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Gold's Future Dependent not on Risk Trends but Sovereign Credit Fears

Gold's Future Dependent not on Risk Trends but Sovereign Credit Fears

2010-05-22 03:22:00
John Kicklighter, Chief Currency Strategist
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Taking stock of the troubles that plague the finances of the world’s largest economies, there is plenty of reason to be concerned that governments will struggle to repay their obligations which will lead to a depreciation of their Treasury paper and currencies. However, it is one thing to erode confidence in something as liquid and seemingly-secure as these instruments and another to encourage investors to fully divest themselves. Government debt from the United States and United Kingdom are two of the most dependable yield-bearing investments in the world; and conditions would have to devolve a long way before large investors truly lost confidence in these assets. In fact, it seems there is very little chance that they will even lose their top credit rating any time in the near future. Alternatively, there are other nation’s that are further down the hole. Greece, Portugal and Spain have had their sovereign ratings cut and there have been warnings they could fall further. Yet, with austerity cuts being implemented and the 750 billion euro financial backstop in place, the European Union has at least bought itself some time. To truly unseat the markets, another major downgrade (or threat of a downgrade) will have to emerge. Japan may carry that burden. Deflation, credit troubles, anemic rates, demographic troubles and a dependence on exports is a set a problems that almost certain to produce a crisis unless global conditions turn robust in the near-future. Under any other conditions, an illiquid, expensive and volatile commodity does not make for a reliable alternative to Treasuries or established fiat currency.

What are some of the potential catalysts for these bigger themes next week? Underlying investor sentiment itself holds the greatest potential; but that will develop through momentum itself. The bigger themes for global fear are there; but they require some kind of spark themselves. From the economic docket, there is relatively little that can leverage a market wide panic or euphoria. Considering the growing doubt over the European Union’s continued existence, the European Commission and OECD’s June economic outlook survey may hold considerable sway over investors. Otherwise, the path will be defined by second readings of US and UK GDP, confidence surveys and inflation reports. - JK
 

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