Gold Spikes 3% After Debt Ceiling Rises & U.S. Downgrade

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Today’s AM fix was USD 1,308.50, EUR 959.87 and GBP 813.09 per ounce.
Yesterday’s AM fix was USD 1,278.25, EUR 944.75 and GBP 797.71 per ounce.

Gold fell $1.80 or 0.14% yesterday, closing at $1,279.50/oz. Silver slid $0.06 or 0.28% closing at $21.27. Platinum climbed $14.80 or 0% to $1,395.20/oz, while palladium rose $7.25 or 1% to $712.55/oz.

Gold prices jumped $36 in 15 minutes and it surged as high as $1,321 per ounce or as much as 3.6% at one stage. Silver jumped by an even greater margin, by 5.1%, and rose as high as $22.18/oz.

Gold rose for the first time in four days after U.S. lawmakers reached an agreement to increase the debt ceiling and increasingly important Chinese credit ratings agency, Dagong Global Credit Rating Co. cut its credit rating for the U.S.

This led to short covering and some safe haven demand for gold as the dollar fell against all major currencies.

Gold in USD and Debt Ceiling - Quarterly, 1933-2013 (Bloomberg)
Gold in USD and Debt Ceiling - Quarterly, 1933-2013 - (Bloomberg)

The smart money is scooping gold bullion up at these depressed levels. Gold is down 23% this year despite robust demand from central banks and especially from India and China.

Global sales of bullion bars and coins gained 78% in the second quarter, according to the World Gold Council, showing that demand actually accelerated.

The U.S. government has avoided default but remains essentially insolvent and its appalling fiscal state has deteriorated once again due to the debt ceiling being raised above $16.7 trillion. Although the U.S. national debt has already surged well above that and as of writing, the U.S. National Debt is actually nearly $16.97 trillion and rising at roughly $1 trillion every year.

It is worrying that the recent debate has again been superficial and revolves around the theatre and political chicanery of the Republicans versus the Democrats and the usual partisan support for opposing ‘teams’ rather than the substantive issue of America’s likely insolvency and the fact that the actual national debt is actually between $100 trillion and $200 trillion and there is little sign of political or economic will to tackle this fundamentally important issue.

The U.S. is engaged in fiscal and monetary policies that are akin to a Banana Republic.

In addition to electronically creating out of nothing $85 billion every month to buy its own debt in the form of bonds, the U.S. is also borrowing more money than it is authorized to borrow, from itself again.

The extra $264 billion or so in borrowing — the difference between the actual real time $16.964 trillion national debt and the $16.7 trillion debt limit — was lent to themselves - by one section of government to another - in recent weeks.  Treasury Secretary, Jack Lew, ex COO of Citigroup Bank, has been using “extraordinary measures” since the U.S. ran out of money a few months ago and has been using government retirement programmes to make up the difference.

This is a form of shell game or confidence trick used to perpetrate what is a dangerous accounting practice that tends to end in tears.

 


Gold and Silver in USD and Debt Ceiling - Quarterly, 2000-2013 - (Bloomberg)

These unusual, some would say fraudulent, accounting practices and the fact that the U.S. is borderline insolvent, contrary to copious amounts of denial globally, are extremely dollar bearish and gold and silver bullish.

The risks posed to the dollar, but also to the pound, euro, yen and other electronic and fiat currencies is why we remain confident that both precious metals will reach real (inflation adjusted) record highs in the coming months.

Silver will likely continue to outperform after its most recent period of under performance.

JP Morgan Chase has issued letters to its business account holders notifying them that as of November 17 the bank will limit all cash transactions, including deposits, withdrawals and ATM usage, to $50,000 per month, and will prohibit all outgoing international bank wires.

Chase Bank has moved to limit cash withdrawals while banning business customers from sending international wire transfers. This has caused speculation that the bank is preparing for a looming financial crisis in the United States by imposing capital controls.

Some have suggested the drastic measures were designed to push business clients into more costly premium business accounts. Bank officials confirmed yesterday that the new capital limits apply to all business account holders but could not say why the measures came about and whether they were bank driven, due to profit motives or government regulations.


Gold in USD and Debt Ceiling, 2011 - (Bloomberg)

The bank will stop processing any outgoing international bank wire, and that any monthly cash transactions in excess of the new $50,000 limit will be subject to penalties and fees.

JP Morgan is embattled after a series of scandals including allegations of manipulation in many markets including LIBOR, foreign exchange, oil and energy markets and of course in the gold and silver markets.

It has received some enormous ‘slap on the wrist’ fines as it attempts to clear up the mess created by the London Whale trading scandal. The bank will pay $100 million to the U.S. Commodity Futures Trading Commission (CFTC), conceding "reckless" behavior led to the trading debacle that generated about $6 billion in losses.

There remains the real risk of capital controls and it will be important to own gold bullion in the event of capital controls.

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