What is a Downgrade?

The United States was recently downgraded from an AAA credit rating to AA+. This affects the country’s borrowing costs and investor opinion of assets owned by the U.S. Many people want to know the Who, What, When and Why regarding this landmark event. Here’s what this all means..

1. Who Downgraded the AAA Credit Rating?

Standard & Poors is one of the three major credit rating agencies which assigns scores to the debt held by governments, municipalities and institutions. S&P has determined that there is a heightened level of risk associated with holding debt issued by the U.S. Therefore it’s rating from the previous top-tier AAA has now been lowered one notch to AA+.

2. When Did This Happen?

On Friday August 5th along with one of several statements that read “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

3. Why Did S&P Lower The Rating?

They believe that the outstanding debt of $14.3 trillion and projected deficits for the country no longer warrant the AAA credit rating it had previously assigned the United States in 1941. It does not believe the current political environment inspires enough confidence in that the U.S. can agree on how to effectively lower the deficit in the near future.

4. Who Owns U.S. Debt

Excluding the Federal Reserve, the current data from the U.S. Treasury shows China as the largest holder of our debt with $1.16 trillion in U.S. Treasury securities. China has been aware of developments leading up to the downgrade, but due to the fact that China maintains the value of their own currency through the purchase of U.S. dollars it is likely that it will continue to be a major holder of U.S. Treasury securities.

5. What Impact Does This Have on the Precious Metals Markets?

Since the U.S. dollar and gold/silver precious metals do not normally trade in parity this has spiked the price of gold to an all time high of $1,716 per ounce with silver pushing back toward the $40 mark. There is also high demand for physical silver at this point. Precious metals such as gold and silver have a strong outlook based on current market conditions as hard money assets.

Read our related article: Gold: Currency or Commodity?