US downgrade sends gold price rocketing higher

2011-AUG-08

As expected, the gold price has surged in response to the weekend news that Standard & Poor’s has downgraded the USA’s credit rating from AAA to AA+, breaking through $1,700 per troy ounce. In addition, the news that the European Central Bank will start buying Spanish and Italian government bonds in an effort to stave of economic meltdown in the eurozone has provided further impetus to gold’s gains.

As Alan Greenspan discusses in this candid television interview, however, the simple truth remains that the United States can pay any debt it has – thanks to the Federal Reserve’s printing press. Tangent Capital’s Jim Rickards made the same point during a panel debate at the Gold Anti-Trust Action Committee’s London conference, noting that this made S&P’s decision suspect. (You will be able to watch James Turk’s interview with Jim Rickards on this website shortly). Others such as Bill Gross of PIMCO are more impressed by S&P’s actions, though, on the grounds that “enforcing some discipline” on the US government can only ever be a good thing.

Earlier today the dollar fell to a record low against the Swiss franc, while stock markets around the world have fallen, with the Japanese Nikkei settling down 2.2% of the day. Ironically, yields on US Treasuries have fallen; it seems that traders’ long-conditioned habit to buy US debt at the merest hint of market turbulence will die hard – and not yet even when they are confronted with a US sovereign debt downgrade.

Amid all the market woes, politicians and monetary officials from around the world will at least be happy to have seen crude oil prices drop (Brent crude is now around $105 a barrel), while the ECB’s decision to resort to its own version of quantitative easing programme may temporarily take some pressure off the beleaguered PIIGS of Europe.

The Dollar Index has recovered after falling sharply this morning, though the dollar remains vulnerable and is still below its 100-day moving average. Things are are still looking ominous for the greenback.

Though there have been efforts by some to downplay the importance of S&P’s US downgrade, it is yet another indicator of the perilous fiscal state the US government is in, and another sign that America is losing its dominant position in the world economy.