by Adam Crum
The argument has been made that the current price spike in gold is ONLY due to the declining value of the dollar; however, the fundamentals of supply and demand are also at play.
The market is being SQUEEZED by 1) a substantial increase in demand from increasingly wealthy nations with HUGE populations that prefer to hold wealth in tangibles (gold being their preference) AND 2) a world that grows increasingly afraid of holding the dollar as a reserve currency.
It’s a “double squeeze” play…and higher prices are the likely result.
It is increasingly difficult to find ore
Production of gold worldwide peaked around the year 2000 and has been in decline ever since, even as exploration budgets tripled during the same period. Not only is it more difficult to find ore, the quality of ore has declined as well.
In recent days, India’s central bank bought up half of the gold being sold by the International Monetary Fund. China has quietly doubled its holdings to 1,054 tonnes and is believed to be adding to its holdings periodically as dips in prices occur. Gold exchange-traded funds (ETFs) have accumulated 1,778 tons, making them the fifth biggest holder after the United States, Germany, France and Italy.
With supply down and demand up, gold continues to set all time highs. But, that is only part of the story.
President to focus on economic concerns next year
In just three years, the Federal deficit has exploded 770%…$161 billion in 2007…$407 billion in 2008 and now a mind-boggling $1.4 trillion in 2009.
According to the White House’s own Office of Management and Budget, the future deficits will add $9 trillion in debt over the next ten years, bringing the national debt to more than $21 trillion.
Peter Orszag, the White House budget director, recently stated that: “The President strongly believes that as the recovery strengthens and job growth returns, we will have to take the tough steps necessary to return our nation to a fiscally disciplined and sustainable path.”
That all sounds fine, of course, except the government is already planning to send supplemental checks to 50 million seniors, extend unemployment benefits, renew tax credits for new homeowners, pass the biggest health care legislation in history and pursue an aggressive global warming bill.
Debt even LARGER than Washington claims
When reporting the national debt, Washington apparently has forgotten about the $104 trillion for Social Security, Medicare, Medicaid and veterans benefits. And, oh, by the way, the oldest of the 76 million baby boomers turn 63 this year and are beginning to collect these benefits.
“We’re seeing deficits projected for the next 10 years of over a trillion dollars a year,” said Senator Judd Gregg of New Hampshire, the ranking Republican on the Budget Committee, in congressional comments last week. “It’s not sustainable. It’s not fair, and it’s not right.”
The nonpartisan Congressional Budget Office reports we could be on the verge of an economic crisis of colossal proportions. In its 2009 report, “The Long-Term Budget Outlook,” the CBO writes: “[Our] model predicts only a gradual change in the economy as federal debt rises. In actuality, the economic effects of rapidly growing debt would probably be much more disorderly as investors’ confidence in the nation’s fiscal solvency began to erode. If foreign investors anticipated an economic crisis, they might significantly reduce their purchases of U.S. securities, causing the exchange value of the dollar to plunge, interest rates to climb, and consumer prices to shoot up… The growth of debt would lead to a vicious cycle in which the government had to issue ever-larger amounts of debt in order to pay ever-higher interest charges.”
Printing money like there’s no tomorrow
The only alternative Washington has is to pay its bills with cheaper dollars. In fact, the Federal Reserve has been doing its part by printing money like there’s no tomorrow.
To put it into perspective, the Fed increased bank reserves by an unparalleled $73 billion in an extraordinary three month period before the Y2K scare. That was only 1/14th as large as what they have just done! In the days following 9/11, the Fed again flooded the banks with liquidity, $40 billion by September 19th. But, that was only 1/25th as big as what they’ve just done. More on the effect of this in a minute!
Time honored tradition of debasing currency
While the new terminology may be quantitative easing or money printing hedging, currency has been debased throughout history when countries can’t pay their debts. Think of the Roman Empire, British Empire and the Russian Empire. It took 4.2 German realmarks to buy one U.S. dollar at the start of World War I and three trillion realmarks to buy one in August 1923. In 1933, Franklin Roosevelt devalued the dollar by 75% simply by raising the official price of gold. And, more recently, similar currency devaluations have occurred in Argentina, Brazil, Indonesia, Zimbabwe and other countries around the world.
This is why the dollar…your dollar…has plunged 40% in value. THIS is why the price you pay for just about everything has increased and will continue to do so.
Back to the effect earlier explosions in the supply of the dollar…after the Y2K effect, the rare coin market saw a mild drop in value through 2001 and then experienced the biggest rise in value we have ever witnessed. Beginning in mid-2009 the rare coin market saw decreases off of those highs and have begun to rise again. Given the HUGE increase in the supply of dollars, I believe we are at the precipice of a rise by epic proportions.
China Central Bank governor says dollar should be replaced by new global reserve currency
Washington now owes $7.9 trillion to foreign investors and governments (mostly Asian) according to the U.S. Treasury Department. Since that debt is now worth 15% less than just seven months ago, as is the interest on the debt, it is not surprising that foreign lenders are not pleased.
China, the largest holder of U.S. debt, has announced repeatedly its concerns about the U.S. Dollar. Zhou Xiaochuan, governor of the China Central Bank, says “The costs of a dollar-dominated system to the world may have exceeded its benefits. The dollar should be replaced by a new global reserve currency.”
China’s commerce ministry spokesman Yao Jian just told reporters while the U.S. President travels in that country: “It is necessary to create for enterprises a stable and predictable environment, including (stable) economic and foreign exchange policies, to help the global economy grow steadily and China’s exports recover.” While the U.S. administration says Washington is not at fault, the commerce ministry spokesman added that the United States had “continued” to let the dollar drop “to improve its competitiveness” while pressing for the yuan’s appreciation. “It is detrimental to the global recovery and is unfair for (the U.S.) to require other (currencies) to rise while allowing the dollar to keep slumping.”
Members of the G-20, the International Monetary Fund and the World Bank have called for the dollar to be replaced as the world’s reserve currency. And, the United Nations has recommended a “global currency [that] would be backed by a basket of currencies of all the members.”
We have entered an entirely new uncertain economic era. One thing is for sure, however. You must protect yourself!
We’re witnessing a paradigm shift in the way the world economy operates
We’re witnessing a change in the way the world economy operates. We are now in a period of asset deflation and debt payback that has major implications, not only for the economy, but for financial markets in the years ahead. The tangible assets in your portfolio will be extremely important in the months and years to come.
Most of my wealthiest clients are aggressively seeking unencumbered investments. Gold in its various forms is the only unencumbered, time-tested asset on the face of the earth. Numismatic quality gold coins can provide the following important aspects to your portfolio…
- Diversification. Investment professionals recommend ten to twenty percent of an investment portfolio be devoted to tangible assets like gold coins as a hedge against inflation and protection in times of economic upheaval
- Security. Gold coins possess the security and intrinsic value of bullion…and the government will never have to bail out gold.
- Privacy. Gold coins are a true storage of portable wealth that you can have in your own possession.
- Certification. Numismatic quality gold coins are certified by the Numismatic Guaranty Corporation and safeguarded in a protective holder designed exclusively by them.
- Liquidity. There are abundant opportunities to easily liquidate gold if the time comes.
- Profitability. While all other asset classes collapsed in the past years, gold continues to skyrocket, and many economic analysts are now projecting much higher prices in the very near future.
- Simplicity. Gold coins are essentially management-free, that does not require daily buy/sell decisions or monthly statements to decipher.
- Rarity and History. Gold coins are unique works of art and pieces of history providing a time tested asset class.
It’s time for action!
The plunge in the dollar’s value we’ve seen so far is only a drop in the proverbial bucket I’m afraid. From what we’ve already experienced, we’re likely to see the dollar devalued and wealth diminished to an even greater extent in 2010, 2011 and beyond. Your standard of living and quality of life are being threatened. Even if the budget of the U.S. government was balanced today…generated surpluses every year from now on … and paid down its debt at a rate of $100 million per day… it would take 3,446 years for the United States to pay what it already owes!
I know it’s a lot to think about! But, in this turbulent and uncertain economic environment, the need for a well diversified portfolio is increasingly obvious.
I invite you to follow-up with us personally for a one-on-one portfolio review and consultation with a member of Monaco’s professional investment staff.
Call us right now toll-free at 888-900-9948 for a thorough and objective review of the hard asset part of your portfolio. If you do not yet have hard assets as a hedge against a devaluing dollar, increased risk of inflation or other unforeseen economic turmoil, then now is the time start. Our mission is to educate and assist you so you can begin or enhance the rare coin portion of your portfolio, as well as preserve and grow your capital. That’s what we do for our clients every day.