There’s Gold in Them Thar Thrills!

As the dollar remains under siege, the price of gold has soared. Folks will put their cash in stocks, commodities, precious metals… anywhere other than in the depreciating greenback. With rising oil prices that increase our trade deficit, and as our huge deficit-enhancing stimulus package makes the United States a humbled “supplicant” debtor nation, unable to mount any credible negotiation with the Chinese– who hold $2.3 trillion in dollar reserves – over any number of key issues, America is in arguably the worst financial condition since the Civil War. Pull the stimulus out of the economy – which would vastly reduce the deficit – and does the condition of our private economy fall into the abyss? There are no good choices, but it does appear that we, as a nation, face a near-term future of less.

Less (“fewer” if you insist on grammatical purity) jobs, less dynamic growth, less in the quality of life, less economic clout and less political sway. The dollar is likely to fall out of favor as the global reserve currency – the currency nations use to maintain international accounts and which is used to value the world’s commodities, particularly oil. We will be lucky if the dollar maintains the majority of value in the probable new “aggregated and virtual” special drawing right currency, if that does in fact replace the dollar in international circles. If the world’s major oil producers instead elect to go directly into an existing currency, like the Euro where the dollar has no part, expect a dramatic further fall in the value of the dollar, which has dropped, over the past year, 18% against currencies like the Euro and a whopping 40% against the Australian dollar or the South African rand.

The U.S. has been riding the wave of favorable low interest rates for its massive national debt, but there is little doubt that the international community, faced with a falling dollar, and the Federal Reserve, which adopted a near-zero percent interest rate only as a short-term emergency measure, are expecting normal to higher rates in the very near term. The November 22^nd New York Times: “With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher… In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan…

“ ‘The government is on teaser rates,’ said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. ‘We’re taking out a huge mortgage right now, but we won’t feel the pain until later.’” And folks are not cooperating with us the way they used to. The Chinese have refused to budge on maintaining a lockstep parity with the dollar (making their exports consistently valuable in the U.S., and continuing the dollar’s lack of export value in that market), and the Europeans are desperately trying to shore up the dollar so that we will continue to buy their exports (which improves their job growth at the expense of U.S. exporting companies.). Gold futures have pushed the value of that precious metal well past the $1100 mark, and prognosticators are suggesting that this value could more than double in the coming year.

Speculators are going crazy for gold, but that actual purchase of gold itself – for private or industrial use – has plunged. The November 21^st Los Angeles Times: “Gold bought as jewelry, for example, reached 673.3 tons in the third quarter of 2008, when gold's price was mostly below $900 an ounce. In the third quarter of this year, with the price mostly above $900 and on its way to $1,009 by the quarter's end, the amount of the metal bought as jewelry totaled 473.5 tons, down 30%.” In simple terms, jewelers are not having a good time, and holiday sales are likely to see a serious shift away from gold jewelry. I can see smart wives and girlfriends arguing that giving them more gold for the holidays is actually a hedge against the inevitable further erosion of the dollar.

How do governments approach the physical use of gold? The LA Times: “Interestingly, the Austrian government mint is betting otherwise, at least in the near term: The mint, the world's biggest producer of gold coins, recently said it planned to cut output by 32% in 2010, figuring that an improving global financial system will slash gold demand from investors… The U.S. Mint, however, is siding with the bulls: On Dec. 3 it plans to resume production of American Eagle gold coins in half-ounce, quarter-ounce and one-tenth-ounce sizes to supplement its production of one-ounce coins.”

Okay, husbands and boyfriends, assume the brace position and prepare! The holidays approach! Okay, those of you who still have jobs, have not experienced a cut in pay, and are feeling generous in perilous times.

I’m Peter Dekom, and I approve this message.