Will the Downgrade Mark the End of the Gold & Silver Bull Market?

Austerity in the U.S.A. Many believe it could never happen as the public would not accept meaningful tax increases and/or spending cuts to bring our budget deficit under control and address the unsustainable growth in our national debt. We have always believed that printing money was the only solution. A solution that would, in the long run, destroy the Dollar and lead to runaway inflation. That belief is the primary factor driving the bull market in gold and silver.

But the world changed this weekend. S&P had the guts to put down on paper what we have all already known. Absent meaningful reform, holders of US Debt will realize substantial losses in the future – either through default or inflation. Whereas the politicians and traders believed we would be able to kick the can down the road for at least another 10-20 years, the downgrade served as a shocking wake up call. While the public didn’t care much about the 2008 crisis and the bailouts – the downgrade of our debt has hit Joe and Jane Sixpack like a ton of bricks. In fact, it has been a trending topic on Twitter since the announcement was made last night. Beating out Snooki as a TT is a very big deal.

Which means that the issue is front and center for the public and that has finally given Washington the political cover to take action. Harry Reid has already issued a statement calling for tax hikes (which polls show the public supports). Republicans will surely call for spending cuts and a balanced budget amendment. The public will accept a little bit of both. Austerity is coming.

Austerity is the worst thing for gold and silver. Austerity through sharply higher interest rates broke the gold and silver bubble in 1980 and would do so again today. So, while many may believe the downgrade will result in a sharp decline in the dollar and a rally in gold and silver, I think the opposite. The U.S. finally has the political cover to take meaningful action to address our long-term structural problems. If they follow through on that, I think the gold and silver bull market may be over.

What do you think?


Unknown said...

I have no idea where these people come from. GOLD is going higher in INDIA as we speak. Its going to $12,500 by 2015 as per JIM Sinclair. There is no substitute for the dollar EXCEPT GOLD. $1700 next week, EASILY. Silver will follow.

Spicy Guacamole said...

ok - fair enough. One vote for "to da moon, baybee!" and "nothing will ever change my mind about that".

Louis Cypher said...

Interesting contrary analysis Brian. I'm not sure the Congress critters are ready for austerity any more than the public is. The immediate reaction of the Fed etc was to issue a calculated insult to S&P. They used lower level flunkies to tell them the debt is still good. The MSM was babbling about S&P miscalculated by 2 trillion as well.
In other words they are blustering, bluffing, still in can kicking mode until they come up with an actual plan. There is no plan. There has never been a plan.

If we are talking austerity, deflation, economic contraction etc this gives Bernanke the green light to save us with the printing press or to shut the Fed down and trade in Benny bucks for Obama bucks.

If FOFOA, Bix Weir etc. are correct then we are heading for the paper world burning and out of those ashes something new arising based in part upon Gold.

If Reggie Middleton is correct we are heading for a winner take all scenario and right now it looks like the Chinese hold the best hand if you can believe their numbers.

I honestly don't believe there is any room for austerity here. Where is the austerity going to be applied? What group is going to take the haircuts? The middle class are already tapped out living from week to week.

Where has austerity gotten Ireland and any other country that was stupid enough to follow that game plan? Further downgrades in credit ratings make the debt even more expensive. Sweden and Iceland are the only countries that come to mind with any success in dealing with wayward and irresponsible banks.

In short I am standing still on my physical.

Lack of liquidity across the board will be the biggest concern so Ben better get on the phone to his fellow Central banker friends and the big banks. Repo stuff, (CDS ?), Bonds in the toilet is a lot of stuff to worry about over the weekend.

Louis Cypher said...

OK, so here is my projection. Up, up and away. Next stop $1700 minimum. Crash a couple of hundred and then lift off to da moon if people stop believing in un backed paper. This is based on what I know now. If I learn something different I reserve the right to change my mind.

It's easy to get sucked into scenarios of doom and gloom. Look around though and for the average American NOTHING has changed. Monday might change all that. I still made a bunch of sales today on my weekend biz. Nobody thinks the world is ending (yet?).

If we collectively don't believe in the Central bank mad schemes then they are over. The same applies to Gold.

Spicy Guacamole said...

Great points Louis and I must admit there is some wishful thinking in my post. I'd really like to believe that our leaders will seize this opportunity to take the required actions - short-term consequences notwithstanding. As a saver, I despise the fact that I have to take great risk with my savings just to protect it from inflation.

Austerity is the real solution. Austerity will deal with the banks - forcing them to delever and/or restructure to the point that they no longer present such great risk to our system. Austerity will force governments, consumers and businesses to delever and live within their means. The pain will be immense - as it has been for the UK and Ireland - but will greatly benefit the long-run, as our own Great Depression in the 30's set us up for prosperity in the decades that followed. It is my firm belief that the public is slowly starting to realize that.

Everybody thinks the death of the dollar is a certainty. They thought that in 1980 too. The problem can be solved if the will is there. You may be right that the will is not there and may never be there, and if so, the gold and silver bull run is most definitely not over.

Spicy Guacamole said...

One other thing regarding QE3. I don't think Bernanke has the political backing anything other than a token amount. As Roubini was discussing on Friday evening on Bloomberg, the Fed will probably announce something on the order of $300 billion - which will do nothing in a deflationary collapse. Unless they can do another several trillion, there may be nothing that can stop deflation and thus austerity.

GM Jenkins said...

If we collectively don't believe in the Central bank mad schemes then they are over. The same applies to Gold.

I first read this as "the same applies to God." :P

The only certainty with this stuff, seems to me, is that unanimous-seeming certainty in markets is almost certainly wrong. I'd like to see more skepticism, like here, about the dollar "approaching its intrinsic value" for that reason, as now even JPM is touting gold, if not predicting gold to the moon.

Brian, regarding your comment here, what do you think of the argument that Volcker could prevent dollar collapse in 1980 by raising interest rates, whereas we have no such option now bec we couldnt service debt (among other things, like triggering housing market armageddon). I think a good rule of thumb is "Sell gold when real interest rates are substantially positive."

Spicy Guacamole said...

If the powers finally stop propping everything up (or lose control thereto) and finally allow deflation to run its course, then real interest rates are substantially positive even at 2% or 3%! Sure, that would be depression, housing collapse, numerous bank failures, etc - but afterward the system would be cleansed and we can begin to generate real growth.

Not a likely scenario perhaps, but very much in the realm of possibilities. Seems Germany may put the world on this path by refusing to back Italy, which can lead to a domino effect of sovereign defaults and restructurings.

Steve said...


We had our experience with debt in the mid-nineties, and our now highly regarded loonie was referred to as the 'northern peso'. We got out of it with increased taxes, and spending cuts, courtesy of a Liberal government, which was the last thing expected of Liberals. I don't remember concluding that we had to hunker down, but I do remember that there was a community feeling that we all had to take the medicine. Contrast that perception with the mood in the US today.

I disagree that 'the world changed this week' (sorry, forgot about the centre of the universe and all that ;)). It appears that half of the US would rather hack off their arms than undergo tax increases to pay for their government services. Because of that attitude I disagree that the US is ready for austerity. The only political will your leaders have is 'will I get re-elected'. If the people demand fiscal responsibility then the politicians will jump in front and claim leadership. ("No tax increases, don't touch my medicare" - geez you're fucked). I would also offer that there are a large group of people in the US that are on the austerity plan right now.

You will devalue the dollar. Either through inflation, or over-night. I think trust in gold is well placed, but I don't see how it ends well (what the hell do you end up buying with it - new fiat?)

Interestingly enough, 1650 is where Mr. Sinclair expected gold to stop, unless something very bad happens.

Then again as Roger Waters wrote, 'fuck all that, I gotta get on with this' - this being optimistic, enjoying life and the ride.

Spicy Guacamole said...

Indeed, ledzepSteve, it may be wishful thinking that the US has the ability to take the necessary measures. It may also be the case that the downgrade is ignored and forgotten. If so, one would certainly be better off in gold and silver.

Only thing we can do now is watch and see what the policy response turns out to be.

Louis Cypher said...

Brian said; "As a saver, I despise the fact that I have to take great risk with my savings just to protect it from inflation."

That in essence is why gold bugs are gold bugs. This is our Ghandi like passive way of excusing ourselves from the madness of an ever expanding money supply. Nothing wrong with an ever expanding money supply if it's an honest expansion. But we came to the realization a long time ago it's not an honest expansion. We can't all be super traders.

Kid Dynamite said...

interesting piece, Brian, but I think the key points are:

1) there is no austerity - the debt plan is a joke, even over a 10 year plan
2) rates will be low for a long time.
3) anything that damages the dollar's standing as the world's reserve currency is good for gold (in my opinion)