The US AAA downgrade to AA+ and what it means for markets

T1Ps comment which mirrors my own review comment end June;- “Last week gold shares were sold lower as gold soared? Madness? Yes. But there are a lot of folks out there who were whacked by the general meltdown and just had to sell anything they could to cover losses and margin calls. So gold stocks fell with the market. But the speculators will be cleared out at some stage (soon we think) and with gold stocks trading on crazy multiples they must move ahead very sharply indeed as gold continues to climb.”

With GOLD trading sharply higher ($1,710pto + $40) on US debt downgrade (to AA+) it’s clear that investors are entering the ‘Dead Zone’. That is that the prospects of any real growth hereon for western developed economies just took a turn for the worse. Although the downgrade by Standard & Poors has been expected for quite some time the immediacy of the downgrade on the back of the Obama debt extension debacle has surprised a few. The leading Chinese credit agency Dagong has already last week lowered US debt to A from A+. Buffett’s view that US should be on quadruple A just shows how out of touch even some sophisticated investors are to the outlook for US and Europe. In my view we can expect other credit agencies such as Moodys & Fitch to downgrade US debt hereon but I think the real rumblings are in the EU with Spain, Italy and now France on the danger list. In essence the Euro is a ‘dead parrot’. It is deceased. It’s only a matter of time before the ECB finds itself diametrically misaligned with markets and I’m sure downgrades will follow. France could be the real surprise that shakes the tree and it’ll be interesting to see whether Europeans politicians can respond in a timely and efficient manner. I very much doubt it. The absurd stampede into US Treasuries and European bonds as well as the support for busted flushes in the Eurozone (just let these banks go to the wall, none are lending so just put them out of their misery) is absolute madness. The only sound investment here is Gold and it’ll be a while before general equities should be considered as p/e’s are still too high in my view. Others see things differently but the risk scenario to the downside has just taken a new turn with huge market unrest likely to erupt hereon.

ALL clients should reassess their attitudes to risk noting my continued recommendation to consider a 25% weighting in Gold shares. The risk and market landscape has literally changed this weekend. Gold will now likely reach $2,000pto ++ possibly by xmas (2011) and treasury and bond yields could well see some sharp rises once reality sets in.