Mission accomplished. Can kicked. Crisis averted. At least for another several months...
Gold rebounded sharply on the deal to end the government shutdown and boost the debt ceiling, just as it did when the 2011 debt ceiling deal was struck. As we discussed in yesterday's DMR, the market realizes that the debt ceiling is more a target than any real attempt to limit the amount of debt accumulated.
At this point we don't even know what the new debt ceiling might be, the ceiling has simply been suspended until February 7. Treasury can borrow whatever it needs — unhindered for the time being by a pesky ceiling — putting us ever-deeper in debt and moving inexorably toward that as yet to be determined new debt "target".
The Fed of course has been the buyer of the majority of Treasury's new debt issuance in recent years, and they will likely continue to step up to the plate. The prospects for tapering have dimmed even further.
The day after the 2011 deal, our debt exploded by $238 bln. It was the largest one-day increase in the history of the United States, which took our debt/GDP ratio beyond 100% for the first time since World War II. S&P downgraded the U.S. a couple days after that.
Although the threat of imminent default has been averted, China's Danong ratings agency quickly downgraded U.S. sovereign debt to A- from A. In a press release Danong said: “The [U.S.] government is still approaching the verge of a default crisis, a situation that cannot be substantially alleviated in the foreseeable future.”
This move came days after China Daily ran an op-ed calling for China to "gradually reduce its current dollar holdings as a matter of financial prudence and steadily work with others toward a new global financial architecture." In short, China would very much like to see an alternative to the dollar as the global reserve currency.
The financial press is indeed rife with stories these days about the decline of dollar supremacy. Our mounting debt burden, our propensity to try and paper over our problems by printing more dollars, along with persistent political intransigence are all to blame.
Jim Grant of Grant's Interest Rate Observer, summed it up on BloombergTV yesterday by saying "The U.S. government is persistently, chronically and abidingly cash flow negative. We can't get along without more debt." Indeed, the U.S. debt is expected to reach $23 trillion in the next five-years and if the economy takes another turn for the worse, I fear it could be much worse than that.
There's a requirement in the deal that calls on Congress to hammer out longer-term tax and spending policies for the next decade and report by December 13. We need look back no further than the so-called "super-committee" that begot the sequester to deduce the likely success of that endeavor.
So, sometime early next year, this whole nonsense will begin all over again, further diminishing our already eroded standing as the global economic superpower and keeper of the world's reserve currency.
I'm not surprised in the least that the dollar has tumbled to a new eight-month low and gold is up nearly 3% today. In the aforementioned Bloomberg interview, Jim Grant said he still believes in gold "fundamentally and over the long-term as the legacy and final monetary asset." It would seem I share more than a last name with Mr. Grant...
HSBC Global Research upgraded a number of gold stocks on Monday after seeing "value opened up again," providing fresh impetus for a rerating of the sector following last week's bump.
The investment bank upgraded world number one gold producer Barrick Gold Corp (TSE:ABX) to overweight from neutral forecasting "actually reasonably strong operating results" amid a weaker gold prices.
HSBC cited the positive impact of the sale of the Yilgarn South assets in Australia to South Africa's Gold Fields, a slower ramp-up at Pueblo Viejo and good news from the $8 billion Pascua Lama project on the border between Chile and Argentina.
Barrick's permit for the massive project which is years behind schedule and way over budget, has been upheld by Chile's Supreme Court although a local Antofagasta Court of Appeals last week agreed to hear a new appeal by environmental groups lobbying against the proposed mine high in the Andes.
HSBC predicts the Toronto-based miner will produce 1.82 million ounces at a cash cost of $577 an ounce in its third quarter, in line with the company's own guidance of 7,000 to 7,400 ounces of output for the year and at the lower end of Barrick's own cash cost predictions.
In late afternoon trade on Monday Barrick Gold added 1.8% giving up some of its gains enjoyed earlier in the day.
Barrick is now worth $19.4 billion on the TSX, still down 44% so far this year amid an aggressive divestment and cost-cutting drive.
The world's most valuable gold miner, Vancouver-based Goldcorp (TSE:G) and fellow Canadian counters Iamgold (TSE:IMG), Yamana Gold (TSX:YRI) and Agnico Eagle Mines (TSX:AEM) all received upgrades from HSBC.
Iamgold jumped nearly 4% in value on the Toronto big board, bringing its gains since Thursday's broad gold stock rally to 11%. Yamana (up 2.8%), Agnico Eagle (1.4%) and Goldcorp (2.4%) all reacted positively.
South African miner Gold Fields (NYSE:GFI) stood out as the sole downgrade, but HSBC citing the world's fourth largest gold producer's contrarian purchase of high-cost mines and an SEC investigation into a 2010 deal under the South African government's so-called Black Empowerment Policy.
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