What Wal-Mart Has to Do with the Rising Price of Gold Bullion

When I told my dear readers to buy gold and gold-related stocks back in 2002 when gold bullion was around $300.00 U.S. per ounce, my recommendation was primarily based on my concern over the U.S. dollar. And as that concern continues, the rise in gold bullion will carry on.

Starting after World War II, the United States did a masterful job at convincing the rest of the world — world central bankers in particular — that the U.S. dollars should be the world’s reserve currency. Why do you need gold in your vaults backing up your currency when you can have the real thing — American dollars? Central bankers bought the theory and today, sadly, 70% of world central banks have the U.S. dollar as their reserve.

Huge American deficits and China changed everything. Over the past five years, the smart money realized that the United States has gone from becoming a creditor nation to a debtor nation. What country can do that and not have their currency fall in value against other world currencies? China’s economy has been on a tear since the mid-1990s, growing at a pace of 10% per annum.

American consumers demanded cheaper prices for the goods they bought and Wal-Mart (Sam Walton, bless his soul, the greatest discount retailer in history) was more than happy to peddle made- in-China goods to them. China exported heavily to the U.S. and took plenty of American dollars in for the task. Today, China sits on over $1.0 trillion American dollars, which they would likely now want to get rid of. Add a world awash in U.S. dollars and a U.S. Federal Reserve expanding the money supply at the rapidest pace in history and you have too many U.S. dollars in the system. And like in Economics 101, too much supply of anything results in lower demand, which results in lower prices.

Times change… priorities change. If I were the U.S. government, there is nothing I would want more than to see the value of the U.S. dollar fall on world markets so Americans would stop buying cheap imports and start buying American again — recreating the jobs we lost to foreigners in the first place over cheap labor. (A lower dollar would certainly help with a record trade deficit, too.)

So what is an investor or world central banker to do if they realize the game plan is for an orderly decline of the U.S. dollar? Get out of U.S. dollars and say thanks to Sam Walton. But to what currency? The U.K. is having its own problems (see below) so the pound may not be a good bet. The euro? A currency that is endorsed by a group of countries that cannot agree on a common constitution to back their currency? Europe’s economy is not exactly booming these days either.

Gold remains the only viable alternative for investors escaping U.S. dollars. Looking at a chart of gold bullion, we literally see a straight line up from 2002 to today. My bet is that line will continue moving up, taking quality gold-producing stock prices up with it. In the years ahead, gold below $1,000 will be looked upon as utterly cheap.

NEWSFLASH — Home prices fell by one percent in the U.K. in November from October and, for the third month in a row, home prices have fallen in Britain. The last time home prices fell three months in a row in the U.K. was 12 years ago. The decline in housing prices is obviously not restricted to the United States. The question is whether the coming economic recession will be restricted to the U.S. or will spill over into other world economies.