If you ask most investors what is the main driver for the price of gold they are likely you tell you that it's the direction of the U.S. dollar. Therefore, the only due diligence most investors perform is a perfunctory glance at the Dollar Index (DXY). While it is true that the purchasing power of the dollar is a key metric to judge the direction of gold prices, the DXY will only tell you what the dollar is doing against a basket of 6 other flawed fiat currencies.
The main component of the Dollar Index is the Euro Currency, which represents a 58% weighting in the basket of currencies. It logically follows, if the Euro is tanking, the Dollar Index could increase regardless of the fundamental condition of the U.S. dollar. In order to truly access the intrinsic change in the value of the dollar you must first determine; the level and direction of real interest rates, the rate of growth in the money supply and the fiscal health of the government. When analyzing the dollar using those metrics, it is clear that the intrinsic value of the dollar is eroding in an expedited manner.
The Ten year Treasury note is now yielding 1.85%, which is down in yield from 3.34% a year ago today. Meanwhile, the year over year increase in Consumer Price Inflation jumped to 3.4% in November, up from 1.1% in the 12 months prior. Therefore, real interest rates are not only negative but are falling. Falling real interest rates reduces investors' appetites to hold dollars and increases their willingness to buy gold. Negative real interest rates cause consumers, businesses and governments to borrow more money. When more money is borrowed into existence, the supply of money grows. Increasing money supply growth reduces the value of dollars already in existence. The YOY change in M2 money supply growth is near 10%. Since U.S. economic output is around 2%, the supply of goods and services is growing far below the rate of money supply growth. This causes aggregate prices to rise and reduces the value of the dollar, while boosting gold prices.
The level of U.S. Federal debt is serving to destroy confidence in the currency. Our government just requested permission for yet another $1.2 trillion increase in the debt ceiling. U.S. debt stands at over $15.2 trillion and is now estimated to be larger than America's entire economic output in 2012. The proposed increase would boost the debt ceiling to $16.4 trillion and would be sufficient to last only until the end of this year.
U.S. deficits are running over $1 trillion per annum and our accumulated debt amounts to over 700% of Federal revenue. And just last week, we learned that the monthly budget deficit climbed to $85.97 billion in December, up from $78.13 billion in the same month a year earlier. The sad truth is that our debt is already intractable and becoming more so by the day. The only relief from such debt will be a default on the part of the United States. A sovereign U.S. debt default by either the explicit (restructuring) or implicit (inflation) method would be pernicious for the dollar and massively bullish for gold.
The simple truth is the U.S. dollar is under increased assault from negative real interest rates, increased counterfeiting from the Fed and a national debt the government is attempting to inflate away -- that truth isn't made less painful just because a European vacation may be getting cheaper.
Since the intrinsic value of the dollar continues to deteriorate, long-term investors would do well to ignore the dollar's temporary and beneficial measurement against the Euro and focus on its true fundamentals, which are forcing investors towards gold.
Michael Pento is the President of Pento Portfolio Strategies
Follow Michael Pento on Twitter: www.twitter.com/michaelpento1
It's impossible for a country to default on debt denominated in its own currency. This guy should know better. When does the level of debt destroy the dollar? 16 trillion? 23 trillion? 200 trillion? Why not 5 trillion? Deficits are running high, and yet the value of the dollar relative to goods (inflation) is not budging. The dollar is not being destroyed by deficits. Fiat currency doesn't work that way. The gold bugs have gotten lucky because the politicians are acting like we are still on the gold standard, not because they understand banking and currency fundamentals. Don't put all your eggs in the golden basket.
1. No debt for the U. S. government going forward.
2. No future borrowing by the U. S. government.
He's the first reporter I've ever seen call the FED what they truly are. ;-)
Time for I to run the Table ?
Lower the Cost of Capital ASAP for Jobs created in the USA !
Remember Industrial Revenue Development Bonds ?
Back to the Future !
Bottled Water.
Flashlights and or lantern with extra batteries.
AM Radio with extra batteries.
Fire extinguisher.
Sterno fuel and unit; charcoal and lighter or propane for gas grill.
Tools: pocket knife, nails, saw, a hammer, an ax, and rope.
Topographic maps.
They are however a good starting point.
The financial crisis evaporated trillions of dollars in American wealth. That catastrophe should've halted the economy, bringing the nation into a 1930s-style great depression. Running up the national deficit is the only path toward preventing that scenario.
If the powers that be are so concerned about the national debt crushing the dollar, then why not propose higher taxes on the wealthy? If the only alternative is a worthless dollar, then what do they have to lose? Otherwise, drastically cutting social services will only send the economy back into a sputter as it slips into the great depression that should've begun in 2008.
Not everyone suffered during the great depression. The wealthy elite remained mostly unscatched, which suggests an explanation as to why they currently care so little about a repeat of that scenario. Meanwhile, conservative voters are angry that a "muslim" is sitting in the White House and that zygotes aren't considered people.
The Great Depression went on because they never allowed the malinvestment to be liquidated. The exact actions we are taking today by trying to prop up prices and wages. If you let the market clear the bad debts we will have a sharp short painful recession followed by a return to growth.
See
http://mises.org/Rothbard/AGD.pdf
"That catastrophÂe should've halted the economy, bringing the nation into a 1930s-stylÂe great depressionÂ. Running up the national deficit is the only path toward preventing that scenario."
Running up the debt and the money supply is only prolonging the problem. The only thing more debt and TARP saved were the wealthy bankers you're railing against. Yes, there would have been pain, but the recession is the cure. It's the market's attempt to purge the bad investment, but the government is keeping it from happening and prolonging the mess.
In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. The sovereign government via deficits is the only entity that can provide the provate sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.
The analogy current orthodox economics draws between private household budgets and the government budget is false. Households, must finance their spending prior to the fact. However, government, as the sole issuer of the currency, must spend first before it can subsequently tax. Government spending is the source of the funds the private sector requires to pay its taxes and to net save and is not inherently revenue constrained.
In a fiat monetary system, unemployment occurs when net government spending is too low. As a matter of accounting, for aggregate output to be sold, total spending must equal total income. In the absence of government spending, unemployment arises when the private sector, in aggregate, desires to spend less of the monetary unit of account than it earns.
http://modernmoney.wordpress.com/2011/03/14/stock-flow-consistent-macro-models-part-1/
- Mises