Health Care Costs and Gold Stocks

How much will health care expansion cost the government? Like everything else related to this soon-to-be-law bill, there is a deep and wide chasm between proponents and opponents.

The White House estimates that the health care legislation will cost $950 billion over the 10-year period from 2010 and 2019, and the Congressional Budget Office (CBO) estimates that the bill will reduce the federal deficit by $143 billion during the same period.

It’s hard to imagine the accounting that makes those two numbers compatible, as a former CBO director under President George W. Bush points out in a commentary in Sunday’s New York Times.

Douglas Holtz-Eakin suggests that, based on his analysis, the health care legislation will actually add another $560 billion to an already massive federal budget deficit estimate by the CBO – nearly $10 trillion over 10 years. This figure is equivalent to more than 80 percent of current U.S. GDP.

Huge deficits tend to weigh on the dollar, which stands to benefit gold equities. We discussed this in a commentary last year in which we used the charts below comparing gold stocks to the S&P 500.   The visuals, going back to 1971, show that when the federal government spends more than it takes in, gold stocks tend to outperform the broader market. 

The federal budget deficits will likely lead to increasing worries about inflation and keep downward pressure on the dollar. If the cost of health care is higher than current estimates, the dollar stands to be weakened further. Either way, the potential remains for gold stocks to be attractive relative to the broader market for some time to come.

By clicking on the link, you will be directed to New York Times website. U.S. Global Investors does not endorse all the information supplied by this website and is not responsible for its content. The Toronto Stock Exchange Gold and Precious Minerals Total Return Index is the total return version of the Toronto Stock Exchange Gold and Precious Minerals Index with dividends reinvested. The Toronto Stock Exchange Gold and Precious Minerals Index is a capitalization-weighted index designed to measure the performance of the gold and precious minerals sector of the TSX 300 Index. The S&P 500 Total Return Index is the total return version of the S&P 500 Stock Index with dividends reinvested. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. #10-205

This is a syndicated post. Read the original here.