The Well-Dressed Dollar
Versus Down-to-Earth Gold
Kevin DeMeritt
President, Lear Financial
Many people, though not as many as a generation ago, may remember at least the ending of the Hans Christian Andersen's fairy tale, The Emperor's New Clothes.
It's a moral tale of vanity, conformity, even mass hypnosis. A conceited king seeks the ultimate in royal clothing and finds fulfillment in Guido and Luigi, two con men who are only too willing to oblige. The swindlers promise to weave the leader clothing so glorious, so elevated, that stupid people can't even see it.
When the exquisite-and non-existent-clothes are delivered to his majesty, as he's being dressed in the pretend robes, he's chagrined to find himself among the unwashed masses unable to actually see them. But he doesn't dare admit it. Neither will his underlings.
Neither will the townspeople. The farce is carried to its ridiculous end when the proud king, attired in his lighter-than-air clothing, goes on parade for all his people to see. Amid the cheering crowds, a little boy spots the naked king and shouts, "He has nothing on!"
The boy's authentic observation is quickly passed around until the people snap out of their delusion and finally point out the truth, too.
It is a 19th Century fairy tale that could be one of the 21st Century's worst nightmares.
The Greenback's Invisible Value
The Emperor's New Clothes is getting a 2006 re-write, this time with the greenback in the starring role.
Where once the dollar was a mighty symbol of a towering nation, it now represents debt that will never get paid, trillions of wallet-sized IOUs, valuable only because people-not unlike the townspeople cheering the naked king-still believe in it.
But belief in the dollar may be the only thing backing it.
Bill Bonner of The Daily Reckoning wrote, "'What is behind the dollar?' Just faith, comes the answer. But faith in what? Is it in the financial future of the United States? Talk about unbalanced; no nation in the history of the world has ever had such a big gap between what it earned, and what it spent. U.S. public and private finances are out of whack, and on the evidence, becoming more and more out of whack with each passing day. What faith can you have in its paper currencies? Its notes? Its bonds?"
These are all questions everyone-but Americans, of course-are starting to ask.
The townspeople, it seems, are slowly coming to their senses.
Valuable Receipts to Worthless Currency
Dollars are now at the end of a cycle…the part that is sheer madness.
At first, to do business, Americans tended to carry precious metals around in one form or another. But since carrying large amounts of, say, gold, was neither convenient nor safe, people either hid the bulk of their precious metals at home or put it in banks.
Banks, in return, gave their customers fancy receipts-as long as the institutions remained honorable, these receipts were "good as gold," actually becoming a respectable means of exchange on their own.
With time and man's mischief, these bank receipts got further and further away from the actual precious metals they represented, until, under Nixon's reign, the receipts-U.S. dollars-could no longer be redeemed in the gold that allegedly backed them.
The separation was complete, the insanity in place. Now the dollar was valuable only because important people said it was…in much the same way that Guido and Luigi scammed the king and his people with their invisible clothes.
Today the Fed (which is, contrary to the understanding of the American people, a private banking corporation) can print as many "naked" dollars as it likes. It's not as if the Fed is conjuring gold in its basement, after all. This is mere paper.
Mideast Seeing the Naked Dollar
The townspeople's eyes are opening wider.
"World financial markets are betting against the dollar and against
Mr. Bernanke's chances of correcting the imbalances caused by Alan
Greenspan."
That's from Texas Congressman Ron Paul, and he isn't shooting from the hip.
The United Arab Emirates, for one market, is even now debating how many dollars it should shed in favor of euros. It's no longer a question of "should they" but "how many."
Katie Martin of the Dow Jones Newswires reported that "the potential of other major Arab oil-exporting nations following the United Arab Emirates central bank and buying euros at the current low-value against the dollar could certainly develop into a meaningful long-term risk to the greenback."
She also reported "momentum is gathering" for other Middle East nations to follow suit.
Momentum is gathering in China, too. But not for more paper money.
China's Shiny New Reserve Currency
"China has become the biggest rumor in the gold world right now."
That was from John Reade, a UBS analyst, and he's talking about something Liu Shanen said.
Shanen is the official at the Beijing Gold Economy Development Research Centre who shocked the financial world when he recently said China should raise its gold reserves from 1.3% to between 3% and 5%.
Why is that so shocking? Because, if it happened, it alone would suck up most of the planet's annual production of the precious metal.
"The rapid growth of the Chinese economy…make it incumbent upon China to diversify its holdings away from US dollars and toward bullion to hedge against future global currency shocks," one industry analyst was quoted as saying.
The bottom line result of such a move would be gold going through the roof and the dollar falling through the floor.
And as more of world's townspeople wake up to the realization that the dollar "has no clothes on," there'll be more of this gold-for-dollar-reserves talk going on. Which makes it a pretty prudent bet for you to add to your gold portfolio, despite the metal's heady run-up.
The dollar may be strutting around in its pretend clothes, but gold remains as steady as ever. As Bill Bonner aptly puts it, "While the dollar could never say 'no,' gold says nothing else: No to debt. No to new spending schemes. No to re-electing scoundrels. No to bubbles. No to trade deficits. No, no, no, no, no."
Kevin DeMeritt
www.goldcentral.com
May 19, 2006
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