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28 March 2024

Gold closes in on $1500 as US debt downgraded

The ratings agency slammed the US government’s inaction on closing in on its huge deficit. (FILE)

Published
By Vicky Kapur

Spot gold prices shot up to another lifetime high of $1,496 an ounce after ratings agency Standard & Poor’s revised its outlook for US debt to negative from stable. That’s a new record for gold, which had slipped in electronic trading earlier yesterday, but reversed that loss after the ratings news.

S&P said the US economy remained high-income, highly diversified and flexible, but the world’s largest economy may not be able to fully service its credit debt over the next couple of years. “Although we believe these strengths currently outweigh what we consider to be the US’ meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the ‘AAA’ level,” said S&P credit analyst Nikola G. Swann.

“Our negative outlook on our rating on the US sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the US within two years,” Swann said. “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.”

The ratings agency slammed the US government’s inaction on closing in on its huge deficit. “More than two years after the beginning of the recent crisis, US policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” Swann added. S&P maintained its triple-A rating on the US, but that didn’t stop investors from fleeing stocks.

Crude-oil futures also declined, as did most commodities, including copper, platinum and palladium. Silver’s rally remained intact, with spot prices rising to a high of $42.97/oz. The white metal is now up more than 140 per cent year-on-year, rising more than 18 per cent in the past 30 days.

“In 2003-2008, the US’ general (total) government deficit fluctuated between 2 and 5 per cent of GDP. Already noticeably larger than that of most ‘AAA’ rated sovereigns, it ballooned to more than 11 per cent in 2009 and has yet to recover,” S&P noted in its report accompanying the downgrade announcement.

“We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning October 1, 2013), and we believe a delay beyond that time is possible,” S&P said while justifying its negative credit ratings for the US.

The S&P downgrade of the outlook on US debt to negative pushed global markets sharply down, with the FTSE closing at a 4-week low while the Dow Jones Industrials were down 1.5 per cent and Russian stocks plunged to a nine-month low.