Gold and silver rose again yesterday (1.2% and 2.3% respectively) as the dollar continues to come under pressure.

The dollar has fallen not due to an increase in risk appetite but rather an increase in risk aversion coming from the dawning realisation that the very credit worthiness of the US is at risk due to the global financial and economic crisis.

The former US Comptroller General, David Walker, warned in an op-ed article in the Financial Times that “America’s Triple A Rating is at Risk”. This is because the US has an accumulated negative net worth of US$11 trillion, additional off-balance sheet obligations of US$45 trillion and a current year budget deficit forecast at US$1.8 trillion (a massive nearly 13% of GDP).

These daunting fundamentals mean that America is at risk of losing its AAA credit rating for the first time since 1917. This would have huge implications for the international financial and monetary system as it would likely lead to the dollar’s dominance as the global reserve currency being diminished and consequently gold’s role being greatly enhanced. The Chinese government, and overnight, the Japanese opposition have voiced their concerns regarding their dollar assets (Chief Finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar and if elected, Japan would not buy US dollar denominated bonds).

The deteriorating financial condition of Uncle Sam is a long term fiscal and economic challenge that should result in gold remaining in a bull market for the foreseeable future. Indeed, it means that the inflation adjusted high of $2,400/oz reached in 1980 (when the US fiscal situation was positively benign compared to today) is a more than plausible target in the coming years.