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In Debt We Trust

August 17, 2009


Once upon a time the United States of America was the world's wealthiest nation. The dollar was 100% backed by gold. In 1933 the US was on the Gold Standard under which our currency explicitly certified that the there was on deposit in the US treasury Gold payable upon demand to the holder. You could take a $20 bill to any bank and receive a one ounce gold coin in exchange.

Check out the US currency in your wallet, issued by the Federal Reserve System. All it says is that the note is legal tender for all debts, public and private. The US Treasury website states it even more clearly: "Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything." This change in our currency was the beginning of the Debtor Republic.

While on the surface the US appears to have two major parties with widely divergent political and economic philosophies, in reality both parties are very much alike when it comes to spending our money. There is the party of big government and the party of even bigger government. Over decades this reality has gradually but inexorably reduced the once hugely wealthy United States to the status of the world's largest debtor nation.

Recent events have confirmed this shift in power. China has announced that it has almost doubled its gold reserves, and that it plans to increase its already expanded holdings by as much as 500%. And China's Premier, Wen Jiabao, has publicly expressed concern over the long term value of the dollar. Considering that China holds more US debt than any other nation, this is a significant event for the future of the dollar.

Continuous and massive deficit spending by the US requires that the US find willing lenders. Without such lenders, the US has no alternative other than to print money that has no backing at all. In recent months our government has printed trillions of such unbacked dollars. This course will devalue the dollar drastically.

It appears that China has decided to bow out of its present position as prime lender to the United States. At the most recent Treasury auction, the Federal Reserve had to buy over a Trillion dollars of US debt when China declined to bid on it. Instead China has been using the Trillions of US dollars it has amassed over the years to buy Gold.

And now China has proposed at several economic summits that a new world reserve currency be created to replace the US dollar as the reserve currency of the world. The proposed currency would be backed by Gold, just as the US dollar was when it was the undisputed world reserve currency.

In summary, the US dollar has been losing status in the world since the United States went off the Gold Standard. That loss of status has been exacerbated by our nation's huge and increasing national debt, and our lack of fiscal discipline. These have all contributed to the decline of the dollar and inflation in our nation.

Further declines in the dollar (and therefore further inflation) have resulted from the Trillions of dollars with nothing backing them that our government has printed over the last year. Finally, China is dumping Billions of dollars on the market in its quest for more and more Gold, causing further declines in our currency (and even more inflation).

If the world's biggest investor in dollars is selling them, will Americans continue to hold US dollars as an investment? Only the financially unsophisticated and those with no choice (such as retired citizens on fixed incomes) will keep their assets in dollars. They will suffer the most as a result of the inevitable devaluation of the dollar.

This devaluation will not likely be a formal replacement of the dollar by a "new" dollar or some other new currency as has happened in many countries, but a rapid debasement of the existing dollar through hyper inflation. This is the only politically expedient solution.

World events are moving rapidly. The shrewd will protect themselves. The only real protection is to own the only real money – Gold. Gold has been used as money by every civilization on record, and is even referred to as such in the Bible. Gold has tripled in value in the last eight years. With US and world inflation out of control, within a few years we will see Gold prices at levels that few can imagine.

THE FOLLOWING IS AN ARTICLE PUBLISHED RECENTLY IN THE FINANCIAL TIMES…

SHANGHAI/BEIJING, April 24 – China revealed on Friday that it had quietly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tonnes and confirming years of speculation it had been buying.

Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told Xinhua news agency in an interview that the country's reserves had risen by 454 tonnes from 600 tonnes since 2003, when China last adjusted its state gold reserves figure.

The world gold market has been buzzing with talk about China buying gold for years as the country's foreign exchange reserves have rocketed, and speculation has picked up since the global economic crisis threatened to weaken the value of those reserves.

Gold prices jumped on the news and were up 1 percent on the day at $910.80 an ounce at 0540 GMT. By a Reuters calculation, China's holding of gold would be worth $30.9 billion at current prices.

China recently reported the change in its gold holdings to the International Monetary Fund and would include the latest change in central bank reports and balance of payment statistics, Hu said.

China's reserves were now the fifth biggest in the world, with only six countries holding more than 1,000 tonnes, she said.

China had increased its stocks by buying on the domestic market and from domestic producers.

Gold market participants said Hu's revelation was good news for the market and signalled likely further buying.

"The comments indicate that China will buy more gold as reserve to improve its foreign reserve portfolio. This is a trend," said Yao Haiqiao, president of Longgold Asset Management.

Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tonnes.

"It's not a matter of a few hundred, or 1,000 tonnes. China should hold more because of its new international status, and because of the financial crisis," he said.

"The financial crisis means the U.S. dollar value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage."

The European Central Bank recommends its member banks hold 15 percent of their reserves in gold, but among Asian nations the percentage is far smaller, said Albert Cheng, World Gold Council managing director for the Far East.

Copyright ©2009 Greg Halloway

Greg Halloway has made his living trading gold bullion and rare gold coins for over 40 years. He is a world-renowned expert on rare coin grading and valuing, and was one of the six initial shareholders of the world’s largest professional coin grading service. He was also one of the founders of the world’s first electronic trading system for certified coins. His predictions on the prices of gold bullion have been remarkably accurate for dozens of years. Greg resides in Palm Beach and in Europe. To receive a free PDF copy of his monograph on rare European coins (which includes beautiful photographs of ancient coins) or to attend a free educational conference call on Gold, request it in the "Contact" area at www.GoldenArtTreasures.com. 
Visit Greg Halloway's web site at www.GoldenArtTreasures.com

 


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