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Commodites Soar as US Dollar Plunges to New Lows Due to Record National Debt

Commodities / Gold & Silver Sep 20, 2007 - 04:57 PM GMT

By: Gold_Investments

Commodities Gold
Spot gold rose more than one percent to hit a 27-year high at $730.20 an ounce this morning on safe-haven buying and a slide in the dollar to record lows against the euro.
Gold was quoted at $728.00/728.50 an ounce, compared with $721.10/721.90 in New York late on Wednesday.


Gold has risen more than 15 percent so far this year. In January 1980, gold reached its all-time non inflation adjusted high price of $850. If one was to adjust for the considerable inflation of the last 27 years, the inflation adjusted high would be some $2,400. Most commodities are now at inflation adjusted all time record highs and given increasing uncertainty regarding the health of the U.S. economy and the USD it seems extremely likely that gold will challenge the inflation adjusted high of $2,400 in the next 5 years.

News that the U.S. debt limit is to be increased to $9.815 trillion will put further pressure on the USD. The U.S. national debt has now increased by more than 90% since George Bush came to power 7 years ago (more in Forex and Gold below).

Forex and Gold
The USD hit a new all time low against the euro at 1.4064.
The USD has fallen to a new all time low mark on the US Dollar Index at 78.791.

A number of factors were cited for the USD further sell off. Bloomberg reported that Bernanke will tell a congressional hearing that the U.S. housing slump threatens to slow economic growth. This is not new news and the currency markets had likely already priced this in.

Of more importance was the breaking news regarding the likelihood that the Saudis may break their USD peg as they are refusing to cut interest rates in unison with the Fed for the first time (http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/09/19/bcnsaudi119.xml). This may result in the huge petrodollar reserves of the region staying in the region or being diversified internationally and not recycled in the USD Treasuries and USD denominated assets.

Ben Bernanke has placed the dollar in a dangerous situation, say analysts
Also of importance is the news that Treasury Secretary Paulson expects the federal government to reach its $8.965 trillion statutory debt limit on October 1. Paulson, in a letter to congressional leaders, urged quick Senate approval of a bill that would increase U.S. borrowing authority by $850 billion and reduce chances that uncertainty over federal funding could exacerbate financial market turmoil. "The full faith and credit of the United States, to which we all remain committed, is a national asset and a cornerstone of the global financial system," Paulson wrote. "In light of current developments in financial markets, which would be exacerbated by uncertainty in the Treasuries market, I urge the Senate to pass the legislation reported by the (Senate) Finance Committee to increase the debt limit as soon as possible," he wrote. The finance panel last week approved an increase in the federal debt limit to $9.815 trillion.

Greenspan recently chastised George Bush's fiscal policies. He said that Bush has engaged in "profligate spending" and has abandoned "fiscal restraint".

It is not surprising that Greenspan has questioned Bush's fiscal policy. The national debt limit has gone from $5.12 Trillion to be soon over $9.815 Trillion in less than 7 years. This means the national debt has increased by more than 90% in just 7 years. Fiscal conservatives have said that Bush has engaged in drunken sailor spending on par with Latin American banana republics. Some have even suggested that his pork barrel "guns and butter" spending (more guns than butter) could push the U.S. close to bankruptcy - http://www.cato.org/research/articles/cpr28n1-050101.html. The Emperor is not wearing any clothes and their international creditors in China, Japan and the Middle East are getting extremely nervous which could lead to a wholesale dumping of and a run on the USD.

Silver
Spot silver is trading at $13.10/13.11 (1200 GMT).

PGMs
Platinum was trading at $1311/1316 (1200 GMT).
Spot palladium was trading at $334/338 an ounce (1215 GMT).

Oil
Oil prices closed Wednesday at a record high near 82USD a barrel in New York following news that U.S. crude reserves tumbled last week. They remain near record highs but are off somewhat on profit taking.
With the USD down some 30% against a basket of currencies in recent years, $80 a barrel today is not what it was in 2001. Oil producers seeing their dollar revenues continuingly depreciating are likely to seek higher USD prices.

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