Gold Will Rise as U.S. Debt Increases
The Congressional Budget Office has recently forecast the US budget deficit for fiscal 2009, to reach a mind boggling $1.825 trillion, or approximately 13% of GDP. Next year, the budget deficit is expected to total $1.43 trillion under Obama’s budget plan. Furthermore, the CBO sees the US deficits between 2010 and 2019 totaling $9.1 trillion, thereby raising doubts about America’s ability to finance its debt at low interest rates, and whether it can maintain its top tier AAA credit rating.
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The exploding US budget deficit and the Fed’s policy of flooding the financial markets with US dollars, knocked the value of the greenback 7% lower in the second quarter, and heightened fears on global bond markets about a surge in inflation. This had the effect of eroding the value of China’s holdings of US Treasury notes, estimated at roughly $1.45 trillion, putting Beijing on the offensive with Washington.
With news like this an investment into gold seems prudent.
Can anybody explain why physical gold market is so tight if not for preservation of wealth, or as an insurance? I store about 50% of mine in $. The rest are in some other currencies (which I believe won’t be destroyed in this depression) + Gold and silver + real estates.
As for $, massive devaluation is a must in order to rebuild America. It can not hang on an economy with 70%-80% services, a large % of which is a money losing financial games.
The rise of $ in the past few months are the result of several moves: payment squeeze on trade deficit countries who still prefer to settle in $; withdraw of oversea investment by US investors; potential easing by other central banks while the US is already done.
It appears to me all financial tricks have been played out. Currency swaps among other central banks are on the rise, which clearly try to squeeze the $ out of their mutual trade settlement system. The world can not go back to “goods for goods” trade. But they are trying to find other ways to settle. Wolrd trade volumes are falling fast.
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Take a look at the purchasing power of the US$ for the last 100 years. What the trend clearly shows is that it is in steady decline. Also there have been very few times where the average investor has been able to get a real return (rate of return minus inflation rate) on their investments. This is forcing many investors to consider gold. Proper timing of entry and exit points will provide an acceptable level of wealth preservation. If that way of thinking deems me to be labeled as a “goldbug” then so be it.
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In a financial crisis and recession, shorting gold for financing represents an almost exponential amount of risk, since you´re shorting something that performs very well (theoretically) in a recession because it´s a store of value. Also, you would typically use this financing to buy much higher yielding debt, and during a financial crisis the risk of this debt defaulting goes up. Thus, you have gold going up in value and the value of your bond going down if things get worse, and that represents a very large amount of risk, since you could theoretically be out an infinite amount of money if gold went up in value an infinite amount (that would never happen, but it´s what could happen theoretically).
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