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Deficits and Spot Prices

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Deficits and Spot Prices

The recent first meeting of President Obama’s National Commission on Fiscal Responsibility and Reform yielded few results. Originally designed to address the growing problem of U.S. fiscal deficits, the delegation has concurred on little at this point except that there is in fact a problem that needs to be engaged.

The primary concern of this commission and many of the citizens it was assembled to protect is our growing fiscal deficit. Because of the accumulation of years of federal budget overages and the recent stimulus bill, the national debt currently represents over $12 trillion. By the year 2020, our national debt is projected to equal over 90% of our GDP – a more than mildly concerning prospect given recent events in Greece.

But further to the question of what implications our advancing debt problem will have on the likelihood of default is controversy over what effect the anticipation of default may have on world markets, and specifically, the market for precious metals.

Because much of the world’s investments are dollar-denominated, concern over American ability to service investor debt would precipitate marked capital flight from these assets to another, perceivably safer type of investment. If the movement in precious metals markets over the last 30, and particularly the last 3 years has taught us anything, it is that the price of precious metals generally exhibits movements opposite that of the U.S. dollar. Such a large switch to precious metals as a means of investment would surely have extraordinary effects on the prices at which they trade.

As U.S. lawmakers consider what to do about a real and growing problem, global investors are waiting with bated breath for the outcome.

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