Downgrades Unfold – Gold Tops $1,700
By: John Fisher Downgrades unfold and gold tops $1700. The price of gold moved through $1,700 an ounce for the first time today. Stocks are also tumbling, and at the forefront of these moves is the downgrade of the U.S. debt.
But the downgrades didn’t stop at the downgrade of the U.S. debt – it then unfolded in to subsequent downgrades, prompting investors to ask, “What next?”
The cascading downgrade details are as follows:
1. The gloomy credit outlook began months ago when Moody’s cast a “negative outlook” on the U.S. debt. Moody’s once again confirmed their negative outlook on Friday and warned that it would be watching how the US’s budget deficit is handled in the future
2. On Friday evening, Standard & Poor’s cut the long-term credit rating for the U.S. by one notch to AA+ from AAA, deepening investor fears about a weakening U.S. economy. But the news did not end there.
3. Only hours ago, the S&P then downgraded the debt of Fannie Mae and Freddie Mac. The downgrade is only natural as a result of Fannie and Freddie’s direct reliance on the U.S. government.
4. Next in line was 10 of 12 Federal Home Loan Banks that were propped up by the federal government after the financial crisis of 2008. S&P also reduced their ratings one notch, to AA+ from AAA. The banks of Chicago and Seattle had already been downgraded earlier to AA+.
5. S&P also cut ratings for several of the main arteries of the US financial system – the four depositories and clearing institutions. Depository Trust Co., National Securities Clearing Corp., Fixed Income Clearing Corp. and the Options Clearing Corp. All were cut one notch to AA+.
“What Next?”
- On the downgrade front, Robert Litan, a former Clinton administration budget official who is now vice president for research and policy at the Kauffman Group states, “The states and locality ratings will be next because of the interest rates benchmarked against U.S. treasuries so there is a linkage between that debt. In an environment of budget austerity this is not good for states and localities.”
- Some estimates put a downgrade like this as likely to shave 1 percent off GDP. This slowing certainly increases the risks that the U.S. will have a second dip into recession. It also means less tax revenue, so the potential for additional debt increases.
- There will be additional impact that will likely come through the resulting dampening of consumer confidence, which of course has a direct negative effect on the psychology of consumer spending.
- Interest rates on mortgages and credit cards could rise for American consumers already struggling with high unemployment.
- And finally, interest rate increases will burden financing for business expansion, likely resulting in worsening unemployment.
As the global economy continues to trend downward, investors will continue to seek refuge in gold. Although gold has doubled in price since the beginning of 2009, adjusted for inflation, an ounce of gold remains below its 1980 peak of $850, which translates into $2,400 in today’s dollars. Gold is no where near finishing its upward trend.
All Things Considered – John’s Commentary:
Gold’s allure stems in part from fears that the world’s major economies are dangerously indebted. The economic perils reach far beyond our borders.
Further market destabilization is at risk due to the economic crisis in Europe. Investors are watching with great concern as to whether Spain or Italy (two of the world’s major economies) could be priced out of the bond markets and subsequently default on their debts.
Action to take: Gold price predictions of $2,000 and $3,000/ounce look significantly less “lofty”. This is NOT the bubble…there is ample time for price increases, profit and insurance against the declining dollar. It is simply time to take the plunge and buy if you haven’t already done so, otherwise add to your position.
What to buy: Most importantly, find a dealer that will source low premium (mark-up) bullion for you. Beware that as the markets are rocked, the gold ads will increase – many of whom are sponsored by companies that will direct you to their HIGH margin products.
Quote of the day: “America today has insufficient savings to finance both crucial investment and its consumption of imports.” – James Dale Davidson
