On Monday the S&P ratings agency downgraded its outlook on US government debt to negative. S&P kept US government debt rated triple A, but the outlook switch to negative hit the US stock market hard and also prompted a sell off in US Treasuries. Meanwhile, the US Dollar Index backed down from its session high on the news. The downgrade prompted fresh safe-haven buying interest in precious metals, with both gold and silver futures rallying sharply.
The gold price closed in on major psychological resistance at 1,500 USD per troy ounce, and set yet another record high. I believe the $1,500 mark may prove to be as important as the $1,000 mark that was reached back in 2008. Gold is still not overbought and does not look over-extended by any measure.
Although I do not place great importance in the remarks of ratings agencies anymore, as I believe they lost most of their credibility during the credit crisis for not predicting things that more informed observers had clearly seen coming, this downgrade could prove to be the straw that breaks the camel’s back for America’s monetary authorities
Investors who hold a large portion of their liquid wealth in dollars should seriously consider shifting part of these assets into bullion, i.e. physical gold. It is the best way to shield their wealth from debasement of the dollar.
Meanwhile, gold and silver mining equities have a lot of catching-up to do. Mining shares have never been cheaper versus the underlying metal prices than they are today. This under-performance is a result of hedge funds going long bullion and short mining shares. However, if gold and silver continue to perform well, these hedge funds could get seriously burned.
People should continue accumulating gold and gold-related assets. After all, do not forget that the general public is not yet invested in a big way. If my scenario pans out, we could have another 1999 on our hands within a few years.
All Things Considered – John’s Commentary:
Standard & Poor’s cut its rating outlook on the US from stable to negative for the first time ever yesterday. They specifically cited a growing disparity in responsibly dealing with fiscal issues between the US and its triple A-rated peers. Relative to the other 18 sovereign governments rated AAA by the S&P, the US has very large budget deficits and indebtedness with no clear path being outlined to address those concerns.
Action to take: As I said last week, gold is poised to reach $1,650 or more and silver $50 by the end of the year, if not sooner. Gold already hit a high of $1,500.80 earlier today and silver a high of $43.96. The psychological level of $1,500 is a powerful target. Take your position today.
Quote of the day: “Within the next five years, for the first time since the 1970s, the dollar will be re-linked to gold.” – Steve Forbes, April 4th, 2011
