Only One Way to Go

By the time you’re reading today’s commentary, the price of gold bullion might have surpassed its previous January high of US$426 per ounce. Quietly, without much fanfare from the press or popular media, gold prices have moved up to levels that have not been seen in years. Here’s why:

I’ve often talked about how the value of the U.S. dollar is in decline against other world currencies and about how the Fed has being pumping the system with easy money. Just consider the following:

— There have been 13 consecutive Fed rate cuts, to a 40-year low of one percent.

— The Fed has flooded the system with over $1 trillion in new dollars.


— We are nearing a debt crisis. The projected annual federal government deficit is $500 billion for this year and $500 billion for next year… all financed with U.S. bonds bought by foreigners.

— The Fed has made borrowing as easy as possible, resulting in a huge consumer appetite for loans and mortgages. In fact, consumer debt is at record highs.

Is our paper money worth anything anymore? It looks like many others are asking the same question, explaining gold’s rise in price.

I suspect the last thing the Fed wants is for the price of gold bullion to rise. Sure, we can have a debt crisis and a currency crisis at the same time, but a flight to security (gold) would only put the nail on the coffin for our currency… so you can bet the Fed will fight gold’s price rise tooth and nail.

But I am a strong believer that no manmade force can stop the natural actions in the marketplace. A run on dollars will see gold prices spike… and that’s why the smart money is already in the metal.

At its peak, gold’s market capitalization was one third of all U.S. financial market capitalization (stocks plus U.S. government bonds). That was true in 1934 and again in 1982.

In 2004, gold’s market cap is $1.4 trillion, while U.S. financial market capitalization is $46 trillion. Today, gold’s market cap is equal to only three percent of the financial market’s cap. Amid all the free money and debt out there, you can see why I believe the metal’s price has only one way to go.