Gold prices declined last week despite the downgrade of US government debt by a rating agency.
Gold: Weekly Chart
Gold prices encountered resistance at $1,959 and subsequently fell back to $1,942. The moving average provides support at $1,900, with a larger target at $1,808.
Gold (XAUUSD) is a perplexing asset because it is supposed to be a hedge against inflation, but it fell in 2022 despite the surge in inflation and the start of central bank rate hikes. This is because gold is also sensitive to rising interest rates, which make it more expensive to hold. In 2023, however, hopes that the central banks would reverse course caused gold to rally. Even a Fitch downgrade last week failed to boost prices, as investors remained optimistic about the prospects for gold.
Fitch Ratings, one of the three major credit rating agencies, lowered the United States’ sovereign debt rating from the highest possible rating of AAA to AA+.
Fitch Ratings downgraded the United States’ credit rating from AAA to AA+, citing a “steady deterioration” in the country’s governance over the past 20 years. The rating agency said that the downgrade was based on a number of factors, including the country’s rising debt levels, political gridlock, and a weakening of its institutions.
In response to the downgrade, US Treasury Secretary Janet Yellen said that the decision was “arbitrary” and that it was based on “outdated data.” She said that the US government remains committed to fiscal responsibility and that the country’s economy is strong.
The downgrade is a blow to the US government and could make it more expensive for the country to borrow money. It is also a sign of growing concern about the country’s fiscal health.
This year saw another round of political brinkmanship over government borrowing, which will rear its head again after the 2024 election. Investors are also wise to see a President under investigation, with an opponent being suppressed by indictments.
The government’s borrowing in June raised the debt ceiling to $31.4 trillion, but only after a contentious political battle that threatened to plunge the country into default on its debts. When Congress returns from its current summer recess, lawmakers will need to work to reach an agreement on next year’s budget before the end of September to avoid a government shutdown.
Fitch Ratings stated that the United States’ credit rating downgrade was due to the projected fiscal deterioration over the next three years, a high and rising general government debt burden, and a decline in governance relative to peers.
Fitch Ratings believes that governance standards have steadily declined over the last two decades, including in fiscal and debt matters, despite the bipartisan agreement in June to suspend the debt ceiling until January 2025.