Gold on the Run
Inside Liberty Watch Today - June 12, 2006

After running up in price to the $730 per ounce range, the price of gold has come back down to the low $600's. A few financial pundits are saying the party is over, contending that gold is but a flash in the pan: A bursting bubble. Nothing could be further from the truth.

The gold story is really a monetary crisis story. The Greenspan Federal Reserve created more money than any in history and The Maestro's successor Ben Bernanke is likely worse. Greenspan understood gold and its role as money. He also worked in the business world. Bernanke has always been an academic. "[Bernanke] has only been chairman for about four months," James Turk explains in a Barron's interview, "but he seems to be focused on the deflation in the 1930's and this is quite alarming." Legendary investor, author and commodities bull Jim Rogers is more blunt, calling the new Fed Chair "an amateur with no knowledge of markets."

The federal government is running a monster deficit that won't go away soon. "As they did in the mid- and late 1960's," writes Jim Grant, "war and deficits will push the gold price higher, we believe." Grant points out that defense spending was 40 percent of the federal budget back in the Guns and Butter 1960's, while that percentage is but 19 today. But, in 1964 Health and Human Services was only 4 percent of the budget and debt service required only 9 percent. Today, HHS is 23.5 percent of the budget and 16.5 percent of the budget is required to pay the burgeoning federal debt.

The US ran a current account surplus in 1964; today the current account deficit is nearly 7 percent of GDP. From 1960 to 1964, the federal debt increased 16 percent, since 2001, the Federal debt has exploded by 40 percent. "In short, this country financed the guns and butter of the 1960's with taxes," explains Grant. Today, debt is being used, and "the tax Americans will ultimately pay is that of a lower dollar exchange rate."

Foreigners currently finance America's debt burden, but for how long? Investor Doug Casey quips: "It would take a phenomenally slow person, say, a central banker, to have much faith in Uncle Sam's good credit when the U.S. can't pay its current bills by a very wide margin-and has trouble saying 'no' to new spending plans. But even the faith of a central banker must have its limits."

While the US government needs $2 billion each and every day from foreigners to keep its boat afloat, Casey makes the case in his current International Speculator newsletter that these same foreigners are not exactly thrilled with the US right now. The US has troops stationed in 130 countries and is pushing for democracy in places that have no interest in it. US foreign policy has kept dictators and murderers in control around the world and people remember it. "In short, the American global cop," writes Casey, "far from harvesting the gratitude of a world made safer, is perceived as a hypocritical and plundering thug-hardly the sort of thing that makes foreigners line up to invest in America."

Casey sees not only foreign central bankers fleeing the dollar, but private investors as well. And the result will be a dollar dropping in value possibly 80 percent according to Casey, along with a collapse of the welfare system, skyrocketing unemployment, government instability, essentially the fall of the American empire, "the Greater Depression."

Gold will again takes its place as a monetary medium after the dollar collapse. Why gold? Gold has five properties that make it money. Aristotle listed the five centuries ago: Gold has intrinsic value; it's convenient, divisible, durable and consistent.

Congressman Ron Paul told Liberty Watch reporter Jarret Keene that he believes we are moving to a gold standard quickly, "because paper never works." The Congressman made the point that gold is not an investment, but a place for your money "because you don't trust paper money." Paul agrees with Casey and Turk that the dollar will collapse.

With the gold price back down near $600 per ounce, it may be time to stock up. Especially if you agree with James Turk, who told Barron's: "Now we have to think about the possibility that gold is never going to go back below $600, ever." By the way, Turk's long-term target price for gold is $8,000 per ounce.

Doug French, Liberty Watch Columnist


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