Gold and America's Fake Default

October 29th, 2013
in gold, syndication

Bullion Vault Article of the Week

Written by , Bullion Vault

Gold just isn't working as advertised as Washington flirts with disaster...

There is no denying that precious metals were falling even as the U.S. debt-limit deadline drew so near, you could see that it was wearing a wig.

In fact, the mere hint of a short-term fix to avoid default earlier this month knocked gold prices below $1300 on 11 October, with a further plunge as U.S. trade opened on the 16th.

Follow up:

For long-time investors, the irony looks so thick you could butter your toast with it.

The U.S. Dollar is the world's most important currency. The United States is also the world's largest debtor. So-called gold "bugs" who began buying gold in the early 2000s thought they saw what was coming. Then from 2007, Washington only added to its historic debt pile, backing the nation's entire finance sector with yet more taxpayer promises.

The endgame looked clear. And it looked like it might be within a week of happening. We had the very real risk of an outright default, a failure by the United States government to pay its debts or bills as they come due.

US Treasury bonds underpin the world's financial system, setting interest rates and acting as collateral for pretty much the entire planet. The panic about to take hold should have meant gold and silver would be soaring. Yet there we were, back below $1300 and $22 per ounce.

From John Waggoner in USA Today on 10 October:

"You would think that the threat of a government default would send gold soaring. In default, after all, those who normally buy government debt would flee, driving down the value of US currency on foreign markets. But gold is doing little to aid your portfolio."

Dan Denbow - a guy who understands gold more than most, as manager of the $1bn USAA Precious Metals fund (USAGX) adds:

"Honestly, it doesn't make sense.  The current situation is a bit perplexing."

But step back for a second. The world doesn't fit your model. So the world must be wrong?

Back in 2009, "the recent price surge looks suspiciously like a bubble," wrote Nouriel Roubini of gold. Because in the absence of severe inflation, or a catastrophic economic collapse, the NYU Stern School professor couldn't imagine gold rising. Yet it was. So gold must be wrong. Because of course, Roubini could only be right.

Now in late 2013, the opposite problem is confusing pundits worldwide. Gold is falling when it "should" be soaring. Maybe gravity's failed, the earth is flat, or somebody's rigging the market?

But check the other end of your telescope, and this U.S. "default" isn't for real. It's a sham, a fraud, a scamola, and the financial markets know it. Political posturing is all that is happening. America faces default on a technicality, not a strike by its creditors. Even if no deal is done by October 17th, equity and bond investors know the US can borrow and spend all it wants at the moment. Only the arbitrary and very moveable debt ceiling is stopping it. And the U.S. of course remains the world's biggest economy, and the source of its hottest must-have investments, regardless of value.

Take communications, for instance. The UK has Royal Mail, floated a couple of weeks ago for the equivalent of $5.25 billion, and then jumped 38% on the next Friday's open. The monopoly postal service for the world's 7th largest economy, it's even been freed from the financial shackles of its pension promises to former employees. Not since Gordon Brown sold half the UK's gold reserves at the turn of the century has the British state offered investors quite such a bargain.

The U.S. in contrast has Twitter, priced at twice as much by its IPO.  Never mind the business models (Royal Mail made $700m operating profit in full-year 2012. Twitter lost $68m in the first-half of 2013). One of these stocks is a sell. But the faller will most likely be different short-term from long. Meantime, there's little surprise that gold and silver aren't jumping. Because the US default wouldn't really have happened, whether it had nominally happened in October or not.

Alongside U.S. assets' return to froth, the sense of crisis peaking in 2011 continues to ebb. The real panic, the financial "end times" which Tea Party Republicans are winking at, is still pending. It isn't here today. But when it does eventually show up, precious metals - most especially gold - will offer the antidote.

Physically rare and indestructible, gold is the very opposite of debt investments. Owning it puts you a million miles from being a creditor. If this U.S. default were for real, gold would say so. For now, this is not the debt default gold owners were looking for.

Expect lots more confusion, however, if the buffoons go ahead and force a technical fail any time soon.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

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