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[chinese investor] 31/5/2023 07:50

Good Morning

[soulsauce] 30/5/2023 20:56

NATO sending 700 more troops to Kosovo.

[chinese investor] 30/5/2023 16:46

Professor Pettigrew doesn't post and the price of gold increases.

Uncanny !

[thanksamillion] 30/5/2023 11:14

Gold on another one of those lift off moments.

[chinese investor] 30/5/2023 07:16

A result of Professor Pettigrew's long post predicting a rise in the price of gold is......a dramatic drop in the price of gold !

[professor pettigrew] 29/5/2023 22:52

What a U.S. Debt Default Could Mean for Gold

The Spotlight


The recent market movements suggest that investors, after months of ignoring a debt limit standoff, now seem to be taking the once-unthinkable possibility of a U.S. default seriously.

Don’t you sometimes wish your bank would give you an unlimited credit line?

Well, the U.S. government has the next best thing: over the past 60 years, they have raised their own debt limit almost 90 times, and most of these increases have been drama-free.

But today, Congress seems to be locked in a stalemate regardless of reports of a deal, with the clock ticking down and a potential debt default looming in June.

With this once-unthinkable scenario now becoming more likely, let’s see what a U.S. default would look like for physical gold investors and how they could prepare for it.

First, what is the debt limit?
To put it shortly, it's the total amount of money that the U.S. government is authorized to borrow.

The first debt limit was established in 1917 at $11.5 billion… today it stands at $32.4 trillion and rising.

Since 1960, Congress has acted 78 times to change the debt limit, according to official data.

Failure to further suspend or increase this limit could lead to the first-ever U.S. default, meaning the federal U.S. government would not be able to repay its debt, which would bring on dire economic consequences.

US Treasury Secretary Janet Yellen has recently urged Congress to raise the debt limit by June 5:

“It is imperative that Congress swiftly addresses the debt limit. If it does not, America would default for the first time in history. The full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession,” Yellen said in her remarks to the Senate Banking Committee.

So what happens if the U.S. defaults?
Well, according to analysts, the fear of default alone could shake up the stock market and send shock waves across the economy.

For example, in 2011, the U.S. was on the brink of default before lawmakers finally struck a deal, but not without significant market volatility and a downgrade of the country’s credit rating.

“If you go back to a decade ago, there was an immediate selloff in the financial markets — it hit investors hard and runs the risk of a cascading financial crisis,” said Mark Hamrick, senior economic analyst at Bankrate.com.

What does it mean for the U.S. economy?
According to an estimate from Moody's Analytics, a prolonged default scenario would send the U.S. into a recession:

GDP would fall by almost 4%
about 6 million jobs would be lost
unemployment rate would be up to 9%
the stock market sell-off could erase $15 trillion in household wealth
Janet Yellen, too, has issued a series of dire warnings, saying that any default on U.S. debt would cause “irreparable harm.”

"Default could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil. Our current economic recovery would reverse into recession, with billions of dollars of growth and millions of jobs lost,” she wrote in the Wall Street Journal.

And even a short-lived default could “threaten economic growth" by roiling markets and economic confidence, cutting off vital services to Americans and undermining the trust in the credit of the U.S. This damage would be hard to repair,” former U.S. Treasury Secretaries said in a letter to congressional leaders.

It seems like if Congress fails to avoid a debt default by June 5, the U.S. economy is in for a rocky time.

“If it turns out that [...] it can actually default, that would basically detonate a bomb in the middle of the global financial system. And that will be extremely messy."

And, as we know, when crises originate in the U.S, they usually quickly spread to the rest of the world.

What will be the impact of a U.S. default on the global economy?
Indeed, the spillover would be felt globally. Bearing in mind the importance of the United States as the world’s financial center and the U.S. dollar’s role as the global reserve currency.

"The U.S. Treasury market is the world's anchor asset. If it turns out that that asset is not actually risk-free, but that it can actually default, that would basically detonate a bomb in the middle of the global financial system. And that will be extremely messy,” said Jacob Kirkegaard, a senior fellow with the Peterson Institute for International Economics.

Securities issued by the U.S. have been so trustworthy for such a long time that they are seen as essentially risk-free in the financial market. They are used to underpin a huge number of financial contracts around the world.

"A bedrock of the U.S. economy and global financial system is that the U.S. government pays what it owes in a timely way. If the government defaults, the U.S. and global economies, which still have a long way to go to recover from the recession caused by the pandemic, will descend back into recession,” Mark Zandi, the chief economist of Moody's Analytics, wrote in a research note.

How will a U.S. default impact gold?
For those looking to buy gold as an investment, it’s important to know that the U.S. economic data is one of the key forces driving the gold price. Therefore, if a default was to happen, the precious metal would most likely be affected.

Here is how Nicky Shiels, Head of Metals Strategy at MKS PAMP GROUP, thinks a U.S default could impact gold:

“There is a positive structural force and correlation given the US debt trajectory and gold, but the short-term pricing is dependent on the Fed, on drivers from other assets and [market] sentiment.”

This means that there could be two scenarios for the gold price:

SCENARIO 1: the U.S. debt becomes “unsustainable” and tops 200% of GDP, gold price goes up.
“The takeaway is that the unsustainable US debt path is structurally bullish for gold […] the model-implied gold price should be $4,070 if US Debt explodes over 200% of GDP (as expected by the Congressional Budget Office by year 2050),” Shiels wrote in a note.

SCENARIO 2: the ceiling is raised and the debt-to-GDP ratio goes down, gold price hovers above the $1,900 level.
“A simple regression, with US Debt as a percentage of GDP at 101% (in 2024) puts gold at $1,950; in other words, gold has already largely priced in an increase in the debt ceiling and short-term US debt trajectory,” she said.

What’s the bottom line?
All things summed up, if a U.S. default were to happen, it would have major repercussions for the country and the global economy, potentially creating “a historic financial crisis,” according to Yellen.

And although the Senate has reached a last-minute deal to avert the government shutdown, the clock is still ticking for U.S. lawmakers to raise or suspend the debt ceiling.

In times of uncertainty, to protect their portfolios, investors usually turn their attention to safe-haven assets, such as gold.

As we can see from Nicky Shiels' scenarios for gold price, no matter which way the debt ceiling situation goes, it seems gold should retain its value, offering a haven of safety, as it has done over the centuries.

And while we don’t know what’s going to happen yet by June 5, the debt ceiling deadline, now might be a good time to get yourself a perfect crisis hedge and buy physical gold.

[charles clore] 29/5/2023 22:09

Rennicks - perhaps this will assuage the fears of those shareholders who felt threatened by the uncertainty brought about by the Turkish elections.

[soulsauce] 29/5/2023 15:54

You're right Plasybryn, never trust what the BBC says 🤔

[jaynesdad] 29/5/2023 15:47

Have to agree with Plasbryn. The Turkish Lira has deteriorated vs $ but not dramatically in the past 5 days. As for whether the retention of Erdogan is good or bad for AAU, the regime has not prevented development in the pas. Also if there had been a regime change there may have been a period of instability even if the eventual result was positive.

[plasybryn] 29/5/2023 15:28

Bit of occasional volatility but to be expected.

[plasybryn] 29/5/2023 15:27

Lira seems to be doing ok against US$ & British pound unless i have the chart upside down.

[soulsauce] 29/5/2023 13:08

That will remain to be seen Charles but the lira has already plummeted further on the result.

Let's hope for a quick resolution on Tavsan now but nothing happens quickly in Turkey.

[professor pettigrew] 29/5/2023 12:55

After my post yesterday, this guy sounds suspiciously similar in thought to what was sent me.

Frightening when you think one trillion seconds is 32,000 years. Monopoly money doesn't come into it.

[kemche] 29/5/2023 11:33

wrestling, will you also be coming to Cornwall for the annual meeting of chums?

[charles clore] 29/5/2023 11:26

Thanks - the result was probably the best outcome AAU could have wished for.

[thanksamillion] 29/5/2023 11:00

On a human level I cant say I am happy at Erdogans win, the Turkish economy is in for turbulence. For miners however "business as usual" is the best outcome and now the election is over perhaps the courts can quickly process our outstanding "leach complaint" issue.

[chinese investor] 29/5/2023 07:16

Good Morning

[xow98] 28/5/2023 18:35

Erdogan declares victory.

[professor pettigrew] 28/5/2023 13:30

Sent to me this morning by an American cousin - quoting a local in Texas who apparently knows a few things about finance:-


"Of course, on the surface the US debt impasse is now over, but as usual it's a case of "kicking the can down the road" - yet again. The mamoth debt built up in the US now stands at $31.2 trillion - and press reports from the White House indicate a "deal has been reached". So, okay you'd think they could now borrow say another trillion or two until 2025 (debt deals and recalibration occur on a rolling two year basis), but no. This is a deal reached to actually suspend the debt ceiling, in other words for all the fluffery surrounding the press release wording, the US government via the Fed are now free to borrow exactly what they want for the next two years, precisely until the next US elections.

This frightening scenario brings into focus just how much money $31.2 trillion really is - as we loom in on the magical $40 trilion mark. Why is $40 trillion so important? Because once the cumulative debt reaches that stage, the interest repayments actually exceed the amount borrowed, in other words for every $1 borrowed the eventual interest will be around $1.01. In the big scheme of things one cent does not sound and is not a lot - but multiply that forty thousand million million times and you get the picture.

This impending disaster now means two things. Firstly the Fed will undertake massive money printing again as their constant desire to raise the Fed funds rate to try to kill off inflation leads to a looming recession, which could be categorised as "severe". You will witness the spectre, maybe within less than two years of a fed being forced to then cut rates to ease the recession, but without inflation returning to their supposed target of 2%.

This will then set off a new and unstoppable wave of inflation going forward which will further debase the $ and lead to the debt ceiling being raised yet again. The only answer to all this is to attempt to back what is left of the paper dollar with something of intrinsic value.

And there is only thing.

Gold.

Despite repeated attempts to rein in the gold price by the Fed and the rigged trading by the bullion banks worldwide, this time the economic forces of nature will overwhelm all of them and the true price of gold (and by implication silver) will eventually show through. Don't be surprised to see $3500 gold and $75 silver within the next 18 months"

[kaos3] 28/5/2023 11:31

I am sailing. Not in the present loop. Clever people say no war. Also no mine there. But very good geology. That is abot it.

[thanksamillion] 28/5/2023 10:20

Living in that part of the world Kaos might be able to enlighten us re likely outcome of Serb/Kosovo clashes??

Meanwhile I think we must be due some "meat" from AAU.

[soulsauce] 27/5/2023 16:59

Meanwhile Serbian forces are massing on the border 🤔

[shortarm] 27/5/2023 15:31

Post from Mentor Some great days in Kosovo, with our American partners, the world's largest Gold mining company.

[renniks2016] 27/5/2023 15:24

https://www.linkedin.com/jobs/view/3619398551/