Pento – Here is Why Gold Price Will Stay Strong & Not Retreat
With 2011 coming to a close, today Michael Pento, of Pento Portfolio Strategies, writes for King World News to explain why the gold price is remaining firm, near $1,600, and why it is not likely to retreat much further from current levels: “Standard and Poor’s has been greatly vilified for their call to lower the U.S. credit rating to AA+ from AAA. The evidence, naysayers point to, for their justification of excoriating S&P is the performance of Treasuries since the downgrade occurred. Indeed, U.S. debt yields have fallen and the dollar has increased in the four months after being stripped of AAA.”
“In fact, foreigners increased their holdings of Treasuries in Q3 by $17.2 billion and now own nearly 50% of our marketable debt. And 60% of their currency reserves are in U.S. dollars. So there are no signs of panic yet.
The prevailing wisdom of today now yields to the conclusion that getting your debt downgraded automatically renders a boost to your currency and bond prices. Therefore, why worry? Their comfort is ridiculously based upon the notion that the U.S. has a printing press and can create unlimited amounts of inflation. Therefore, interest rates will never rise and debt service won’t ever be a problem.
I think that’s also what the government of Hungary believed after WWII. They had a printing press also and it was used to pay debts accumulated during the war. But their daily rate of inflation hit a global record of over 200%. I wonder if the mortgage rates in Hungary were low back in 1946?
I, of course, strongly applaud S&P for attempting to shed a light on our pernicious debt problem. The U.S. government seems completely inept at taking even the smallest baby step towards lowering our annual shortfall in revenue over spending—let alone paying off the debt
“Recent examples of the paralysis in Washington include; the debt ceiling debate, Simpson Bowles Committee and the payroll tax holiday extension. Time after time D.C. manages to decide to increase the debt without cutting spending.
Our debt now exceeds GDP, and the annual deficits pile on an additional $1.3 trillion each year to that accumulated debt. Our publicly traded debt has increased 100% in the last 5 years!!! What is even worse is that our debt as a percentage of revenue is exploding. Back in 1971, the national debt was 218% of revenue. Today it has skyrocketed to about 700% of revenue, and if you think that is bad you are correct.
But just wait until interest rates start to rise. The average yield on U.S. debt is near 1% today. It was 6.5% in the year 2000. But given our record level of debt and Fed-led money creation, yields on Treasuries could go much higher than at any other point in U.S. history. Just imagine the instability that will arise when yields start to soar on corporate, consumer and government debt.
That’s the reason why I believe if there is any criticism to be placed on Standard and Poor’s it should be that their rating of U.S. debt is still too high and that the downgrade came way too late. It is also the most important reason why the price of gold is still just 20% off its all-time high. And why it’s likely not to retreat much lower than where it is today.”
Statistics: Posted by DIGGER DAN — Wed Dec 28, 2011 3:24 am
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