Tuesday, August 15, 2006

Gold and our Debt.

An article in last week's Financial Times notde that the US government maintains two sets of books. The book that we never see deals with national debt and legal obligations of the US. The total of what the US owes come to the staggering sum of $79 trillion dollars.
This is a bit more than what the Bush administration claims. The so-called "President's Budget" issued by the Department of Management and Budget shows that the deficit for 2005 was $319 billion. The rather secret Financial Report of the United States issued by the Treasury states that the deficit was $760 billion.

In the face of these facts, Americans have only one true defense against this depressing long-term picture. And that's to own gold or real money. I say this because the dollar is doomed as is every fiat paper currency that has ever been created. The question is not a matter of whether, it's simply a matter of timing. The fundamentals which will lead to the dollar's demise are already literally set in stone.

What about protecting oneself in another currency? The problem is that the reserves of every nation are largely in US dollars. If the US dollar goes, it will take down every other paper currency with it. Despite the logic of this picture, many central banks are now diversifying by adding other currencies to their mix. Some such as China and Russia are increasing the meager gold portion of their foreign reserves.

My guess (prediction) is that somewhere ahead as the bull market in gold reaches it's third or final phase, we'll see a worldwide panic to own gold. The panic will include holders of fiat paper from around the world as well as the various central banks of the world. The panic for gold lies a few years to perhaps ten years ahead.

Holders of gold can relax in the knowledge that the only money that cannot go bankrupt is the intrinsic money that we call gold. This is the fact that no government and no central bank will admit to or deal with. It's the reason why, over the ages, nations and wise men have always opted to accumulate gold. Gold has always gone to the most powerful nations and the wealthiest individuals.

My own guess is that at worst gold will correct back to the steeper trendline at 600. At best, my guess is that gold will continue to fluctuate in the 625 to 650 area, work off its overbought condition, and then head higher.

In the meantime, more and more fiat paper will flood the global economy. The greater the sum total of the world's debt, the greater the amount of paper needed to service those debts. The totals of debt in the US are far too great ever to be paid off. At least they will never be paid off in dollars which have anywhere near today's purchasing power.

Dec. gold was down today 6.40 to 632.90


Blogger seamus said...

Help me out here. How can "all currencies go down together"? Their measure of worth is against each other. How could the dollar, yen, euro, and pound sterling (the world's four major hard currencies) all decline simultaneously? What would they be declining against?

Also, what makes gold "real money"? It's not money, it's a metal. So are copper and lead and bauxite. Gold is only special in that people agree it's special, which is really no different from fiat currencies, if you think about it.

7:21 PM  

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