S&P Down Grades Debt Rating a “Wake-Up Call” For Washington

By: Elizabeth Kraus

While President Obama criticized Standard & Poors’ decision to lower the US credit rating outlook, arguing that the US is not in danger of a downgrade and that a deficit reduction deal in Congress is within reach. It was reported that the White House got a heads up last Friday that the US debt outlook would be lowered by S&P. As it turns out, back and forth pleading went on for weeks before the decision, according to Zachary Goldfarb at The Washington Post. The administration’s line: “Yes, we can come together to solve the debt problem”. S&P’s line: “No, you can’t.”Even as the S&P’s warning was to spur Republicans to dig in to help ensure the negotiations will be arduous, requiring Capitol Hill’s nearly undivided attention until July potentially pushing the country to the brink of default. It seems there probably won’t be much chance to work on major changes to taxing and spending. What’s funny is that the overwhelming response to S&P is that, it was meant as a warning call for lawmakers to get their act together, which backfired.

One of the most stunning developments in the fight over the US debt is the emergence of the “pro-default” stance among serious analysts. Dean Baker recently wrote that default worked just fine for Argentina, and it could work in the US, too. The latest is bank analyst, and frequent TV personality Chris Whalen, of institutional risk analytics, who urges Congress to vote NO on raising the debt ceiling because in doing so, the US would be forced to default and restructure its debt. Right now the market shows zero concern about the debt ceiling/default issue, but there are some stunning developments out there.

Could the US lose its status as the world’s premier safe harbor for global investors? Regal Assets team of analyst commented in a conference on Monday that while the country’s political infighting and burgeoning debt may warrant a downgrade, in short, US’s days as a AAA-rated investment may be numbered. “Even if a deficit reduction deal is reached, S&P fears Washington’s political party divide is so wide it threatens the US government’s ability to maintain a successful budget policy for years to come” states Regal Assets.

So as this news fires a warning shot to politicians, that a lack of U.S, fiscal discipline-and lack of compromise in Congress-could strike a painful blow to the county’s economic future, and that it may be the “wake up call” Washington needed…investors are loosing confidence in the US which proves the tremendous run in Gold and Silver. But, should there be a correction, until the shorts capitulate; the market is going to run higher, especially as it looks like the government is going to keep printing money, whether they call it QE or something else. The “something else” is another QE3 on the horizon shielding (high inflation, unemployment, foreclosures, high food and oil prices) continuing to drain the US economy.

If the Fed really ended QE, by that or any other number of it, and allowed interest rates to rise, and did not subsidizing government borrowing any more, then gold and silver might drop quite a bit. But this would cause the economy to tank and in turn the Fed would blink and resume printing. And when they do, at some point thereafter there will be a widespread panic move into the precious metals, the shorts will be overrun and the price will go higher than anyone today would believe.

Could there be a time come when 100 ounces of silver will buy a nice house?

One of the biggest reasons investors are flocking to precious metals, is because they only see a dark cloud of chaos in the government, a looming inflation and a weak outlook for the U.S. dollar, prohibiting their protection. So, the trend has turned investments related to gold, silver and other precious metals into some of the hottest plays of the past year. And that’s just starters. We get the same response that the dramatic increase in inflation this year could push gold prices much higher than predicted as more investors seek safe haven investments, gold could continue to climb and reach $2,000 an ounce, and even higher.

“I’m still looking for gold to reach $2,500 an ounce – but after a brief pullback,” Money Morning Chief Investment Strategist Keith Fitz-Gerald said last month, “not only are many people beginning to seriously accumulate the yellow metal, but so are many countries, as one of the truly viable alternatives to traditional currencies and a means of diversifying their sovereign debt risk. China is one of the countries flocking to gold. The country’s inflation risk pushed its investors into a gold buying spree last year. Chinese demand for gold bars and coins reached 180 tons in 2010, up a whopping 70% from 2009, Albert Cheng, the World Gold Council’s managing director for the Far East, said at a news conference last month.”

And now Japan’s economy will contribute to the gold rush. In the wake of Japan’s disaster, the Bank of Japan (BOJ) will pump more money into the financial system. The central bank poured a record $183.17 billion (15 trillion yen) into money markets Monday and doubled the size of its asset-purchase program to ease liquidity worries. The money inflows will prompt more investors to seek gold investing to protect their wealth.

“I think gold has not really performed as well as I would’ve expected it to, given some of the crises in the Middle East…but silver has been exceptional,” Shah Gilani of Money Morning said on a visit earlier this month to FoxBusiness’ “Varney & Co.” program. “Industrial use is tremendous for silver…it is the ultimate precious industrial metal. Also, we’ve got [exchange-traded fund] phenomenon. As ETFs continue to buy as investors come into them, they’re taking supply off of the market. That’s going to continue a nice cycle for silver to go higher.”

As the demand for “safe-haven” metals investments continues pushing prices to new highs in both Gold on Wednesday at $1500 and Silver almost $45: “People are quick to take profit when gold reaches a record,” Matthew Zeman, a strategist at Kingsview Financial, told Bloomberg News. “But the silver market is the one suddenly everyone is in love with and afraid of missing the boat. People fully expect silver to get to $50.” Besides investors seeking inflation hedges and speculators pushing prices higher, there is industrial demand for these metals that supports continued price jumps.”

As for Gold, analyst polishing their crystal ball see gold as Afshin Nabavi, head of trading at MKS Finance: ”For the time being, it looks like $1,505-$1,506 is small resistance. There seems to be some profit-taking, but once we break $1,505-06, then it looks like we may be possible to see a rally up toward the 20-ish area. It looks like it is going to go higher. Longer term, as long as the situation we’ve living in doesn’t change politically or economically, I think there is only one way—up for gold. Then $1,600, $1,700 or even $2,000 at this point in time doesn’t look too far-fetched.”

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