If we assume that when it comes to relative value Gold is doing a better job of predicting what something is really worth, how does that translate into cost? On average a barrel of oil costs about 0.0668 ounce of Gold. This puts fair value of a barrel of oil at about 114 using the average, at about 85 using the low over the last 3 years (including the dip last week) and at about 135 using the high of .08 over the same period.
In the long term, if other rating agencies follow suit and challenge credit worthiness of the US, popular opinion suggests that the status of the dollar as the primary reserve currency will come under a fresh challenge. The actual likelihood of this happening is low and no one does a better job of presenting this argument than Professor Pettis at China Watch.
In the short run while US regulators have stated that there will be no regulatory capital impact on holding US treasuries, European and Asian regulators still have to issue an opinion on this event. The most likely reaction given what will happen on Monday is that ECB, Bank of Japan and a host of other regulators are likely to toe the line to avoid further roiling markets and increasing capital requirements for domestic banks
The post market close rating cut on Friday evening should create a very volatile trading environment over the next week. While media coverage so far has downplayed the overall impact on the cost of US debt by comparing the two other extremes (Japan – lower rating, lower rates and Australia – higher rating, higher rates), the rating downgrade will have a significant impact on repo trades, the cost of funding proprietary positions and commodity markets over the next 4 – 12 weeks.