Gold barrels higher as Fitch drops potential downgrade bombshell - Wealth Managers

Ratings agency has U.S. on negative watch as debt-ceiling fight drags on

Deja vu 2011? Gold prices reversed higher in a 1% surge late Tuesday, touching $1,287 after debt-ceiling talks went nowhere and ratings agency Fitch dropped a bombshell: It has put the U.S. on negative watch. Silver, meanwhile, endedwith a gain of 0.33% after hitting $21.50.

"Safe-haven bids are coming in for gold as the debt-ceiling worries are gripping everyone," noted Phil Streible at R.J. O'Brien & Associates. "Investors are very nervous and are in a 'risk-off' mode."

"Completion of a debt-ceiling agreement before the ThursdayTreasury deadline appears increasingly unlikely, and market stress is likely to build further in the days ahead," said Vassili Serebriakov, currency strategist at BNP Paribas.
Shadow cast over "full faith and credit"
What did Fitch say? "The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S," it warned. "This 'faith' is a key reason why the U.S. 'AAA' rating can tolerate a substantially higher level of public debt than other 'AAA' sovereigns."

Of the Big Three agencies, Fitch and Moody's both rate the U.S. debt at AAA, in contrast with Standard & Poor's, which issued an unprecedented downgrade in August 2011 that shocked the stock market, pummeled the dollar, and sent gold to its all-time nominal high above $1,920.

"The announcement reflects the urgency with which Congressshould act to remove the threat of default hanging over the economy," a Treasury spokesman said of the Fitch memo.
Stocks, U.S. dollar pressured by uncertainty
On the equities front, continuing uncertainty rattled the major indexes. The Dow Jones dropped 133.25 points, or 0.9%, to 15,168.01, while the S&P 500 fell 12.08 points, or 0.7%, to 1,698.06. The Nasdaq declined 21.26 points, or 0.6%, to 3,794.01.

The dollar ended the day up but also was stressed by the Fitch news -- as are, most likely, our biggest foreign creditors. "The dollar doesn't like this, but I think a lot of people have gone home and equities are closed. But what you can be sure is that China will pay very close attention to this rating," saidDouglas Borthwick, managing director at Chapdelaine Foreign Exchange. "I would expect comments from China and Japan regarding their frustration over the lack of conclusion of the U.S. debt talks. It certainly poses concern for those with dollar holdings."
Key manufacturing index sputters
And earlier in the day, in another sign that the economy isn't ready to stand on its own feet without stimulus, the New YorkFederal Reserve's "Empire State" general business conditions index fell to 1.52 from 6.29 in September, slipping this month to its slowest since May. "With business conditions now anchored around zero for three years, this 'soft' data indicator is not exactly the driver of growth hopes that equities seem to believe in," Zero Hedge noted.

An in some potentially disturbing news on the social front, citing a memo reportedly obtained from the Crossroads Urban Center in Utah, Zero Hedge also suggested more trouble ahead for food-stamp recipients, just days after theEBT system went down in 17 states, where individuals and households access programs like Supplemental Nutritional Assistance Program, Temporary Assistance for Needy Families, and other programs.

According to one news station's interpretation of the memo, "states across the country are being told to stop the supplemental nutrition assistance program for the month of November, pending further notice."

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