While gold opened > $1,700 at a new record on August 8^th, we do not analyze the AA+ rating S&P assigned to U.S. sovereign debt or the fiscal woes of Spain, Italy, Portugal, Greece or Ireland in “isolation” or in a “static” context. Things will not stay the same.

Gold prices will rise more if policymakers in the U.S. or Europe make dysfunctional choices irresponsibly, and vice versa gold could fall if the U.S. or EU make smart economic decisions. Gold prices will rise if the U.S. and EU continue the same policies, or decline if the U.S. balances its budget or the Euro currency block breaks up. Obama's pledge of faith in Tim Geithner suggests no radical changes.

In the U.S. the debt downgrade “boxes” the Democratic Party, pushing them toward the right-wing Tea Party positions of greater fiscal responsibility. While a balanced budget is not at hand, clearly the Democrats and Republicans must make a much bigger deficit reduction than agreed upon on August 2^nd. A faster pullout from Iraq or Afghanistan, increasing the Social Security retirement age, ending 99 week or indefinite unemployment benefits and higher tax revenues are the solutions. Good decisions will strengthen the dollar and reduce the “new supply” of U.S. treasury securities.