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U.S. Budget Deficit
February 8, 2010

Does the present correction in bullion present an opportunity as it relates to projected prices?

Deficits Debt

''WITH U.S. UNEMPLOYMENT around 10%, the U.S. government printing money like it's going out of style, the Standard & Poor's 500 index in some type of technical la-la land, and too many problems, both high and low, to recount, the world may be finally falling into the sea.

This past Tuesday, London's inimitable Daily News published photos reportedly taken from outer space that showed The World seemingly 'sinking back into the sea.'

The World is a set of man-made islands off Dubai's coast made to resemble different countries, so difficulties like those publicized by the Daily Mail would be quite problematic, if true. Nakheel, The World's developer, said reports suggesting that The World is sinking are 'wholly inaccurate.'

The World may be safe for now, but global finance has some players feeling woozy. 'Right now, given where the stock market is, the major risk is something like a Greece or Dubai or some European Union issue sparking some kind of contagion,' says the head of options trading at a big Wall Street bank, who must remain anonymous because he isn't allowed to speak to media.

These problems may seem far away for U.S. investors focused on domestic problems, but they are at the center of discussions about major risks that could affect trading. Last week, we asserted that investors perceived two buckets of risk. The first bucket -- the financial system -- is emptying and the second bucket -- government policies to save the financial system -- is filling. We said government risk would become a major trading theme at some point. We didn't think it would happen in one week.

It's time to think about positioning in case of global financial contagion. Gold was derided last week by traders because charts showed it might decline, and it has. But gold looks good again, as it often retains its value when paper currencies decline. Gold's value could rise should Greece's big deficit problems threaten its financial stability, which would hurt the European Union's currency and perhaps disrupt the finances of other countries.

Should Europe's crisis be averted, the problems in the U.S. loom very large on the horizon. The government has prepared a $3.8 trillion budget as the U.S. budget deficit exceeds $1 trillion, which potentially could lead to inflation or deflation even though the intent is saving the financial system from itself. Timing is critical. Europe's problems will create interest in the U.S. dollar, which will hurt gold's price.

At some point, perhaps very soon, the gold momentum trade will ebb.  Already, options trading reflects some expectations of a defensive rotation into gold,which could cause prices to grind higher.''

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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