S&P’s downgrade of the United States’ credit rating to AA+ from AAA will have a much more negative impact on the value of the U.S. dollar than that of U.S. government bonds, according to Jeffrey Gundlach.
The founder of DoubleLine Capital and one of the world’s most respected bond investors, Gundlach discussed the implications of the U.S. downgrade in an interview with CNBC on Monday.
Gundlach argued that the downgrade is actually more of a referendum on the dollar rather than U.S. Treasuries, due to the fact that America’s ability to pay its debt obligations remains a virtual certainty because the dollar remains the world’s reserve currency and the government can continue to print money to fund its obligations.
Therefore, holders of Treasuries should not be concerned that they may not receive interest payments on government bonds. However, the value of those payments is what has essentially declined, given the fact that with more dollars in circulation due to the printing presses, the value of each dollar by definition declines.
While Gundlach did not specifically discuss gold, the implications of a weaker dollar and higher bond prices (lower yields) are unequivocally bullish for the price of the yellow metal. This is the case because in such a scenario, gold is denominated in dollars and the opportunity cost of holding an asset such as gold that does not pay interest has fallen.