Credit Rating Troubles Put a Shine on Gold

Assets and industries traditionally considered “safe havens” are rapidly losing their luster in our high interest rate environment. Precious metals could soon be the last bastion of safety.

The US dollar has been rising since mid-July. Gold has given up about half of its gains from earlier in the year, but it is still up 5.5% in 2023.

Silver is currently headed for the floor of its trading channel. The gold/silver ratio rose sharply to 84.45, providing a strong opportunity for silver.

US Gets a Downgrade

Fitch, one of the nation’s leading credit rating agencies, downgraded the United States’ credit rating from ‘AAA’ to ‘AA+.’ The company cited “steady deterioration” of the nation’s fiscal and monetary situation over the last two decades, citing concerns about how the US will effectively tackle its rapidly increasing debt.

As rates rise, borrowing gets more expensive, which means larger amounts of total tax revenue must go toward interest payments rather than paying down the debt itself.

The downgrade damages the reputation of US Treasurys, which are generally considered the safest assets in the world. Fitch now rates Germany, Sweden, Switzerland, and three other nations as more stable and trustworthy than the US.

Banks Are Still in Trouble

We have also seen a flurry of downgraded credit ratings in the private sector in recent weeks. Banks secure funding both through customer deposits and the issuance of bonds, which makes credit ratings critical.

Moody’s cut credit ratings of 10 US regional banks, and warned of potential downgrades for six larger lenders — including Bank of New York Mellon, US Bancorp, State Street, and Truist Financial.

When Treasurys Tarnish, Gold Glitters

Economists have long observed that periods of artificially low-interest rates encourage production and investment decisions that are not sustainable when interest rates rise back to their market-clearing level.

We are now observing this theory in action. In addition to Treasurys and banks, here are a couple more prime examples:

  • Yellow, the third largest small-freight company in the US, declared bankruptcy on Monday. By the end of the first quarter of 2023, Yellow had $1.5 billion in outstanding debt which will come due in 2024, including $730 million it still owed the federal government. The debt burden simply became unsustainable in a high-interest-rate environment. The closing of the 99-year-old trucking company will lead to a loss of 30,000 jobs and have a ripple effect across US supply chains.
  • Interest rate hikes are expected to hit the multi-family real estate sector hard in coming months. Rate hikes have made transactions difficult to execute, and existing loans will put many investors underwater. The low-interest rate environment made floating debt particularly attractive for several years. With the floating debt rate coming due, investors are due for a rude awakening.

Assets that were once considered the safest bets on the market – Treasurys, banks, multi-family real estate, century-old companies – now appear the most vulnerable to high interest rates.

With these assets losing their safe haven status, gold is positioned to be the go-to investment when investors seek safety. Unlike its “safe haven” competitors, gold did not recklessly take on debt when interest rates were low.

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