But the bigger factor affecting gold's price is the US bond bubble. Spooked by global market volatility, and deceived by the Fed's continued intervention to keep bond yields farcically low, private investors seem to have made a 'flight to safety' into Treasuries. In the past, this may have been a prudent move; but today, the government bond market is about as safe as walking alone at night in downtown Detroit.
Despite massive capital inflows, the US dollar is losing ground to the yen, Swiss franc, Aussie dollar, loonie, yuan -- and gold. The state of our public finances is extremely weak. In the FY2010 budget, the federal government is spending 49% more than it is taking in revenue per year, adding to a national debt that is now 98.5% of GDP. Compare this to Greece, which is spending 33.5% more than revenue and has a debt of 113% of GDP. And the political climate here is just as hostile to even the mention of austerity. Unlike the EU, the US has guaranteed the ongoing viability of mortgage holders, major corporations, the states, and its own bloated social programs. Unlike Japan, the citizens can't be persuaded to shoulder these burdens because they are broke too.
If the ratings agencies were honest, they'd rate US debt as 'junk.' Of course, the first characteristic of a bubble is that the vast majority can't recognize that it is one. Bubbles depend on confidence to grow, and quickly pop when that confidence disappears. The People's Bank of China, the #1 holder of US debt, has spent the summer quietly selling Treasuries. Japanese holders of US bonds (#2 in the world) are getting clobbered as the yen surges. This could be the beginning of the end of the US bond bubble. When it collapses, private investors, institutions, and central banks will be trampling on each other trying to reach the exit.
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