July 6, 2022

Gold and Silver Prices Soar As Budget Fiasco Sends Wrong Message To U.S. Creditors

Gold and silver prices rose to new highs today on continuing concerns over a weak U.S. dollar, the European debt crisis, growing conflicts in the MidEast and escalating doubts over the ability of the United States to avoid a debt crisis.  The ongoing budget charade in Washington makes it perfectly clear that neither political party has the desire or ability to seriously address the exploding level of U.S. debt.

Gold hit a new all time high of $1463.70 and silver reached a 31 year high at $39.79.  Prices of both metals eased in early afternoon trading with the New York Spot Price for gold at $1456.70 and silver down fractionally at $39.33.  The limit on future increases in precious metals prices has effectively been removed due to the absolute inability of Congress to address the looming debt crisis.

GOLD - COURTESY STOCKCHARTS.COM

With the United States facing a $1.5 trillion dollar deficit on a projected budget of $3.6 trillion, politicians are threatening to shut down the Government over their inability to agree on whether spending should be cut by $40 or $60 billion.  Does anyone really believe that Congress is capable of coming to terms with the reality of an exploding deficit and spiraling national debt when agreement cannot be reached on $20 billion – a mere one half of one percent of total government spending?

The surge in gold prices reflects the realization that the nation is on the fast track to higher interest rates, a spiraling increase in the cost of living and a continued debasement of the U.S. dollar (see Why There Is No Upside Limit To Gold and Silver Prices).

Meanwhile, as the threat of a Government shutdown looms, Treasury Secretary Geithner warned of dire consequences if the U.S. is not allowed to borrow more money by raising the debt ceiling above its current limit of $14.3 trillion.  At a meeting with a Senate Appropriations subcommittee Secretary Geithner forecast that a U.S. default would lead to much higher interest rates, the failure of hundreds of thousands of businesses, payment cuts to senior citizens and a financial crisis worse than that of 2008 – 2009.

Geithner’s prediction of Armageddon, unfortunately, comes with no prescription on how to reign in out of control Government financial policies which are the fundamental threat to the country’s economic future.  It’s not just this year’s or last year’s multi trillion dollar deficits that are the root of concern, but rather the massive long term structural deficits that are now built into Government spending budgets.

The debt limit will eventually be raised and both political parties will claim victory.  America’s creditors will ponder the increasing risk of U.S. Treasury debt and ultimately conclude that the U.S. has no will to fix a financial system on the brink of insolvency.  The ultimate day of financial Armageddon, alluded to by Secretary Geithner, will not be forestalled by our unworkable political process.  The final reckoning and hard choices will be made only when forced upon us by markets that refuse to finance additional U.S. borrowing.

Gold Price Hits All Time High, Silver At 31 Year High

The price of gold hit an all time highs for the second day in a row, while silver prices moved up to a new 31 year high.

As measured by the closing London P.M. Fix Price, gold reached an all time high of  $1,447.00 up from yesterday’s all time high of $1,439.50.  The previous record London Fix Price was $1,437.50 on March 7th.   The all time record high intraday price of gold was also reached on March 7th at $1,444.95.  Earlier in the day, Comex gold futures had hit an all time high of $1,448.60 before a pull back erased the day’s gains.  In late afternoon trading the bid on New York spot gold was $1,431.30.

Silver futures scored another new 31 year high at $38.18 before sliding to $37.45 in New York spot trading.   The closing London P.M. Fix Price for silver was $37.78.

GOLD - COURTESY STOCKCHARTS.COM

In 2010, the price of gold advanced by 30% as investors grew increasing nervous about the value of paper currencies and the increasing threat of inflation.  The U.S. Federal Reserve policy of printing money to fund government deficits sets a horrendous precedence and it appears that other central banks will soon be conducting their own versions of quantitative easing.

The European Central Bank is struggling to prevent numerous sovereign defaults in an effort to preserve the European Union and monetization of the debt seems to be the only feasible “solution”.   Japan, the most heavily indebted developed nation in the world, needs hundreds of billions of dollars for reconstruction after a devastating earthquake and the printing press seems to be their only option.

Reflecting on the fiscal and monetary policies being conducted by the U.S. Government, Warren Buffet stated that “We’re following policies that will lead to a lot of inflation down the road unless changes are made.  The U.S. can’t run the kind of deficits we’re running and other policies without it being enormously inflationary”.

Unfortunately, intelligent changes are not being made and the ruinous policies of central banks seems likely to continue at an accelerated rate.  Gold has broken out to new highs and should see significant price gains in 2011.