Gold and Silver Rally on S&P Announcement

 

Well… There was BIG news yesterday (sort of) from Standard & Poor’s (S&P). The risk assets sold off, initially after the S&P announcement, but rallied late in the day. And gold and silver thought the announcement was like manna from heaven for their values… So, what was this announcement? Oh, come on, unless you’re like that guy in the GEICO commercial who climbs out from under a rock, you heard it…

Yes… S&P finally found the intestinal fortitude to address the US deficit problem, and threw a cat among the pigeons when they cut their outlook on the US to negative, warning that the US fiscal profile may become “meaningfully weaker” than that of other major countries if policymakers can’t tame the budget deficit and increasing the likelihood of a potential downgrade from its triple-A rating.

Treasuries sold off on the news, along with stocks and currencies… At one point in the day, I asked the question… “Where is all the money flowing?” Usually when you see the risk aversion trade come on the scene, Treasuries and the dollar, yen (JPY) and franc (CHF) all rally… But not yesterday… The knee-jerk reaction was to sell everything… Ahhh, but not everything… Gold and silver were the destinations of many a dollar yesterday…

But then as the day went along, everyone decided that the selling was too harsh, for S&P didn’t exactly cut the AAA rating, and most likely they won’t… Not because it shouldn’t be cut, but because I just don’t see any rating agency doing that… Can you hear the call to the rating agency that would cut the US’s AAA rating? Hello? Yes, this the White House calling, and we want you to know that your rating agency has been shut down by the White House… But why? Well, we’re not sure why you’re being shut down, but we’re sure we have a Czar to deal with that!

Seriously though… One has to wonder, why now? Ahhh, grasshopper… Aren’t we in the middle of a debate on the deficit? Aren’t we less than a month away from reaching the current debt limit? Could this be a political statement by S&P? Don’t know, but, from the timing of this, it sure smells like one… Oh, and again, let me repeat, the AAA rating was not cut! Just the outlook was downgraded to “negative”… And we carry on my wayward son!

So, like I said above… Gold and silver were the destinations of many a dollar yesterday… And why not? Isn’t this the type of stuff that, for years, I’ve told you would happen, and that gold and silver would be the thing to have in your investment portfolio to protect your wealth? Well, gold is within spittin’ distance of $1,500, and silver traded past $43! The fun is just about to get started, folks, with all the debate on the debt ceiling being lifted… If I were king… I would say, no debt limit raising… Bring the budget deficit to a surplus or at least balanced, and you won’t have to raise the debt limit… Then, let’s go down the roster of government agencies, and see which ones we “really don’t need”… Of course, the defense bill is quite high, but you can’t go cutting it, when you’re fighting three wars… Hopefully, we’re ready to turn those countries over to the people, and get out military out of there!

But, until we balance the budget, all we’ll do is continue to add to the national debt… Do you know what they want to raise the limit to? $20 trillion… Let’s see… In 2008 the national debt was, $9,669,000,000 and today, three years later, it is $14,307,992,000… That’s an increase of $4,639,000,000 in three short years… Which means that if we don’t do something to stop this debt spiral, then in a very short time, we’ll be debating over whether to raise the debt ceiling limit from $20 trillion!!!

OK… I’m beginning to get a rash talking about this debt stuff, so I’m going to move along now… OK… Nothing like the old kiss of death from Chuck, right? I mean, yesterday, I tell you about the strong move the New Zealand dollar/kiwi (NZD) had made in the past month… And then New Zealand posts a really weak inflation report, and kiwi gets sold off by more than 1-cent! UGH! Now, a weak inflation report is a good thing for a country, right? But, when the outlook is for higher inflation so that interest rates can get back to rising, and traders make bets to this scenario, and it all falls through, that’s not a good thing for kiwi…

Hey! Did you hear that the head of China’s Central Bank, Zhou, said that the $3 trillion in reserves “have exceeded reasonable levels and the management and diversification of the holdings should be improved.” No? Didn’t hear that? Well, he said it… And it all sounds like central bank parlance for: We own too many dollars, and need to find a way to get rid of them!”

Remember a couple of years ago, when the “global imbalances” were pointed to as one of the reasons for the problems in the markets? Well, guess what? They’re BAAACCKK! And, this time, let’s hope that China realizes what their role here is, and that is to strike the right balance, with their policies, and to diversify… Again, if Chuck ran their finances, I would be ditching those dollars for gold and silver… Especially now that S&P has downgraded the US debt outlook to negative!

The euro (EUR) is rallying while I type my fat fingers to the bone here this morning… So let’s look at what’s going on today in the Eurozone… Greece sold some T-Bills this morning, at a decent yield, but they were only 3-month bills… Dag nab it… When is Europe going to restructure the Greek debt once and for all? Rather than have these problems continue to come back and bite them in the rear every time it looks like the Eurozone is ready to move forward… Again, I’m feeling quite regal this morning, and once again, if Chuck were king… Look, most of the Greek debt is either held by the ECB or Greek Banks… So take the hit on a maturity extension and get it over with! Greece has this maturity schedule: 2011: 39.7 billion, 2012: 45.2 billion, 2013: 40.6 billion…

Hey! Even the Chinese renminbi (CNY) lost ground to the dollar yesterday, after the S&P announcement! But, don’t read this as some reason to sell renminbi! Just yesterday, a Chinese Central Bank advisor got the markets all lathered up when the advisor said that, “China will not rule out a one-off revaluation of the currency”… I’ve said this quite a few times before, so for those of you who want to be reminded or are new to class… I really don’t see the Chinese going for some “home run” revaluation… I look back to July of 2005, when the Chinese dropped the peg to the dollar, and revalued the renminbi about 2%… I look for that same kind of revalue, if… The Chinese feel that the appreciation of the renminbi is going too slow…

Well… the data cupboard is pretty thin here in the US, today… But what we do get to see will be important, and that is March Housing Starts, which is forecast to improve on February’s very ugly print of -22%… March Housing Starts are forecast to rise 8.6%… I have to wonder what the building is all about… An excess of inventory is the main problem for home prices now… And the foreclosures continue to mount…

Then there was this… Well, remember yesterday, I told you about the BRICS meeting? Well, here’s another piece of information from the BRICS meeting, that should have been all over the TV, radio, newspaper, etc. but wasn’t… I think when you read this, you’ll know why…

“Our designated banks have signed a framework agreement on financial cooperation which envisages grant of credit in local currencies and cooperation in capital markets and other financial services,” Manmohan Singh told reporters at a news conference with other BRICS leaders. Thus the death certificate for the USD has been signed. It will take some time for Rigor Mortis to set in.

Look, basically, the BRICS are going to be trading amongst themselves, and exchanging currencies in the trade, and removing dollars from the equation… That’s a pretty grim statement from them, eh?

To recap… S&P threw a cat among the pigeons yesterday when they downgraded the US credit rating to a negative outlook… They did not touch the US’s AAA rating…and probably won’t… This announcement sent bonds, stocks, and currencies to the woodshed for most of the day in a knee-jerk reaction to the announcement. Gold and silver took the news as manna from heaven, and rallied to near $1,500 and $43 for gold and silver respectively.

Chuck Butler
for The Daily Reckoning

Gold and Silver Rally on S&P Announcement originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2 .

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