How The Debt Ceiling Affects YOU

Debt Ceiling, Debt, Aug 2, Bipartisan, Gold, Buy Gold, Gold Prices

With the recent chatter about the U.S. debt ceiling, the possibility of a default, and a credit ratings downgrade for the U.S., it’s easy to want to tune out the noise.  Many people have the misconception that the whole situation doesn’t affect the average American; the world of high finance is so far removed from their world as to not have an impact on their way of life.  Nothing could be further from the truth.  Let’s take a look at how government bonds tie all the way from Wall Street to Main Street.

When the government needs to borrow money, it cannot resource a local bank branch for a loan.  To borrow money, our government sells bonds to investors.  These investors are mostly foreign central banks and large investment institutions.  The investors buy the bonds which gives money to the government.  The government pays the investor back their original investment, plus interest, over time.  The interest is based on both the market conditions at the time and the creditworthiness of the government (loan rates are determined by the borrower’s credit score). 

In the case of the U.S., the government’s credit rating is AAA (pronounced “triple-A”) which is the highest rating possible.  For this reason, the U.S. government pays astonishingly low interest rates.  At the time of this writing, the interest rate on a 10-year U.S. treasury bond is 3.03%. The high U.S. credit rating is currently under review by many of the credit ratings agencies.  Even without a government default, many agencies are considering downgrading the U.S. credit rating simply because our government’s current spending path is completely unsustainable. If the U.S. credit rating is downgraded, then the U.S. will pay higher interest rates to attract investors to purchase their bonds.

The U.S. bond interest rate forms a foundation for all other interest rates.  In other words, the higher the interest rate on U.S. bonds, the higher the interest rate will be for all lines of credit. This is called a direct correlation.  The U.S. will pay higher interest in order to get investors to buy their bonds; therefore, U.S. citizens will see their loan rates go up.  For example, the average 30-year fixed mortgage rate is typically, but not always, about 1.7% above what the government pays to borrow money. If the government pays a higher interest rate on U.S. bonds, then mortgage rates and other loan rates will increase.

This trickle-down effect could be seen throughout our economy.  From the homeowner looking for a mortgage, to the small business owner looking to expand, a shopper looking for a new television, or even the farmer who needs a loan to get through the growing season, credit is the oil that lubricates our economy.  Additionally, if the U.S. credit rating is downgraded, we could soon be paying higher prices for all purchases.  It won’t matter how high an individual’s credit score is or how many bills he or she has paid on time, that person will still be subject to the rising tide of interest rates.  A rising tide lifts all boats and this tide may be coming as we speak.

By Robert Davis, APMEX Account Manager

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Take the APMEX 5 Day Challenge!

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We are a society of “movers” and we are constantly on the go.  We consume gallons of coffee and energy drinks to keep us alert and we eat power bars to keep us going. Who has time to search for news about the economy, the geopolitical scene, and the precious metals market? We want our information to be short, concise and right now.  APMEX realizes the importance of your time, the significance of knowing current events, and how it pertains to your portfolio.

APMEX takes the time to find this news for you. APMEX combines it into a few short bits to keep you informed and prepared for what is happening in the world; saving you from having to put your day on hold to search and sift through an overload of information.  You will find this market information in the APMEX daily commentaries delivered Monday-Friday:  8:00 a.m., 12:00 p.m., and 4:00 p.m. (CDT.) You have the opportunity to read the one-page articles as they are posted, or you may read all three posts at the close of each business day. By the end of this 5-day business week, you will be more educated about the value of your precious metals portfolio and the events around the world that affect your investment.

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Market Recap 6/3/2011

Another week, another disappointing jobs report. The ADP private sector jobs report showed just 38,000 new private sector jobs in May whereas it was fully expected to be up by 175,000 new private sector jobs. The futures market opened low today as investors and analysts awaited this report. After the report was released, the futures market fell even further. When will economists stop being caught off-guard by low numbers? Some suggest they are in denial that the economic recovery is slowing down.  Fears of a double-dip recession seemed to hang on today’s nonfarm payrolls report. To put the report in perspective, April numbers showed an increase of 244,000 jobs. Analysts predicted May numbers would be approximately 125,000 jobs. The increase was actually just 54,000 (a nine-month low.) The unemployment rate sits at 9.1%. Stock futures tumbled along with the U.S. dollar index and gold recovered from early-morning losses.

Earlier in the week, there were hopes that Greece would finally be getting the economic help it needs to sustain itself. However, Moody’s has cut Greece’s credit rating by three notches, which drops the score into an extremely speculative phase. This news infers that the payoff of Greek debt is no longer based on funds and paybacks of loans, but speculation. The outlook is quite negative. Greece’s Finance Ministry disputes the credit rating cut and claims the government’s attempts to gain traction has not been taken into consideration, “[The downgrade] is influenced by intense rumour in the media and overlooks the Greek government’s pledges to achieve its fiscal targets for 2011 and to accelerate privatizations.”

News has circulated about a crisis in Yemen but most people have ignored the signs since the small country seems irrelevant to the bigger picture. Is this an accurate opinion? The Yemen situation is so dire that it may take years to recover. How is this relevant? The small country is in financial trauma and it needs restructuring as well as stronger leadership. The domestic oil supply and electricity was cut off by hostile tribes because of the crisis and resulting chaos. Food and water are becoming scarce. At times like these when food and water have become scarce, people are desperate for someone to take control and bring peace. Who desires to assist an oil-rich company?

A  Marketwatch financial analyst announced that, at the moment, gold is the choice that makes the most sense for investors. He explained,”Polls show that while most Americans see the need for the federal budget deficit to be cut, the majority of citizens are not prepared for cuts in Medicare and other entitlements that are necessary to materially reduce it. …And then there is the historical side of it: No fiat currency has ever survived.”

Spot Gold prices opened this week at $1,538.10. The high during the week was onWednesday,June 1st, at $1,551.60, while the low for the week occurred on Thursday, June 2nd, at $1,520.40. Gold ended the week up $6.00 at $1,544.10. This week, the most popular Gold bullion products were 2011 Gold American Eagles, 1 oz. Pamp Suisse Gold Bars, and 2011 1 oz. Gold Maple Leafs.

Spot Silver prices opened this week at $38.12. Silver reached a high of $38.77 on Tuesday, May 31st, while this week’s low for Silver occurred on Friday, June 3rd, at $35.07. Silver ended the week down $1.74 at $36.38. The most popular Silver products on this week were 2011 Silver American Eagles, 2011 Silver Maple Leafs, 1 oz. Silver Buffalo Rounds and 10 oz. APMEX Silver Bars.

Spot Platinum prices opened this week at $1,806.10 and ended the week up $11.30 at $1,817.40. Popular Platinum products this week included, 1 oz. Platinum Bars, 1/10 oz. Platinum American Eagles, and 1 oz. Platinum American Eagles.

Spot Palladium prices opened this week at $764.50 and ended the week up $20.80 at $785.30. Palladium investors preferred 1 oz. Pamp Suisse Palladium Bars and Palladium Canadian Maple Leafs this week at

Featured Product of the Week:  2011 1 oz. Silver American Eagle

 2011 brought with it a newly designed Silver American Eagle. This current date of the Silver Eagle will only add to the coin’s legacy as the most popular Silver bullion coin in the world. Another interesting tidbit about the 2011 Silver American Eagle is the minting location. 2011 is the first year Silver Eagles have been minted at the San Francisco Mint since 1998. 

The U.S. Mint began minting the Silver American Eagle (SAE) in 1986.  The 26 years of mintage have produced over 225 million SAEs.  Since 2000, demand for these coins has exploded.  These 2011 coins trade at premiums close to common-date Silver American Eagles, which makes their current date a bonus of sorts.  The 2011 SAE is a brilliant uncirculated coin that can be bought in bulk at and used in Precious Metals IRAs while potentially adding numismatic value to your investment.