Wednesday, July 27, 2011

US Debt Crisit Sends Gold Price to All Time High

Obama on US debt crisisThis week gold reached a new all time high of $1630 US dollars. Of course, along the way to this new milestone, gold has hit many all time highs and will hit more as it continues to increase in value. The commodities and precious metals bull market still has years ahead of it, and global ecnomic uncertainty continues to push the gold price upwards, and the US`s longterm economic troubles and the near-certain continued decline of the US dollar all make the price of gold continue to rise.

The US has declined over the past year or two, making the US dollar gold price increase more than the value of gold has increased. If the value of the US dollar decreases while the value of gold stays the same or rises only slightly, then the US dollar price of gold will rise. So the degree of the increase in the gold price is somewhat artificial if you are reading it in USD. But even in a currency like the Japanese yen that has held steady much more than the US dollar, the price of gold has risen steadily over the past couple of years. So regardless of currency, precious metals are still in a bull market and gold is still being used as a safe haven investment.

The new all time high this week was related to the American debates over debt, the debt ceiling, and a possible default on the US`s debt. A US default would be an extremely frightening situation for most, since it would seriously harm the credibility of the US government and its ability to pay back its debts. Such damage to the US`s credibility could lead to the dropping of US debt instruments or reluctance to purchase more. The value of the US dollar could be severely affected by this.

The good news for people with investments in gold is that the collapse of the dollar will make their gold even more valuable. As I alluded to above, a simple increase in the USD value of gold itself doesn`t mean that gold has increased in value. But it does mean that those with investments in gold will avoid losing the value of their wealth. And if US dollar denominated assets drastistically drop in value, those who own gold will be in the perfect position to liquidate their gold and buy up US dollar assets at rock bottom prices.

This scenario will in all likelihood happen at some point in the next few years. The question is, will it happen in the immediate future when the US government makes a decision on whether to increase the debt ceiling or not? I seriously doubt that the US will default right now. I think a lot of politicians are milking the current debates for all they are worth. There will be a time when defaults are unavoidable, but I don`t think that will be in the immeidate future.

Gold will continue to rise anyway.

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