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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Market Flashing Debt Crisis Warning

Interest-Rates / US Debt Apr 11, 2010 - 10:07 AM GMT

By: Larry_Edelson

Interest-Rates

Best Financial Markets Analysis ArticleWhen you’ve been trading gold for 32 years like I have, you develop a sixth sense for the precious yellow metal.

You can hear it speak to you. You can feel its heartbeat. You can interpret its signals.


Gold anticipates the not-so-obvious and often completely unforeseen economic developments better than any other investment I know of.

That’s why I am writing to you today. Gold’s rally last week to as high as $1,156 an ounce has an important message for all of us: It’s telling us that all is not well with the world and that something major is brewing out there.

What’s going on out there that’s not so obvious and that gold is picking up on?

It’s the relationship between China and the U.S. — and the implications of that relationship not just for the Chinese yuan, but also for the U.S. dollar.

You see, Treasury Secretary Tim Geithner travelled to Beijing this past week, where he got on his knees with his hat in his hand, begging Beijing to push up the value of its currency.

Now, no doubt, in the media, you’ve been hearing for years that China’s currency is undervalued.

But gold is telling you something different. It’s telling you the other side of the story.

If the yuan is undervalued, then the dollar must be overvalued, meaning the greenback will soon resume its sharp decline in value.
If the yuan is undervalued, then the dollar must be overvalued, meaning the greenback will soon resume its sharp decline in value.

It’s telling you that if the Chinese yuan is undervalued, then the dollar must be overvalued against that currency too.

And that means that the U.S. dollar will soon resume its sharp decline in value, especially against what is now the world’s second largest economy.

So, right now, I want you to be prepared. First, by this heads up I’m sending you. And second, by understanding the historical progression of the relationship between gold and the dollar.

So let’s step back in time a bit …

How Gold and the Dollar Were Irrevocably Separated

It’s 1947. We’re in a London office on St. Swithins Lane. Inside are six members of the London Gold Committee. A bullion expert from N.M. Rothschild & Sons says, “Gentlemen, it is eleven o’clock.” We begin.

Each member immediately calls his office on a special direct telephone line to determine how much gold is available for sale and how much is bid for.

All heck is breaking loose because there’s not enough gold for sale to meet demand. Reason: Investors around the world have been jittery for weeks. They’ve been watching America’s financial position deteriorate.

In fact, America’s balance sheet is in such terrible shape that Treasury Secretary John Snyder had earlier been forced to announce new bond offerings to help cover the worst budget deficit in the history of the U.S. ($45 billion in the red), not to mention a $247 billion national debt.

The official price of gold is $35 an ounce and climbing. It seems like everyone wants the yellow metal. They’re worried that the value of the U.S. dollar will plummet in international currency markets.

Everyone’s hanging onto the gold they have, making the market even tighter.

Over the next few months, the buying pressure mounts, driving gold’s price up to $43.25, a gain of 23.5%. There are frequent rumors that the U.S. Treasury’s stockpiles of gold are dwindling. The squeeze is on.

The bull market in gold lasts until 1951 when Washington announces the so-called Treasury-Federal Reserve Accord, stipulating that the Treasury and the Federal Reserve act separately with respect to dollar policy and monetary policy.

The agreement effectively hands Washington the ability to spend unlimited amounts of money, with the Fed backing up the check book.

Twenty years later, the Bretton Woods Agreement on currencies is disbanded as Washington spends so much money and the Fed prints so much out of thin air that there simply isn’t enough gold to go around. Period.

Then, in 1973, all ties between gold and the dollar are officially cut by President Richard Nixon. Gold skyrockets from $43.25 an ounce to $850 over the next seven years, nearly a TWENTY-FOLD GAIN.

Now, Compare Our Nation’s Debts Today with Those in 1947, 1973 and 1980

In 1947, the official national debt was $247 billion. The price of gold was $35.

In 1973, the official national debt was $469 billion. The price of gold was $43.25.

In 1980, the national debt was $930 billion. The price of gold reached $850 an ounce.

Today, our official national debt is a whopping $12.78 trillion. That’s  …

arrow black Important Message from the Gold Market ...  Thirteen times greater than it was in 1980

arrow black Important Message from the Gold Market ...  Twenty-seven times larger than our 1973 national debt, which broke the back of the gold standard

arrow black Important Message from the Gold Market ...  And nearly FIFTY-TWO TIMES larger than our national debt in 1947

And I emphasize, that’s just the official debt.

Today we also have more unfunded contingent liabilities than ever and more than any country in history, with our total outstanding debt and liabilities now exceeding $137 TRILLION.

Let’s Connect The Dots …

1943: Gold jumps as the world worries about our $247 billion national debt.

1973: The gold standard is abolished by President Nixon as our national debt hits $469 billion and all over the world investors are redeeming their weakening dollars for gold.

1980: Gold skyrockets to $850 an ounce as our national debt hits nearly one trillion dollars.

April 2010: A trade war between China and the U.S. heats up dramatically. Treasury Secretary Geithner travels to Beijing and essentially begs China to boost the value of its currency to “rebalance the global economy.”

And what country in the world has the biggest stash of U.S. dollars that would effectively be sold to boost the value of the yuan?

China!

Gold’s reaction: It starts to jump again, and flash buy signals.

Why? Because gold speaks the truth. That any revaluation higher in the yuan means mountains of dollars are going to be dumped, causing a massive dollar devaluation.

Not surprising, considering our national debt alone is now almost $13 trillion, more than twenty-seven times larger than is was when the gold standard was abolished.

My view: Listen to gold and what it’s telling you. I have absolutely no doubt that what’s going on between China and the U.S. … including Geithner’s visit to Beijing … is the next inevitable step in the demise of the dollar … and all about inflating away the U.S. debt problems.

Stay safe and cautious,

Larry

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.


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