Gold & Silver, STAFF NEWS & ANALYSIS
Puerto Rico Default Bruises Dollar, Boosts Gold
By Daily Bell Staff - May 02, 2016

Scott Minerd, global chief investment officer of Guggenheim Partners, said on Wednesday it is a good time to dip into U.S. Treasuries in the wake of their sell-off.  “It is impossible to get the timing of anything exactly right. You have to ask yourself, ‘Are you a speculator or an investor?'”  -Reuters

Puerto Rico is about to default on bond obligations today, but some of the largest bond funds in the world are starting to “nibble” on Treasuries again.

This is after an April sell-off that The Wall Street Journal and other publications attributed to “improving sentiment toward the global economic outlook sapp[ing] demand for haven debt.”

Over the past few weeks, investors have been easing up on government bonds and buying riskier assets: stocks, oil, junk bonds and emerging-market equity and bonds.

Without belaboring the point, one wonders what it is that so attracts a variety of corporate investors to US debt. Saudi Arabia just threatened to sell off US$750 billion in US assets. The BRICS are doing everything they can to reduce dollar exposure.

It is almost never discussed by the mainstream media, but the totality of US obligations has been estimated to run around US$200 TRILLION. That’s not a feasible number for any sovereign entity to redeem: not even a nation that the prints the world’s reserve currency.

And now Puerto Rico is about to default. Here, from ZeroHedge:

Puerto Rico Says Will Default … Begs Congress For Help “Or Else Crisis Will Get Worse”  … It’s D-Day in Puerto Rico. As Bloomberg reports, investors are finding little comfort in the Puerto Rico Government Development Bank’s efforts to strike a last-ditch agreement with creditors to soften the blow of a default …

The bonds that mature today (May 1st) have crashed to just 20c (disastrously below the 36-cent recovery rate the commonwealth proposed in March).  It appears investors are not buying what Puerto Rico is selling and prefer to dump the bonds than hold out in hope of a ‘deal’…

And here’s some recent commentary from USA Today:

The confrontation between debt-swamped Puerto Rico and its creditors is intensifying as the U.S. territory will default on payments due Monday, deepening the island’s financial crisis and placing additional pressure on Congress to intervene.

The debt crisis threatens to resuscitate moribund ideological debates over the propriety of federal bailouts and the impact of fiscal mismanagement on the lives of real people faced with insufficient services.

We were going to ask whether the default in Puerto Rico might have an impact on gold prices relative to the dollar. But Kitco answers that question this morning with the headline, “Gold Hits 15-Mo. High Above $1,300; Slumping Greenback Fuels Metals Bulls.”

The dollar, of course, is depreciating against gold and “safe haven demand” is become more pronounced. And, yes, the safe-haven in this case seems to be gold and silver rather than US Treasuries. Silver reached a 15-month high over $18.00 overnight.

For so many years, sovereign debt has been flogged as the investment of choice for the risk-averse. But a quick look around the world reveals that the questionable nature of this perspective.

The European Union has virtually bankrupted the entire southern half of Europe. China, Russia and Brazil are all struggling economically. One can certainly question whether such struggles will result in a continual sovereign price erosion.

The apparent upcoming Puerto Rico default on $422 million is no minor glitch. Puerto Rico is a US Territory. Its situation will surely fuel fears about further US-based insolvency.

In fact, there are other issues taking aim at the dollar. We believe firmly that the goal of top banking elites is a single world currency. As hard as it is to believe, the dollar is gradually being destabilized, from what we can tell.

Saudi Arabia is the guarantor of the dollar-as-reserve. Yet the US and Britain are both undermining the Saudi regime. The BRICS, which are providing a dollar alternative, were invented as a unit by Goldman Sachs.

The derivatives marketplace has a notional value of over a thousand trillion dollars. A significant failure there could surely bankrupt the entire, international financial system.

Importantly, as the world transitions toward an international currency, the big anti-gold manipulations seem to have diminished. For one reason or another, those with clout in world markets seem content to let gold and silver appreciate for now.

Perhaps these money metals are seen as providing a bridge of sorts from the dollar to something else. In any event, the perilous state of sovereign debt and the apparent relaxation of anti-gold forces would seem to present an opportunity.

We’ve often stated that this decade reminds us of the 1970s. We’ve reported on the presence of stagflation. But we also recall what gold and silver did in the 1970s.

Gold and silver ran up hard at the end of the ‘70s – reaching prices against the dollar that have likely never been equaled, accounting for inflation.

Conclusion: Is gold on another epic run? If it is, then chances are it will outperform numerous asset classes as it did less than a decade ago. And that certainly includes US Treasuries.

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Posted in Gold & Silver, STAFF NEWS & ANALYSIS
  • Bruce C.

    I just have this feeling that even if Puerto Rico defaults on their bond payment today it’s going to be another big, fat dud if one is looking for fireworks. I hope I’m wrong because I’m frankly getting tired of the shenanigans, but $422 million is such a pittance. Hopefully it’s symbolic though and becomes the straw that breaks the back.

    Personally, I hope the default goes through and the dumb-ass investors who bought Puerto Rican bonds get what they deserve – which is not much. I’d also like to see a bunch of screaming Puerto Ricans dragging their politicians out of their offices and kicking their asses. Maybe we’ll see some TV coverage of protesters promising to ream some US Congressmen too as soon as they can get to DC.

    I hope gold goes up too, but I’d trade an ounce of it to see the above.

    • tom

      $422 million? What’s all the fuss about – that’s lunch money to bankers!

      • True. The default is really the issue …

        • Bruce C.

          But it’s not even a default in a way (and especially how that’s defined). How these “defaults” are handled will be important when derivatives start getting triggered. Everybody thinks that will be the last straw, but what if those contracts/laws aren’t enforced either, “for the good of the country/financial system.”

          As I suspected, this thing could drag out for years. It’s just blah, blah, blah. Look at this:

          http://www.bloomberg.com/news/articles/2016-05-01/puerto-rico-will-default-on-government-development-bank-debt

          • Again, you are missing the fear factor. It is not Puerto Rico’s situation that is the problem. The real problem for the markets is what is next for the US? Puerto Rico is not an isolated problem and the larger issue of US financial insolvency is very real.

          • Bruce C.

            I don’t know why people would be more worried about the US than Europe, Japan, China et al. At least “investors” are still buying US stocks and bonds and Treasuries. Not so true for the above. I just think it’s more fun to pick on the US because it’s supposed to be “the shining light on the hill.” Nobody expects much from other countries.

  • Praetor

    Being we are in an election year. The PM’s should take an upward track, see what happens after the election, that will be interesting. Just keep buying the PM’s.

    Puerto Rico, if we are running out of water they should be able to walk or drive up to Miami. They can become the 51st state and add their debt to the debt clock. What’s a half billion dollars when your credit card has 20 trillion plus, on it!!!

  • tom

    “It is almost never discussed by the mainstream media, but the totality
    of US obligations has been estimated to run around US$200 TRILLION”.

    Anyone who is familiar with British theatre will recognize a theme that runs from Restoration comedy to Wilde and Shaw: when an aristocrat is bankrupt, he or she must spend even more than usual. To cut back would immediately signal the truth, and creditors would close in. Even to settle a single debt suggests vulnerability. (In Wilde’s “The Importance of Being Earnest”, the butler reports that cucumbers are not available in the market, “not even for ready cash” – suggesting that actually paying cash for goods was the very last resort of the upper classes).

  • robertsgt40

    The metals will run up proportionally to the dollar going down. I won’t do anything with mine until it’s time to recalibrate to a new currency that’s based on something other than a promise.

  • Bill

    This guy can’t spell OBMA !

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