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Gold and Silver Rally on Back of Increased Risk Aversion

Commodities / Gold & Silver 2009 May 13, 2009 - 05:47 AM GMT

By: Mark_OByrne

Commodities Gold and silver rose again yesterday (1.2% and 2.3% respectively) as the dollar continues to come under pressure.


The dollar has fallen not due to an increase in risk appetite but rather due to an increase in risk aversion due to the dawning realization that the very credit worthiness of the US is at risk due to the global financial and economic crisis.

The former US Comptroller General, David Walker, warned in an op-ed article in the Financial Times that “America’s Triple A Rating is at Risk”. This is because the US has an accumulated negative net worth of US$11 trillion, additional off-balance sheet obligations of US$45 trillion and a current year budget deficit forecast at US$1.8 trillion (a massive nearly 13% of GDP).

These daunting fundamentals mean that America is at risk of losing its AAA credit rating for the first time since 1917. This would have massive implications for the international financial and monetary system as it would likely lead to the dollar’s dominance as the global reserve currency being diminished and consequently gold’s role greatly enhanced. The Chinese government and overnight the Japanese opposition have voiced their concerns regarding their dollar assets (Chief Finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar and if elected Japan would not buy US dollar denominated bonds).

The deteriorating financial condition of Uncle Sam is a long term fiscal and economic challenge that should result in gold remaining in a bull market for the foreseeable future. Indeed, it means that the inflation adjusted high of $2,400/oz reached in 1980 (when the US fiscal situation was positively benign compared to today) is a more than plausible target in the coming years.


By Mark O'Byrne, Executive Director

Gold Investments
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We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

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Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

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