Posts Tagged ‘us treasury’
Swedish Bank Analysts Gold Predictions
Commodity analysts from Swedish bank SEB AB said in a report that “the continuation of current debt factors combined with longer-term dollar skepticism are all likely to fuel demand and limit downside risk for gold prices.” (03/02/10, Business Week, Gold Gains in New York on Alternative Investment to Currencies)
This quote was found in Business Week two weeks ago and it points to something important. Gold is building steam! More analysts are coming out regularly in favor of long-term gold price increases.
What they say is that the U.S. debt factors are creating gold demand. The U.S. debt is currently around $12.5 trillion and rising rapidly. The U.S. government last week reported a record monthly budget deficit for February 2010 of $220.9 billion and is predicting a budget deficit of over $1 trillion dollars per year for the next 9 years. It is looking like a balanced budget going forward is going to be impossible. The White House is projecting that the interest payments on the debt will reach $500 million per year by the year 2014. The National Inflation Association wrote that “We are now at a point where if the U.S. government taxed Americans 100% of their income, the tax receipts generated would not be enough to balance the budget. Likewise, if the U.S. government cut 100% of its spending including defense, but kept paying Social Security, Medicare and Medicaid, we would still have a budget deficit.”
As far as long-term dollar skepticism is concerned, all we need to do is look at the deficits. All of this money is being “printed” which is what is causing international concern about the U.S. Dollar, and rightfully so. If we look at just a few examples, Germany 1919-1923 and Zimbabwe most recently, these currencies hyper inflated until they finally collapsed.
If the debt in the U.S. continues to climb and we continue to print money at will, internationally the dollar will continue to loose its status as the world’s reserve currency, inflation will set in at a much higher pace and gold prices will continue to rise. Limited downside risk to gold due to these factors will continue as the support level on gold will continue to get stronger, making price drops less likely and less severe.
Concerns about inflation and a possible dollar collapse are the primary factors fueling demand for gold in addition to price increase speculation and will likely continue to be the primary driving factors for years to come.
Gold vs. U.S. Debt
I received an interesting piece of data this morning so I thought I would share it. The spreadsheet ultimately compares government debt with the amount of reserves in gold we have in the U.S. Treasury. The amount of gold owned by the treasury has remained constant for many years at 261,498,899.32 ounces. The really interesting figure is how much the price of gold would have to be per ounce in order to monetize the debt.
In 1980 the total amount of liquidity in the market was $1.4 trillion (that includes government debt, NYSE Market Cap, Corporate Bonds and M1) of that number the government debt total was roughly $80 billion. The 1980 high close on the spot price of gold at the time was $825 per ounce. If the government was to monetize the debt (pay it off) with gold in 1980 it would have only needed to do that at $297.90 per ounce. So in terms of gold to debt ratios, spot gold was overvalued at the $825 closing high.
In 1989 the total amount of liquidity in the market was $3.12 trillion, of that number the government debt total was roughly $144 billion. The spot price of gold at the time was $416 per ounce. If the government was to monetize the debt with gold in 1989 it would have needed to do that at $553.35 per ounce. So in terms of gold to debt ratios, spot gold was slightly undervalued.
In January 2010 the total amount of liquidity in the market is $25.8 trillion, of that number the government debt was roughly $12.4 trillion and rapidly growing. The spot price of gold is currently $1,110 per ounce. If the government was to monetize the debt with gold today, the spot price would need to be an amazing $47,239!
Since we know that wealth never disappears, it merely shifts location. And we also know that, so far in this trend that when investors have become nervous about cash they have shifted their wealth from cash, to stocks or bonds. When they get nervous about stocks they shift to bonds or cash. When they get nervous about bonds they shift to cash or stocks. Therefore, so far in this trend cycle, when investors get nervous they have been shifting from paper to paper. We also know historically, that ultimately this will change and the flight to safety will be to hard currency assets ie. Gold and Silver.
Number one, look at the amount of increased liquidity (money) in the market over the last 30 years, from $1.4 trillion to $25.8 trillion. That is a lot of money. I am not suggesting that all of that wealth will shift this way since it is most likely that once the flight picks up enough steam, those currently liquid markets will most likely become illiquid. But if the 80/20 rule applies that would be $5.16 trillion shifting in the physical metal direction. Almost twice the entire market cap in 1989! And remember, we’ve not taken into account all of the markets, just those four. Number two look at how much the debt has increased, we are in deep trouble here with no signs of stopping. Keep in mind that this number doesn’t include Social Security or Medicare which experts estimate to bring the debt to somewhere between $55 and $80 trillion and growing! And that debt must be addressed one way or another. Lastly look at the fact that if the government was going to monetize the debt with gold they would likely need to confiscate bullion in order to have a more meaningful total number of ounces since the government holdings have never been audited and studies done by GATA suggest we actually hold far less than what we say we have.
Since all the gold that has ever been mined is only 161,000 tons and fits into two Olympic sized swimming pools. You can guess the impact on gold if this $5.16 trillion wall of wealth shifts into physical metals. And since the physical metal has already begun to become scarce on the markets as the 2nd tier wealth began to shift from paper gold (ETF’s and stocks) into the physical. This would likely send rare gold coins to new heights as money would flow into this asset class.
IRS Invades Privacy of American Investors
Over the years many global investors–including Americans–have sought to safeguard their assets and protect their financial privacy by opening accounts with banks in Switzerland.
Some, no doubt, had the intention of evading taxes by sending assets to Switzerland.
But avoiding taxes is far from the only reason for an investor to want to preserve assets.
Nevertheless, the US Treasury Department–more specifically, the Internal Revenue Service–will soon have free access to the accounts of nearly 4,500 American investors with Union Bank of Switzerland (UBS) as a result a strong-arm deal in which the US threatened the Swiss bank with sanctions if it did not open up its books to US regulators.
This deal was originally reported as impacting about 4,500 American investors, but more details are emerging as time marches on. It is now being reported in the press that 10,000 accounts at UBS are being looked into by the IRS and it has also been suggested by The Wall Street Journal that other Swiss banks–with as many as 52,000 American accounts–will also be targeted in similar deals with the US Treasury Department.
Furthermore, the long arm of the US Treasury will now reportedly move into Asia, where other Americans have sent assets to protect them from hazards like a collapse in the US dollar, frivolous lawsuits or some other issue or crisis centered in the USA.