U.S. Economy Still on Shaky Foundations, Gold Targets $1600

Stock-Markets / Financial Markets 2010 Dec 14, 2010 - 10:08 AM
By: Rosanne_Lim

In an innovative TV commercial for Barclays Bank, a man walks down on Wall Street but discovers that nearly everything is a fake movie set. The huge investment houses and international banks are all made of paintings on cloth or Styrofoam while the people are mannequins. The nightmare ended with the man finding one real bank which is Barclays Bank.

While the institution claims to bit more substantial, the truth is that all banks have one commonality: they are built upon illusory paper wealth with an unstable foundation.
The financial crisis has made people aware of the vulnerabilities in institutions they trust with their life savings. There are a lot of developments that make these vulnerabilities even more apparent including the following:

* Politicians and the media propagating economic recovery even as the unemployment rate remains stuck at around 10%. Meanwhile, underemployment is around 20%.
* The US national debt is ballooning by $100,000 every three seconds. The once unimaginable debt load of $24 trillion can actually be exceeded in ten years.
* China and Japan are the two biggest holders of US debt. Until now, they have covered the big-spending tab for US politicians. But as they encounter economic problems of their own, doubts about the United State’s ability to pay are increasing.

Given this situation, the inevitable outcome would be higher taxes and cost of living. The government-induced monetary inflation will reduce the value of the dollar. For some people, the answer lies in converting their dollars to other currencies while for others, it is turning to gold.

Investors are struggling to deal with ballooning US Treasury yields, which are supporting the dollar. The rise in yields acts as a stabilizer but there are inflation concerns. As Treasury rates rise, the dollar becomes more appealing to investors. This could damp the prices in dollar-denominated commodities such as silver and gold. On Tuesday, it can be observed that the bullion suffered swift profit-taking.

The jump in yields may also indicate a more worrying trend – that there are widespread concerns about the US’s fiscal position. According to Moody’s and Fitch, the nation’s budgetary outlook will suffer from adding $1,000 billion to the US deficit from tax cuts.

The dollar also continues to benefit from problems in the Euro-zone. Barclay’s economist said that Ireland’s austerity package is “likely to weigh on the euroâ€