Gold market and America’s triple-A facade

Yesterday’s big news wasn’t really news at all. Standard and Poor’s finally found the nerve to state openly what the rest of the world already knew: the Emperor is naked.

The esteemed ratings service announced that America risks losing its triple-A credit rating. “We believe,” said S&P, “there is at least a one-in-three likelihood that we could lower our long-term rating on the US within two years.”

Officially, America remains the world’s preeminent triple-A credit. Unofficially, America’s triple-A credit is a financial Potemkin Village. It is all façade. The US lost its triple-A credentials years ago, but the rating keeps hanging around – a function of tradition, decorum, politics and complacency.

Behind America’s triple-A façade, its creditworthiness steadily deteriorates.

The budget surpluses of the second Clinton Administration yielded to the $300 billion deficits of the Bush Administration, which gave way to the mind-blowing $1 trillion deficits of the Obama Administration. In the process, America has amassed debts that approach 100% of GDP, while also piling up future obligations that would amount to about 500% of GDP. Both of these debt numbers are only a rounding error away from Greece’s debt-to-GDP levels.

Greece, as you may recall, is the non-triple-A rated country on the verge of declaring bankruptcy. S&P considers Greece a “junk” credit – branding the debt-strapped nation with a BB- rating. Greece, with a debt-to-GDP of about 150%, clearly deserves its BB- rating. But that’s why the US, with debt-to-GDP approaching 100%, does not deserve its triple-A rating.

Why are the heavily indebted Greeks a junk credit while the heavily indebted Americans remain a triple-A credit?

Hard to say exactly. But one very important difference comes to mind. The Greeks cannot print the euros they need to repay their debts, but Americans can, and do, print the dollars they need to repay their debts. A second important difference also comes to mind: Standard & Poor’s is not a Greek company; it is an American one.

As such, S&P’s announcement yesterday began patriotically:

“Our ratings on the US rest on its high-income, highly diversified, and flexible economy, backed by a strong track record of prudent and credible monetary policy. The ratings also reflect our view of the unique advantages stemming from the dollar’s preeminent place among world currencies.”

After saluting the stars and stripes, however, S&P continued:

“Although we believe these strengths currently outweigh what we consider to be the US’s meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the ‘AAA’ level.”

Translation: America is broke.

But you don’t have to rely on S&P’s judgment to realize America’s finances are on a slippery slope. The precious metals markets have been rendering this verdict for several years already. Gold touched another new all-time high yesterday. The dollar’s feeble price trajectory has also been telling the world that America’s finances are broken.

While the dollar remains the world’s reserve currency, it is not acting like it. The dollar’s value has been dropping against just about everything. Really. Everything. Would you believe that the top-performing currency of 2011 is the Paraguayan Guarani? And that’s not all; the next best performing currencies are the Mauritian Rupee, Hungarian Florint, Czech Koruna, Russian Ruble and Colombian Peso.

This is not a joke. Not only are these currencies atop the leader board for 2011, but each of them has also appreciated at least 25% against the US dollar during the last two years. The Colombian peso is up 44%!

To be sure, the Colombian Peso is not about to become the world’s reserve currency. But in a world in which the actual reserve currency has become as reliable as Scottish sunshine, even the Paraguayan Guarani becomes a plausible store of value. Nothing against the Guarani, but if the dollar’s descent gathers steam, we’d rather be holding gold and silver.

In an earlier era, when a dollar bill still commanded respect around the globe, Warren Buffett scorned gold as an investment of “no utility.”

“Gold,” he said, “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

The Martians are not scratching their heads any longer. Gold’s utility becomes evident every time a government becomes profligate. Therefore, now that gold is rising briskly in value – and Berkshire Hathaway’s stock isn’t – deciding where to bury one’s gold is becoming an increasingly important question.

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