Turn Lead Into Gold

December 16, 2003

The primary reasons behind the dollar's foreign exchange value movements are no longer monetary. Since the creation and launch of the euro currency, they have become geopolitical.

The dollar used to be "the only game in town." Traditionally, other countries' Central Banks were forced to support it when a dollar crisis came along, because there was no alternative. Now, it's different.

Since the launch of the euro, there IS an alternative, and countries around the world are reaching for it with both arms - warts and all. That means the dollar, being an un-backed paper-currency like all others, has lost its fundamental, strategic support.

Now, there is only temporary "tactical" support by Asian exporters whose price competitiveness for their products depends on keeping their currencies low versus the dollar. There is also a certain level of tactical support from the EU countries, who cannot afford to let the euro rise too far too fast for pretty much the same reasons.

But the fact that the euro alternative now exists has enabled geopolitical opponents of the United States to play out their trump card: they can wager their holdings of US Treasury debt and FOREX reserves in a deadly game of "chicken."

Most notable among these are China and the Muslim countries. The Muslim countries' enmity toward the United States is legend, and does not need to be elaborated on. China is billed even by US politicians as a friendly "trading partner" of the US - but in truth it is anything but. In the same camp is Russia.

These three power blocs are now playing their trade-surplus and Treasury debt cards against the US. In addition, all three of them invest heavily in gold, knowing that the dollar is structurally dependent on a low price of gold. Europe (lead by Germany and France) is playing alongside them (not heavily investing in gold itself, but limiting its gold sales - which has the same effect).

This leaves the dollar-forces in a situation where they can only count on a smattering of economic featherweights around the world, and on the Asian exporters mentioned above, to support their currency.

As a result, we see steadily rising gold prices and falling dollar values despite a considerable economic rebound in the States - an historical economic anomaly which ordinary Keynesian economic analysis in at a total loss to explain.

The question becomes: can the pro-dollar forces in this game possibly be strong enough to thwart the ambitions of the anti-dollar forces?

As shown, only a few economic no-names, plus the Asian exporters, currently underpin the dollar. That means: the Asian exporters minus China, the elephant among the minnows.

China occupies a special status because its currency is pegged low to the dollar, ensuring export price-competitiveness no matter how low the dollar falls. China is therefore in the enviable strategic position to be able to sell the dollar into oblivion and still make a pretty good export-buck. It can do this all the way to the point where the US economy comes to a screeching halt and US consumers can no longer buy anything.

This, in turn, represents the only technical constraint of China's present ability to sell the dollar into the ground.

But this dilemma is not such a big one, really. Because of all of the above factors, on top of the jaw-popping US trade deficit, the US dollar system along with the economy it underpins is in the process of self-destructing, anyway.

Even without this "Anti-Dollar Axis" strategic efforts, central banks around the world are predisposed to holding euros instead of dollars as their currency reserves. This is so because the euro has no debt-load (actually, a surplus), compared to total US indebtedness (externally and internally), of some 32 Trillion dollars - twice the amount of actual dollars existing in the world!

Meanwhile the US consumer's ability to spend money, buy imports, and invest in stocks rests on nothing other than a continuation of excruciatingly low interest rates combined with an exorbitant amount of individual indebtedness. If interest rates were raised at this point, the consumer's ability to go deeper into hock in order to keep up his spending habits -- habits that currently sustain the Asian exporters and much of the rest of the world -- would simply evaporate.

When the US consumer stops borrowing and spending, the world-wide "free trade" party will be over.

Lights out!

So, can the dutiful American cash-cow (uhh, I'm sorry: consumer) keep it going, then?

In one word: No.

Not with a perpetually falling dollar. Not with international selling (or refusal to keep buying at present rates) of US Treasury debt. Not with climbing world-wide natural resources prices, including precious metals and oil. Not with real estate prices at historic peaks, threatening a collapse of home values. Not with being hocked up to the hilt with home equity debt. Not with a looming retirement funds crisis. Not with a supposedly conservative administration whose answer to the Democrats' traditional "tax and spend" policy is a hair-raising "tax less and spend even more" policy ...

and the list goes on.

Bottom line: the dollar has lost all concrete, dependable, verifiable support. Being itself unbacked by anything other than politicians' promises, it is - in its current unbacked form - simply doomed. There's no point in mincing words.

That's why you need to invest in gold to protect your wealth. Turn literally worthless paper-dollars, dollars whose value is dropping like lead, into always-valued gold. In other words:

Be an alchemist!

Got gold?

Gold is still being mined and refined at the rate of almost 2,600 tonnes per year.