Gold still gaining as debt nervousness grows

In the Lead: “Circus Maximus”

The current spread on CDS stands at 63 basis points; that’s the highest level since February of last year. Of course, compared to Greece’s level at 2.5 points, the price of US swaps is cheaper than almost all of 58 other countries. One has to wonder what happens to investors who are snapping up these insurance devices if there is no credit ‘event’ large or small coming down the pipeline.

In fact, there is a real possibility that US bonds could get a serious lift if in fact the debt ceiling is not raised next week. With a dearth of safe havens available to scared investors, US Treasuries might just be (correctly) seen as the lesser of all evils and be in huge demand if America’s debt limit is not expanded. Consider that ultimate irony. Consider the ultimate contrarian trade. The Wall Street Journal in fact fast-forwards to next month and offers a scene where the debt ceiling will have been lifted, the deficit reduction plan will have been signed by Mr. Obama, and, yes the AAA rating of the USA will have been rearranged into a different sequence of the alphabet soup. And, the WSJ proposes, it will make no difference in certain terms.

It might well turn out to be the case that a US debt downgrade could have more effects on the political front than the financial one. For one, the US Congress would be compelled to actually try to address the deficit problem. The other outcome (and we alluded to this recently) is that all of the noise being made by the rating agencies will have the effect of making them also-rans in the big scheme of things and lessen their influence on governments in Europe and the USA.

They S&Ps and the Moodys and the Fitches might become ignored in the process and their ratings trumpets might just come to be regarded as mere “suggestions” or opinion (which is what they were to begin with). In the interim, if anyone can find at safer alternative to (even a AA-rated) US Treasurys market- the largest, most liquid, and deepest such market currently manifest on the global scene- well, they are welcome to try. Good luck. Bet they won’t come up with one.

Until after-voting day on you-know-what, keep spectating. Circus Maximus does not come to town too often…

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

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