Prospect Of $1 Trillion US Annual Budget Deficit Push Precious Metals Higher

Gold and silver surged again yesterday (up 5% and nearly 8% respectively) as the serious inflationary consequences of the Treasury’s unprecedented plan to buy up at least $700 billion of toxic assets was realised. Gold surged from $861.40 to close over $900/oz but has since given up some of its gains, likely on profit taking.

Given the size of gold’s move up in recent days (up 15% in less than a week) profit taking would normally be expected however these are unprecedented financial times and thus investors waiting to buy on a dip may be disappointed. The psychological level of $1,000/oz looks likely to be regained in the next few weeks and it may get there sooner than even the gold bugs expect.

Extreme volatility remains present and looks set to continue on the coming days. Besides sharp declines in stock markets yesterday, there were also sharp moves with the dollar and oil - they fell sharply and rose sharply respectively.

Oil surged $25 yesterday, its largest one day rise ever but mercifully it has given back much of the surge in price overnight. The surge appears to have been due to contract expiry and exacerbated by a massive short squeeze where those short the oil market had to buy back their positions when the oil price rose against them.

Commodities in general (Reuters-Jefferies CRB) also surged and were up 3.9%, after rising some 11% last week.

The dollar lost 2% against a basket of major currencies and 2.6% against the euro (above $1.48 again). The dollar is set to come under serious pressure in the coming months as the US’ creditors internationally grow increasingly nervous regarding their massive dollar holdings. Even marginal selling by the Chinese, Japanese, OPEC nations, India and Russia could see the dollar falling significantly. There are real concerns of a downgrading of US government debt which could spark a run on the dollar akin to what happened to the British pound on “Black Wednesday” in September 1992.

A run on the dollar is becoming less unthinkable especially in the light of the massive US trade and current account deficits and the prospect of a $1 trillion ($1,000 billion) federal deficit next year. Also, we have seen many retail, mortgage and investment banks be taken over, nationalised and go bankrupt and more are soon to follow. And now even “safe haven” assets such as US money market funds are suffering from massive redemptions as investors grow increasingly fretful regarding paper assets, preferring finite, hard and tangible assets such as gold and the precious metals.

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