Gold closed at $1594.10 an ounce July 15th, 2011. This is an increase of 7.5% in two weeks but the media has not focused its coverage on this important event. The price of gold is determined by two factors: the value of the dollar and the demand for gold on the world market. Both of these factors have contributed to the increased price of gold but the underlying reasons are what we need to address.
The United States is in trouble and Timothy Geithner’s face this week show how deeply our debt crisis has become. The stock market rallied on the probability of yet another economic stimulus plan (Quantitative Easing 3) from the Federal Reserve. QE3 may provide short term profits on Wall Street but it will devalue the dollar and our savings along with it. We must concentrate on the credit rating of the United States. As our credit rating is lowered, the confidence on our ability to repay our debt is also lowered. The consequence of a reduction of our credit rating is an increase in the interest rate on our debt in order to entice people to accept the increased rate of default and/or reduced value of the dollar due to inflation (redistribution).
If the interest rate on our debt is revalued up only 0.001%, we would pay an additional $14.3 billion on our debt annually. If the interest rate is raised 1%, we would pay an additonal $143 billion. Our current debt to GDP ratio is 98% – about the same as Portugal. The long term interest rate for Portugal is 10.87% as of July 12, 2011. If the United States would have to pay an additional 8% interest based on the Portuguese debt to GDP ratio, it would add $1.144 trillion dollars annually to our existing debt repayment. This “additional interest” represents our entire federal budget in 1989.
Unless the US dollar loses its standing as the world’s currency, the last scenario is unlikely. However a 2% raise on the interest of our national debt is very likely resulting in another $286 billion dollars on our annual budget. What does the price of gold signify over the past two weeks? The very strong likelihood that our credit rating will be lowered with the United States people paying the consequences. People are buying gold to offset the collapse of the dollar and the Euro.
Gold tallies nine-session gain of nearly $108
Scores record high on risks of U.S. and euro-zone debt defaults
SAN FRANCISCO (MarketWatch) — Gold futures finished at a record high Friday to score a gain of 3.2% for the week, as lingering concerns over the potential for U.S. and euro-zone debt defaults helped prices tally a nine-session gain of nearly $108 an ounce.
Gold for August delivery /quotes/zigman/700181 GC1Q +0.33% rose 80 cents to close at $1,590.10 an ounce on the Comex division of the New York Mercantile Exchange.
Prices, which have climbed $107.50 since they closed at $1,482.60 on July 1, marked a fresh record settlement price. Gold has hit a string of record high levels this week, as the possibility of more stimulus being pumped into the U.S. economy and global debt worries supported buying.