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U.S. Avoids Debt Default - For Now

Release Date: 
Friday, October 18, 2013

Gold and Silver Prices:

Gold prices recovered from earlier losses in the week to rise by nearly 4% on Thursday following passage of legislation to reopen the federal government and postpone a government default. “On Thursday, gold settled more than $40 an ounce higher. Analysts attributed the move to expectations of continued ‘easy money’ policies and the U.S. government spending ‘way too much money’ now that the shutdown is over.” (“Gold slips, still on pace for 4% weekly gain,” MarketWatch, 10/18/13.)  Gold rose $44.20, closing at $1,318.40. Silver prices were also up $0.62, closing at $22.06.

U.S. Avoids Debt Default – For Now

Following a 16-day federal government shutdown and a near default on America’s debt, Congress finally managed to pass a Senate crafted bill that funds the government until January 15 and raises the debt ceiling until February 7. Mohamed El-Erian, CEO of Pimco, discussed the fallout from this fiscal crisis in a commentary for CNBC. 

“[N]otwithstanding the earlier taper talk, the Fed may now have no choice but to stay longer in its intense policy experimental mode – due both to the likelihood of weaker data and to a perceived need to take out insurance for the economy against future political dysfunction. Markets will soon join the central bank in assessing the extent of lasting damage to the U.S. economy…Past experiences suggest that the next round of negotiations will not be easy. Moreover, in a few months, Congress will be that much closer to the November 2014 elections and, perhaps more importantly, the local primaries. We should not be surprised if both companies and individuals were to consider postponing some important decisions, with a few even opting for greater ‘self-insurance’. This speaks to the risks of lower consumption, less buoyant hiring and fewer investments in new plant and equipment – all ahead of the important holiday purchase season.”

“Unfortunately, it is not an exaggeration to say that many foreigners – and particularly governments and central banks who use Treasuries in size to anchor their precautionary savings – were taken aback by what they regard as Congressional irresponsibility (if not recklessness)…The message from the American private sector (and international community) to Congress may best be thought of as a simple and urgent plea: Please put decisively behind you the shenanigans of the last few weeks and embark on constructive economic and financial governance – for neither our economy nor the plumbing of the global financial system would easily handle yet another set of self-inflicted crises in the next few months.” (“What follows this Congressional deal?” CNBC, 10/16/13)

Government Shutdown Hits Economy, Slows GDP

Standard & Poor’s calculated the U.S. economy lost $24 billion due to the government shutdown. These losses will affect the nation’s already anemic GDP. “The bottom line is the government shutdown has hurt the U.S. economy,” S&P says. “In September, we expected 3% annualized growth in the fourth quarter because we thought politicians would have learned from 2011 and taken steps to avoid things like a government shutdown and the possibility of a sovereign default. Since our forecast didn’t hold, we now have to lower our fourth-quarter growth estimate to closer to 2%.” (“Washington’s Shenanigans Cost the Economy $24 Billion,” WSJ, 10/17/13.)

U.S. Debt Crisis Threatened Credit Rating

Fitch Ratings placed the United States’ credit rating on a “rating watch negative” Tuesday as the federal government neared default on its obligations. In issuing the negative watch, the credit agency wrote, “Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default…" (“Fitch puts US AAA rating on rating watch negative,” CNBC, 10/15/13.)

The U.S. credit rating was last downgraded in 2011 when Standard & Poor’s reduced the government’s rating to AA for for similar reasons. “‘Political brinkmanship’ in the debate over the debt had made the U.S. government’s ability to manage its finances less stable, less effective and less predictable,” S&P wrote at the time. (“S&P downgrades U.S. credit rating for first time,” Washington Post, 8/5/11.)

Later in the week, Chinese rating agency Dagong Global Credit Rating downgraded the U.S. foreign currency rating.  “Dagong, one of China’s four biggest credit rating companies, downgraded the local and foreign currency credit ratings of the U.S. to A- from A, maintaining a negative outlook, the company said in an e-mailed statement today. That’s below Dagong’s rating of Botswana, which has a A rating, and puts the U.S. on par with Brazil…China is the largest foreign holder of U.S. Treasuries and increased its holdings to $1.28 trillion as of July, according to U.S. government figures.” (“China’s Dagong Cuts U.S. Credit Rating After Debt Limit Raised,” Bloomberg, 10/17/13)

China Calls for “De-Americanized World,” New World Reserve Currency

China’s state-controlled news agency, Xinhua, took advantage of the debt crisis to call upon the world to dethrone the U.S. dollar as the world’s reserve currency.

“As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world…[I]nstead of honoring its duties as a responsible leading power, a self-serving Washington has abused its superpower status and introduced even more chaos into the world by shifting financial risks overseas, instigating regional tensions amid territorial disputes, and fighting unwarranted wars under the cover of outright lies...”

“The developing and emerging market economies need to have more say in major international financial institutions including the World Bank and the International Monetary Fund, so that they could better reflect the transformations of the global economic and political landscape.  What may also be included as a key part of an effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant U.S. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.” (“Commentary: U.S. fiscal failure warrants a de-Americanized world,” Xinhua News Agency, 10/13/13)

Physical Gold Demand on the Rise

“Demand for U.S. gold coins has surged in October, reversing recent weak sales, boosted by bargain hunting as prices plunged below $1,300 an ounce and some safe-haven buying due to the U.S. budget impasse.  On Tuesday, the U.S. Mint sold 10,000 ounces of the most-popular 22-karat American Eagle gold coins, for total sales of 22,000 ounces so far in October, a Mint spokesman said.  The October sales are already the highest sales in three months and are nearly double sales of 13,000 ounces in September and 11,500 ounces in August.”  (“US gold coin sales surge in Oct. on price drop, Washington impasse,” Reuters, 10/16/13)

Goldline’s Express IRA Program

Many Goldline clients choose to include precious metals as part of their retirement planning especially during times of economic crisis and uncertainty.* Goldline’s Express IRA allows clients to acquire precious metals on their schedule; they no longer have to wait for your self-directed IRA to be funded before getting started.

Goldline's Express IRA not only provides clients with the ability to diversify their IRA on an expedited basis, clients can also qualify for Goldline's ground-breaking Two-Way Price Guarantee Program when they acquire $10,000 or more of our exclusive bullion coins.  When a Express IRA purchase qualifies for Goldline's Two-Way Price Guarantee Program, clients are protected on short-term upside and downside market movement: they can either call to reprice their coins if the selling price falls (up to a maximum of 28 days depending on the size of the purchase) or, if the selling price of the coins increase during the qualifying period, clients can call Goldline to acquire additional coins at the original selling price.

Goldline provides a wrap-up of the week's precious metals news along with important commentary on the American Advisor Week in Review audio program. Click here to listen.

*Federal IRA tax laws are complex and may change from year to year. Goldline believes it is appropriate to have 5%-20% of retirement portfolio allocated to precious metals. Other individuals and institutions may recommend different percentages. As with any investment, you should consult your tax advisor before making a decision regarding precious metals IRA investments.

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

You should review Goldine's Account Agreement along with our risk disclosure booklet, Coin Facts for Investors and Collectors to Consider ®, prior to making your purchase. Goldline has a spread or price difference between our selling price, called the "ask", and our buy-back price, called the "bid". That spread varies depending on coin or bar you acquire. Spreads on 1 oz bullion coins, 90% silver dimes and quarters, and one ounce and larger bullion bars are 13%. All other coins have a spread of 28%. There is also a 1% liquidation fee when you sell your coins back to Goldline. The market must go up enough to overcome this spread before an actual profit is achieved. Precious metals and rare coins can increase or decrease in value. Past performance does not guarantee future results. Coins are a long-term, three- to five-year, preferably five- to ten-year investment. We believe precious metals are suitable for 5% to 20% of the average investment portfolio though others may recommend a different percentage.

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