Gold reaching for $1,500

Also this morning, crude oil was down by nearly $1 at $106.15 per barrel but continued to be supported by the on-going siege in Misrata, Libya, where Gaddafi loyalists and rebels aided by the UN coalition are still in the midst of a military stalemate. The US dollar declined marginally on the trade-weighted index but maintained the $75.10 level following an afternoon recovery on Monday that came despite the lowering of the S&P’s outlook on US debt.

Do take note of the fact that the S&P shift did not represent a change in the US’ credit rating. Markets witnessed a plethora of headlines such as these on Monday, which led many to erroneously conclude that the rating agency had in fact knocked the AAA rating of the US down a notch or more. Our own Globe and Mail concludes that the S&P’s shift in outlook basically amounted to an “unprecedented scolding” that was intended to “puncture the mood of optimism” that resulted from President Obama’s presentation of a US deficit-shrinking plan last week.

In fact, the S&P deliberately underlined the risk being posed by “political negotiations” on what to do about the deficit, and when to do it. The rating agency feels that the solutions to the problem might only be on offer after the 2012 US national elections, and that is why it raised the red flag on Monday. The Atlantic reminds us that “the US debt problems are large, and they will be painful to solve. But they are not intractably large or painful. It is our bitter, partisan politics—and our own unwillingness to compromise, or even face reality—that is putting us at the most risk.”

However, the entire issue of ratings being issued, as well as what they might mean at a particular moment in time, should be brought into any such discussions for the sake of fairness. It is an open secret that vast amounts of criticism have been leveled at the CRAs (credit ratings agencies) in the aftermath of the staggering losses that took place in the CDO niche just a couple of years back.

For instance, losses of $125 million on more than a third of a billion dollars’ worth of CDOs that had been issued by the Credit Suisse Group came despite such instruments having received a AAA or Aaa rating by…Standard & Poor's, Moody's Investors Service, and the Fitch Group. When pressed for answers to such generous ratings, CRA executives fired back at Congressional investigators with the reminder that all their agencies really do is to offer “opinion.”

Well, then, yesterday’s shift in outlook is also, only “opinion.” It is rather ironic that Wall Street should be the one questioning the long-term credit status of the US following what has transpired…on Wall Street of late. This morning, Treasury Secretary Geithner stressed that he disagrees with the S&P statement. In his opinion.

And that concludes the assembly of fact and opinion on offer this morning.

Until tomorrow,

Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America

Websites: www.kitco.com and www.kitco.cn

About the Author
Jon Nadler

Jon Nadler is senior metals analyst with Kitco Metals Inc. in Montreal.

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