Since hitting a new record high above $1,900 per ounce on Monday, the gold price has lost ground. But Moody's Investors Service unexpectedly downgraded Japan's credit rating to Aa3 from Aa2 at the start of Asian trading – supporting a further rise of spot gold by more than 1% to about $1,850 per troy ounce. Many investors are realising that the recent US debt downgrade by rating agency Standard & Poor's is merely the forerunner to more downgrades of other countries. A growing number of governments will be finding it hard to issue debt. Many countries will face higher interest costs on their debts, while investor confidence continues to fall.
The downgrade of Japan's credit rating by Moody's Investors Service hit the financial markets like a bombshell. Japan's current economic problems are growing exponentially. While Japan was rattled by a catastrophic earthquake and tsunami back in March, which negatively impacted the country's economic activities, the yen's external value continues to rise against other major currencies – regardless of several interventions taken by Japan's central bank to stop the country's currency from appreciating further. The fast-paced rally in the yen is putting Japan's export economy under great pressure. Leading Japanese enterprises warned the government of an exodus to neighbouring countries earlier this year if the yen's appreciation was not stopped. Moreover, Japan is suffering from public debts amounting to approximately 226% of the country's gross domestic product – far too high a figure considering that Japan is a rapidly aging society.
The downgrade of Japan's credit rating is expected to make many market participants realise that there will not be an easy solution to the global debt crisis. Politicians are unable to calm market turbulences by making promises anymore, since investors want to see drastic actions by the most affected countries– including Japan, the US and eurozone nations. With confidence in policy makers in free fall, it might not come as a surprise that precious metals such as gold, platinum and silver are being sought as a safe haven by an increasing number of investors.
Politicians in Germany are also starting to recognise the value of gold. Ursula von der Leyen, labour minister in Chancellor Angela Merkel's cabinet, suggested yesterday that highly-indebted eurozone member states such as Greece should provide collateral in the form of gold or other tangible assets for fresh loan commitments to emergency lenders like Germany in the future. Von der Leyen added that financially distressed eurozone countries should offer their gold reserves or industrial holdings as collateral to Germany and other emergency lenders. The German labour minister's statements were feverishly debated yesterday, but were not well received among Merkel's cabinet. Merkel said that she was astonished by these public comments, which she views as “unhelpful”.
