown in receipts will easily translate into an epiphany of fiscal rectitude when it comes to the government’s penchant for spending. As evidence, consider that cumulative government expenditures rose 8% in the first two months of FY 2006, the fastest pace since FY 2004. In the race between receipts an outlays, the latter are maintaining the lead of late.
As to reasons why, the usual suspects were again at work driving government spending skyward, including Social Security, Medicare and other non-defense items. Meanwhile, the prospect of more tax cuts are in the works, suggesting to some that red-ink momentum may still have legs. The House of Representatives last week passed an Alternative Minimum Tax relief measure that’s estimated to add more than $30 billion to the federal budget deficit. In addition, the House gave the green light to a $56 billion tax cut spread out over five years.
Supporters of the tax cuts say such fiscal stimulation is needed to keep the economic expansion going. Warranted or not, the paring of taxes may add to the government’s debt burden in the short term if for no other reason than Congress is no stranger to embracing more and bigger spending bills in the 21st century regardless of tax receipts. According to the Heritage Foundation, federal spending has been “accelerating” in recent years. “Federal spending has reached $20,000 per household, in constant dollars, for the first time since World War II,” according to recent analysis published by the conservative think-tank.
Source: Heritage Foundation
Arguably, the gold market is paying close attention to such trends and, unsurprisingly, expects the worst. Gold bugs always see doom and gloom just around the corner, and that includes a jump in spending-induced inflation. They were largely wrong for a generation after gold reached an all-time high 25 years ago. Are they right this time?