A U.S. Dollar Collapse Might Send Gold Prices Sky-High
If you take a look at today’s gold prices, you’re not really getting the full picture on what exactly is happening over at the U.S. Federal Reserve.
The Fed’s decision not to hike up interest rates was indicative of less than stellar economic growth. But it also underscored an intrinsic weakness in the U.S. paper currency. What is clear is that once the population wakes up to these realities, gold prices just might shoot through the roof.
You might say that based on these facts, my gold price forecast is pretty bullish these days.
But before we go any further and get into analyzing gold prices, it’s best to take a good, sober look at the current state of the U.S. economy.
Skyrocketing Debt Levels Might Cause a U.S. Dollar Collapse
Now, the Federal Reserve certainly gets it. The American economy simply can’t take higher interest rates right now. Ever since the financial crisis struck U.S markets in 2008-2009, this country of ours has gotten way too complacent when it comes to low interest rates.
Now the question that arises as a result of these facts is how genuine the economic growth we have seen in the American economy is. Is the current state of the economy an accurate reflection of the country’s financial health or the result of artificially low interest rates?
What various businesses have been doing for the last half-decade is financing their growth and operational expenses through cheap money. If interest rates were raised to a more normal level, the debt burdens imposed on many companies could potentially make the loans unaffordable. But this isn’t restricted to just businesses, because homeowners have also benefited greatly from low interest rates. This is in fact one of the key drivers of the current U.S. housing bubble. Even if the interest rates on mortgages were raised by, say, half a percentage point, the effects could be disastrous on ordinary homeowners with outstanding mortgages because their payments owed would soar.
But if you were about to blame frivolous companies and homeowners for getting way too comfortable with the status quo, then think again. The U.S. government also let the debt accumulate between 2008 and 2014, and interest payments shot up from $515 billion to $636 billion. Were the current interest rates to double, the entire U.S. government debt levels would shoot up to more than $1.0 trillion, which is a massive increase. (Source: Federal Reserve Web Site, last accessed September 23, 2015.) Keep in mind that doubling the current interest rate level would still not represent an unrealistic figure.
You might be tempted to think this is a short-term issue that the government can figure out, but the long-term outlook on the federal budget is just as negative. The U.S Congressional Budget Office reported that our current budget deficit is now forecasted to double as a percentage of economic output by 2040. What we would be seeing at that point is Federal debt levels equaling about 107% of America’s gross domestic product. (Source: Congressional Budget Office website, last accessed October 19, 2015.)
Sounds scary, doesn’t it? The worst part is that this is only the beginning.
Surging debt levels will lead to increased negative stress on the government’s revenues, which can only be alleviated through raising taxes. This sounds like a logical fix, but higher taxes would then translate to slowing economic growth.
Translation: We won’t be able to get ourselves out of this mess if we continue to artificially prop up economic growth.
The Effects of This Phenomenon on the U.S. Dollar
Let me let you in on a secret that most economists aren’t willing to talk about too openly.
In terms of its value as a store of value, paper money is not in great shape at the moment. In fact, the basis for our entire American economy is essentially the belief that other countries will always be willing to exchange goods and services for high-valued U.S. dollars. Just how much faith can we place in that idea on a long-time scale?
But here’s the kicker: American dollars are not backed up by a gold standard, or anything else of actual value for that matter. So what you’re expected to do is place your faith in our government and the health of the economy it presides over.
I don’t know about you, but a soaring trade imbalance, growing debt levels, rock-bottom interest rates, and less-than-stellar economic growth is giving me cause for worry.
I think it’s safe to say that any sane person would prefer gold bullion to holding on to pieces of paper.
Now, far be it from me to suggest that a U.S. dollar collapse will be occurring any time soon. However, you should keep in mind that once you strip our current financial system of all its fancy terms and theories, what remains is the fact that we are creating money out of thin air, based on nothing. If and when push comes to shove, the Federal Reserve and any other central banking institution will be forced to start printing currency like it’s going out of style.
I don’t think I have to explain what happens to those currencies next when inflation hits.
But there’s a perfectly viable economic alternative that can be used to hedge against such a scenario.
The One Item That Always Retains Value: Gold
It goes without saying of course that we can’t create gold like we can paper money. It’s a commodity with a fixed supply, and has been used for thousands of years across virtually all civilizations and cultures.
And that’s the bottom line here. Gold is not an investment vehicle in the traditional sense, and the argument used by analysts to denigrate the yellow haven’s usefulness does not hold any water. Gold is used as an insurance policy to hedge against the tough economic times and history shows us that those always inevitably come and go. When the next crisis hits, you might want to ask yourself if you’d prefer to be holding a real commodity of value or a few pieces of paper.