Editorial: Hello, US$1,800 gold

August 5 was a day for the history books, as Standard and Poor’s lowered its rating on America’s long-term sovereign credit to “AA+” from “AAA” with a “negative outlook.” This is the first-ever downgrade of the U.S. debt by a major bond-rating agency in 94 years.

In its report, S&P states that the downgrade was a response to the previous week’s debt-ceiling agreement between the U.S. Congress and the Obama Administration. S&P says it “falls short of what . . . would be necessary to stabilize the government’s medium-term debt dynamics. More broadly, the downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.”

S&P lost credibility in 2008 by not sounding the alarm over the sub-prime mortgage crisis in the U.S., and so this latest move shows it’s more than just a cheerleader for entrenched financial interests.

According to the latest U.S. government plan, the country’s US$14-trillion debt will grow by almost 50% over the next decade, and there is still no mechanism in place to pay for the more than US$100 trillion in unfunded liabilities related to social services.

There is still no powerful political will in the U.S. to change the fact that the U.S. government is spending US$11 billion every single day, and only taking in US$5.5 billion in taxes. As if that isn’t appalling enough, it’s the U.S. Federal Reserve that has bought 90% of U.S. federal debt this year.

On a positive note, at least there is growing recognition within the wider U.S. population that this recklessness on the part of its political elite cannot continue for too many more years without devastating consequences for the U.S. economy.

• The S&P downgrade and new moves by the European Central Bank to shore up the Italian and Spanish bond markets triggered a wave of panic selling in stock markets when they reopened in North America on Aug. 8. The day saw some of the worst declines since the fall of 2008. Interest-rate sensitive banks and insurance companies were among the hardest-hit stocks.

Amidst the financial wreckage, gold performed beautifully as a safe haven, blowing past the US$1,700-per-oz. mark and trading just  below US$1,800 at presstime. Gold even sold at higher prices than platinum for the first time since late 2008, as metals with industrial applications slumped on worries of another U.S. or global recession.

As our readers are acutely aware, junior mining stocks – including many gold stocks – got caught in the downdraft, with one-day declines of 10-15% the norm as investors shed higher-risk stocks, and margin-call selling devastated the more illiquid junior miners.

• One of the most gold-bullish developments was a statement by the U.S. Federal Reserve on Aug. 9 that economic conditions were “likely to warrant exceptionally low levels for the federal funds rate, at least until mid-2013.” It is extremely rare for the studiously vague Fed to give a specific date in relation to its key borrowing rate, which is currently between zero and 0.25%, and this only underscores the Fed’s deep concerns with the ailing U.S. economy.
• In an explosive story you won’t find in the mainstream media, the London-based Sarawak Report blog revealed that top Malaysian government officials have been paying U.K.-based television production company and public relations firm FBC Media tens of millions of dollars to produce television programs and place them in the time slots of supposedly impartial, international news programs.

FBC-planted material showed up as news programming on some of the world’s highest profile news networks, including CNBC, the BBC and CNN. FBC Media also boasts of its links with the International Herald Tribune and Business Week.

For instance, BBC World’s pro-Malaysian-government “Develop or Die?” series was made by FBC Media, but did not reveal FBC’s financial payments from Malaysian government officials and Malaysia’s oil palm industry. It also failed to mention that locals are protesting deforestation on Sarawak.

NBC’s international news broadcaster CNBC abruptly cancelled its flagship show “World Business,” which regularly used FBC-produced material, while the BBC said it would no longer broadcast any shows by FBC Media and has launched an internal investigation. CNN appears to be laying low, as one of its top reporters was FBC’s former president.

Sarawak Report is edited by former Prime Minister Gordon Brown’s sister-in-law Clare Rewcastle Brown, an environmental journalist who lived in Sarawak as a child.