The euro has fallen on international markets as the European sovereign debt crisis is deepening and appears to be reaching a dangerous denouement. European stock markets are also weaker due to serious divisions in Greece and in the EU as to how to resolve the Eurozone debt crisis and prevent contagion.
Moody’s has placed three large French banks on negative review based on their exposure to Greece. The problem looks increasingly intractable meaning that contagion appears more likely every day.
Cross Currency Rates
Gold is higher against the euro, pound and Swiss franc and lower against the U.S. dollar, the yen, Kiwi and Aussie dollar. Demand continues to be very strong especially from China and India where the World Gold Council said that there is a “tidal wave” of “gold demand coming”.
The dollar is firmer despite yesterday’s stern warning from Bernanke that America’s credit rating is at risk. Bernanke urged policy makers to again increase the debt ceiling – this time to over $14.3 trillion – in the hope that this will prevent a U.S. downgrade.
U.S. Worse than Greece Due to $14.3 Trillion National Debt and $61.6 Trillion in Unfunded Liabilities
The humongous size of the real U.S. national debt including unfunded liabilities is now some $75.9 trillion ($14.3 trillion and $61.6 trillion) which means that the finances of the U.S. are not much better than that of insolvent Greece.
The $61.6 trillion in unfunded obligations (money guaranteed for Medicare, Medicaid and Social Security) amounts to $534,000 per household, more than five times what Americans borrowed for expenditures such as mortgages, car loans and other debt.
The U.S. is also confronted with the significant debts incurred in the programs related to the bailout of Wall Street banks following the crisis of 2008 and 2009.
U.S. Dollar Index – 30 Years (Monthly)
Thus, the U.S. is in a worse financial position than Greece and is inching closer towards default every day.
This has obvious ramifications for financial markets and especially currency markets. It could see further sharp falls in the value of the dollar and would likely result in selling of U.S. dollar denominated assets which will likely see U.S. equities and bonds come under pressure which would likely result in an increase in interest rates.
US Generic Govt 10 Year Yield – 45 Years (Quarterly)
Rising interest rates will bullish for gold as they were in the 1970s (see above) and it is only towards the end of the interest rate tightening cycle when positive real interest rates are achieved that gold will become vulnerable to a bear market.
Gold remains below its inflation adjusted high from 1980 and the conditions today are as favourable if not more so than those of the 1970s when gold rose 24 times in 9 years.
The U.S. was the largest creditor nation in the world in 1980 today it is the largest debtor nation. In the late 1970s there was stagflation and geopolitical risk but there were no developing world sovereign nations on the verge of bankruptcy.
Nor were there major “too big to fail” western banks that were seriously exposed to sovereign debt risk and a shadow banking system with over $600 trillion in derivatives and all the risk attendant with that.
Today there is significant geopolitical risk in the world, more than even in the late 1970s and governments internationally are debasing their currencies in a manner not seen in modern history.
Bloomberg Composite Gold Inflation Adjusted Spot Price – 1970 to June 2011
The deepening sovereign debt crisis in the EU and potentially soon in the U.S. is a fundamental reason that the majority of retail investors and savers should have an allocation to gold bullion.
Gold bullion will protect, preserve and grow wealth in the coming years as it has done in uncertain times throughout history.
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