Gold hangs on to fear premium from debt crisis

In the Lead: “Factoid Festival”

One of the reasons industrial metals speculators are apparently skittish (but not yet too much) during these days of indecision in Washington is that the upshot of either plan- Mr. Bohener’s or Mr. Reid’s-will be lower spending levels. That, in turn, could lead to slower US economic growth. That’s not some foggy theory, mind you. As things already stand, America’s pace of economic progress (as reflected by its GDP) was slower in Q1 of this year (by 1.2%) because of more restrained government spending.

Estimates for how much the Boehner/Reid plans might slice away from the US’ GDP between now and 2015 range from 0.1% per annum to as much as 0.5% per annum. Those prospects would give Mr. Bernanke not only something to ponder, but reason to keep a large supply of Rolaids handy near his bed. Consider that even before these measures are rolled out, the current statistical data (released today) will show that US GDP is moving along at a 1.3% growth rate (versus economist projections that estimated it to be near 1.8% per annum). Factoid #38 appears to be fairly grim, Mr. Bernanke.

While the American economy managed the expand three time faster than the near-stall of 0.4% it exhibited in Q1, the rather anemic pace of job and income growth makes the potential implementation of the spending cuts being cobbled together in DC these days a thing of worry for the Fed. Apparently, that holds true for oil traders as well, as this morning they pounded black gold lower by $2.25 (to just under the $95) per barrel in the wake of the weak GDP figure. Stock market players also voted with their feet after the GDP data, and those feet were pointed towards the exit doors; the Dow lost 125 points in a hurry following the opening bell’s chiming.

Falling US stocks might just present the perfect buying opportunity for…China. Huh? Yes, China. As in: the largest holder (1.15 trillion dollars’ worth) of US Treasuries. Independent economist Andy Xie tenders the opinion that China should consider buying US equities not only as an alternative to the possible debt debacle in the making on Capitol Hill, but because they might actually present a better investment proposition than Treasuries. Now there’s an elegant and most helpful solution to the putative efforts of Mr. Bernanke to keep the Dow aloft that some have theorized QE to really be all about…

For the time being, however, China has certain…other priorities, such as addressing the potential slew of losses it might incur if loans to local governments implode and undermine the country’s banks.

Regulators in the country are worried sick that there is a huge shortfall between the amount that lenders have set aside to cover such losses and the size of the potential losses. In fact, the amount exceeds the aforementioned holdings by China that are parked in US Treasuries.

The tally is 1.7 trillion dollars. So, whenever you read someone railing on the subject of US debt and related problems, you might pull fascinating factoid #94 out of your sleeve and inform them than China’s debt ‘problem’ – liabilities on the order of nearly 2 trillion bucks, and local governments whose debt represents 116% (!) of their revenue. How familiar doe all of that sound? Not to mention that the first audit – yes, the first one – of local government debt only took place last month in China. Someone at Moody’s must be sharpening their scalpel as we speak…Bad debt? You ain’t seen nuttin’ yet.

We close this week with a rather interesting angle on the debt maelstrom of indecision in Washington; the one offered by David Weidner in the columns over at WSJ.com recently. Mr. Weidner suggests that beneath all of the anger and posturing and name-calling and such, there lies a secret and perverse desire to witness the mushroom cloud of default, and that we are all (not just the dyed-in-the-bullion gold bugs) guilty of harboring it. Take it away, Mr. Weidner:

“I would argue that there is one more motivation at work in both D.C. and Wall Street: an overriding curiosity. Admit it. Part of you wants to see Washington blow it. You want to see our national debt downgraded. Deep down inside, against your more rational instincts, you want to see a U.S. debt default. We haven’t had a real default since powdered wigs and tri-cornered hats were in vogue. The reason, maybe the only reason, we like games of chicken is the potential for disaster.

“We want to see someone wait too long, past the moment of no return. And the funny thing about it is as that moment comes closer — in this case, Aug. 2 — we want to see it happen even more. If anything, brinksmanship spurs a rabid, adrenaline-fueled curiosity. In the debt-ceiling debate, we’ve got it in spades. And, given the way each side is misreading the other, the odds are getting better every day that we will find out how spectacular a crash would really be.”

On that suspenseful note, we leave you hanging until next Monday.

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

About the Author
Jon Nadler

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

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