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Peter Schiff: What U.S. Default Means for Gold

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Perhaps the debt ceiling should be renamed the "national debt target," for it seems those in Washington are always trying to reach it. One could say it's their only reliable, time-tested achievement. And without fail, upon reaching their national debt target, they promptly extend it further in order to discover how quickly it can once again be attained!

While I have little doubt that the ceiling will be raised, my readers have been curious as to the implications for gold in each of the debt and "default" scenarios possible after August 2. This month, I'll outline how each outcome could affect the price of gold and silver.

Bearish gold case No. 1: The debt ceiling is not raised and enough cuts are made to avert a default.

My readers know that this scenario is actually what the U.S. government should do. The debt ceiling should not be increased and massive cuts must be made. We know this outcome is extremely unlikely. It would require not only a resolute steadfastness to sound money, but also a 180-degree change of philosophical beliefs by the majority of Congress (and the American public) overnight.

Yet in our fantasy world, if this did occur, it would be bearish for gold. It would mean the U.S. government was shrinking, its debts were being paid, that the entire U.S. economy was becoming more solvent and viable. Gold would be less important to own, as the risk of both currency crises and sovereign debt crises would be lower.

Bearish gold case No. 2: The debt ceiling is raised and the federal budget is balanced.

If the debt ceiling is raised in order to avert imminent default, but the spare time is used to truly bring the federal budget into balance, the U.S. economy might still be saved. But when I say "balanced," I mean it. This would mean not only eliminating the entire $1.5 trillion deficit, but also leaving enough of a surplus to cover all outstanding debt and unfunded liabilities.
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