Will Historic U.S Credit Downgrade Bolster Demand For Safe-Haven Metals?

The Credit Downgrade and Its Implications

And there it is! Fitch is the latest credit rating agency to downgrade the United States of its triple A rating, saying successive standoffs over the nation’s debt ceiling and rapidly ballooning federal debt have cast doubt on the U.S to meet all its payment obligations.

The historic downgrade, moves the federal government’s rating as a currency issuer from AAA to AA+. A lower credit rating could make borrowers less likely to lend money to the federal government on favourable terms, which in return will drive up costs for U.S taxpayers.

The credit downgrade now puts the U.S on the same level with the likes of New Zealand, Austria and Canada, below countries such as Denmark and Luxembourg and within touching distance of France, Ireland and Czechia.

The Potential for a U.S. Debt Crisis

In Fitch’s view, the rating downgrade of the United States reflects the expected fiscal deterioration over the mid-to-long term. Their analysis suggests that Debt-to-GDP in the U.S is expected to rise from 98% of GDP in 2023 to over 121% of GDP in 2033 – reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden.

And the interest repayments on that debt are close to hitting $1 trillion for the first time ever in history. Put another way, that’s more than the U.S Education, Veterans’ Benefits and National Defence Budget combined.

If the Federal Reserve continues to hike, that would ultimately increase the odds of a U.S debt crisis becoming the next big “black swan event”.

Most economists have long felt that the Fed has gone one rate hike too far. Now with odds of a U.S debt crisis brewing on the horizon – expectations are running high that the end of the tightening cycle is near.

If you are feeling déjà vu all over again, you aren’t alone.

This has all happened before. Back in August 2011, the S&P Global Credit Rating Agency downgraded the U.S government from AAA to AA+ credit rating. In the weeks that followed, global equity markets reversed gains made in the first half of the year. This in return, bolstered demand for safe-haven metals – sending Gold prices to an all-time high, while Silver prices rocketed to $50 an ounce.

The credit downgrade is sure to reignite an intense political firestorm in the weeks ahead with Republicans accusing President Biden of contributing to the nation’s debt burden of more than $31.5 trillion.

All of this leads to one question: Will political pressure force the Fed to skip, pause or signal an end to their hiking campaign next month?

Only time will tell, however if history has taught us anything, then the time to take action is not at the time of the inevitable event, but before the inevitable occurs. Now is the optimal time to prepare your portfolio and get ready to capitalize on the markets next big move.

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