Political Metals

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Updated Monday, Aug 8. Go directly to updates
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After the markets closed Friday, S&P downgraded US credit rating from AAA to AA+ with a negative watch.  Although there have been warnings as far back as April, this is significant because it is the first time the US actually lost its sterling AAA rating since it was granted in 1917. S&P’s full report in pdf. Dagong, the Chinese Credit Rating Company lowered the United States to A+ last November after the U.S. Federal Reserve decided to continue loosening its monetary policy and announced a further downgrade to A earlier in the week.

With this historic downgrade the US credit rating is at par with New Zealand and the bonds of Germany, France, Canada and the UK now have a higher rating.

Initial reactions to the downgrade

Buffet, whose Berkshire Hathaway was downgraded from AAA to AA+ by S&P in February, told FBN late Friday that the downgrade of the United States’ triple-A credit rating “doesn’t make sense.” He further went on to say

If nothing else takes place, meaning, if all other variables hold and there isn’t say, a new problem in Europe, it won’t make any difference. “Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you’re talking about inflation, that’s a different question.”

Peter Schiff, on the other hand, thinks that the downgrade was not low enough! Claiming that he has a higher credibility than S&P for giving the sub prime mortgage related bonds junk status way back in 2006 while S&P continued rating them at triple A, he thinks this downgrade is going to accelerate the flight from the US$ and kick off a self-perpectuating loop of Downgrades > Higher Interest Rates > Weaker Economy > Increased Deficit > More Downgrades.

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Some seem to think that Wall Street insiders knew of the impending downgrade and have already started to sell down stocks the whole of last week. While the global stock markets lost about 10% last week in the midst of worsening Euro zone crisis, the US$ did not experience the “flight to safety” effect as it did in 2008, despite the fact that Switzerland and Japan intervened aggressively in the market to prop up the dollar. On the other hand, gold hit another weekly all time high despite a slightly stronger dollar.

Gold bugs and holders of hard currencies are eagerly looking forward to an exciting week to see how the big boys move their paper assets around. Would they be chasing perceived relatively stronger fiat currencies like the Euro or still-standing triple A paper assets or would there be a frantic flight to gold (& silver).

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Any clue from BullionVault’s Round-the-Clock trading physical gold platform?

While all markets are closed for the weekend, BullionVault’s 24×7 physical gold & silver trading platform may give a clue of what’s ahead Sunday night when Asian markets open Monday morning.

Clients at BullionVault are able to trade physical gold & silver with each other (with BullionVault as a dealer) or directly with BullionVault as principal. A recent check online shows that offers have dried up for gold at their New York and London vaults.

Normally, even during weekends, there are active bids and offers at reasonable market depths. See typical screenshots here. At time of writing, there’s only 3.236kg (104oz) on offer at the London vault while the New York vault has only ONE oz (0.031kg) on offer at whopping $1804/oz ($58,000/kg). The markets at Zurich vault looks more normal, albeit at a much higher spread of 0.93%.

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Finally, Dan Norcini has this to say about in his KWN interview on Aug 6, 2011. Read the interview here.

“I would expect the immediate reaction to the news in Asian trade Sunday evening will be to see the US Treasury markets open lower in a knee jerk reaction with gold opening higher from the get go. Whether or not the bond markets recover is unclear at this time since some of this might have been reflected in the move lower in the bonds just before the close of Friday trading late in the afternoon yesterday.

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Updated 8 Aug (Monday Morning in Asia)

Gold up $25, Dow futures down 276 points when market opens in Asia. Buffet is wrong, Schiff is right!

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By noon, Asian market.

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