The price of gold smashed the $450 barrier on Thursday and surged to an intraday high of $455 on Friday, the highest level in 16 1/2 years. Gold market observers talked about a quick run-up to $460, $470, even $500.
Meanwhile, fears of a dollar collapse spread like wildfire. The immediate reason: One central bank after another hinted at plans to shift from dollars to other currencies:
* The first deputy chairman of the Russian central bank said it might increase the proportion of its reserves held in euros ... and the dollar was slammed.
* The deputy governor for monetary policy at Indonesia's central bank said Jakarta might reduce its reserves of dollar assets if the currency fell further ... and the dollar plunged some more.
* Professor Yu Yongding, a central bank committee member in China, said China had cut its holdings of U.S. government debt ... and the dollar dropped like a rock, only to recover later in the day when Prof. Yu said he was merely quoting from Federal Reserve data.
But throughout it all, the U.S. authorities did nothing to stop the dollar decline. Nor did they say much to dissuade international investors from the prevailing view that the United States actually WANTS the dollar to fall.
Consider, for example, some of the comments of market observers in the last 72 hours:
Financial Times: "Investors have taken the [recent] comments as a signal that the Chinese and Japanese central banks might also be reconsidering their asset holdings. If either began to shift into European or Asian assets, the dollar would plunge and interest rates on U.S. government debt would rise sharply, damping U.S. growth prospects."
ABN Amro: "The rising gold price is telling us that there is now great uncertainty in the marketplace. It is telling us the U.S. dollar is again in trouble and the world economy may be in trouble."
The Guardian: "The markets have finally lost patience with the laxity of Washington towards the twin trade and budget deficits, pumped up by cheap money and tax cuts. ... Washington is relying on a soft landing for the dollar. History shows that there is a better than even chance of this process ending in a full-scale crisis, as it did in the mid-1980s, when the weakness of the dollar culminated in the stock market crash of 1987.
...Overseas investors are waking up and smelling the coffee, since the end of 2001, the Dow Jones Industrial average is up by only about 4%. That's pretty lousy to begin with. But for European investors, it's actually much worse. For them, the decline in the value of the dollar translates into a 30% loss. Is it any wonder they're beginning to sell?
...Look at what happened in 1987. Back then, as the dollar went into a tailspin, overseas investors cried uncle and began to exit U.S. financial markets in droves. This set off a panic by U.S. investors as well. First they sold bonds. Then they sold stocks.
The dollar has already plunged by about 30% in the past two and a half years. It's close to busting through its lows of the mid-1990s ... and then through the all-time low it made in 1992. Plus, look at the SPEED of the decline. See how it's similar to that of 1987?
SECOND, the fall in the dollar's value abroad is lighting a fire under inflation. ...Washington says not to worry about inflation. That's because they advertise the so-called "core inflation rate" which excludes food and energy costs
Maybe THEY don't need energy to heat their homes and drive cars. Maybe THEY don't need food to feed their families. But the rest of us do.
With the dollar's international purchasing power falling so rapidly, inflation is surging higher. The full Consumer Price Index report jumped 0.6% in October, at an annual rate of 7.2% inflation. And that — in my opinion — is still a conservative measure of inflation.
What Else Is Driving Gold and Inflation Higher?
Besides the falling dollar, there's been a massive, unbridled boom in consumer borrowing and spending in this country. Since 2000, household liabilities have grown 65% faster than the growth in America's GDP.
That means we're spending like a drunken sailor. Eventually, American households will buckle under the weight of all that debt. But first, they will experience a sharp increase in inflation.
If we were saving money, it wouldn't be as frightening. But the personal savings rate in the United States fell to 0.4% in the second quarter. Think about how atrocious that is! For every $100 earned, Americans are saving just 40 cents! |
