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Standard and Poor's downgraded the United States credit rating from AAA to AA+ Friday night, marking the first time the US has not held the highest possible rating since 1941. S&P said in a statement:

"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.

The outlook on the new U.S. credit rating is "negative," indicating another downgrade was possible in the next 12 to 18 months. The action is likely to eventually raise borrowing costs for the American government, companies and consumers.

Last week, the stock market plunged below important congestion support at the lower boundary of the distribution pattern that had been developing since February. The breakdown process was unusually violent for this type of consolidation formation and now we know why. One of the driving forces behind the 13% decline during the last two weeks was the impending downgrade.

click on images to enlarge

Of course, that is not to say the impact of the downgrade has already been fully priced into stocks. The next trading day will likely be one of the most wild in recent history and we will have to see how the market behaves after the initial volume surge during the early part of the session.

The downgrade itself is no surprise to anyone who monitors structural trends. We have been discussing the negative economic impact of excessive debt for the past several years and the following graph of total US debt as a percentage of GDP clearly displays the magnitude of the problem confronting us as a nation.

Very few financial markets have understood the developing problem as well as gold. Since the secular low in April 2001, gold has trended strongly higher, producing an annual compound return of 19.8%. The message of the gold market has been consistent and clear during the past decade and the long-term uptrend shows no signs of weakening, suggesting that we still have a long, difficult road ahead of us.

Our Gold Currency Index (GCI), which tracks the intrinsic value of gold as an international currency itself, has also trended strongly higher since the 2001 low, logging an annual compound return of 16.8% and demonstrating that the gold secular bull market is a global phenomenon.

Additionally, the GCI has predicted nearly every meaningful breakout and breakdown in advance, further demonstrating that gold has been behaving as an international currency during the last decade.

Make no mistake about it, the US economy is being weighed down by a veritable mountain of debt and the foundation for the next self-sustaining, structural growth cycle cannot be created until the deleveraging process has run its course. Unfortunately, there are no easy fixes for a problem that has developed over the course of three decades and the economy will continue to suffer subpar performance until the debt issue is addressed in a meaningful way.

Source: U.S. Credit Rating Downgrade: No Surprise to Gold Market