2011-08-09

The price of gold advanced on the back of the United States being stripped of its AAA rating

The gold price soared to a new all-time high, touching $1,722.90 per ounce Tuesday morning. The price of gold advanced on the back of the United States being stripped of its AAA rating by S&P. The debt downgrade led to worries over the longer-term sustainability of the U.S. dollar as a reserve currency, prompting a flight to gold. Helping to amplify the trepidation among investors were fresh worries over contagion in Europe as Italian and Spanish debt came under heavy selling pressure.

S&P’s downgrade and the debt ceiling debacle in Washington have certainly contributed to the record-setting run in the gold price. However, this is only half the story. A series of disappointing U.S. economic data has led to concerns over a new recession and to prognostications that the Federal Reserve will hold interest rates near zero as far as the eye can see.

Late last week, Jan Hatzius, chief U.S. economist at Goldman Sachs, lowered the firm’s GDP estimates in 2011 to 1.7% from 1.8% and to 2.1% from 3.0% in 2012. Hatzius also forecasted that the unemployment rate will rise to 9.25% by the end of 2012, and said there is a one-in-three likelihood of a renewed U.S. recession.

In a note to clients, the Goldman economist wrote that “Even our new forecast is subject to meaningful downside risk. We now see a one-in-three risk of renewed recession, mostly concentrated in the next 6-9 months. There are three specific issues that concern us. First, a worsening of the European financial crisis, and a failure of European policymakers to respond adequately, could lead to a further tightening of financial conditions and credit availability, which would worsen the economic outlook globally. Second, our forecast assumes that the payroll tax cut—currently scheduled to expire at the end of 2011—is extended for another year, but if that failed to happen the fiscal drag in early 2012 would increase significantly. Third, increases in the US unemployment rate have historically had a tendency to feed on themselves, and this could happen again.”


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