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Why Gold Price Rise Will Trigger U.S. Dollar Collapse

Currencies / US Dollar Oct 28, 2008 - 02:34 AM GMT

By: Eric_deCarbonnel

Currencies For the last few years, the dollar has been in a bear market due to the horrible fundamentals backing the currency (the huge debt mountain, unfunded liabilities in the tens of trillions, rampant money printing by the central bank, and the huge federal budget deficit). However, in the last three months the US dollar has diverged from its fundamentals and rallied due to investors fears about deflation.


Because they see parallels between today's credit crisis and the Great Depression, investors are pilling into the dollar and treasuries. Since the results of 1929's housing and credit collapse was an increase in the purchasing power of the dollar (deflation), investors have come to believe that purchasing power of the dollar is also going to rise today. Based on this belief, investors are selling assets in other currencies and buying dollars, which explains why foreign markets and currencies are crashing at the same time right now. These investors are then taking their dollars and plowing them into the "safest" investment, short term treasuries. Investors are willing to accept the near zero interest rates on these short term treasuries because they expect the dollar's purchasing power to rise. Unfortunately for these investors, the purchasing power of the dollar is not going to increase.

In 1929, the dollar was protected by the gold standard. In contrast, today the dollar is not backed by physical gold but is instead controlled by the federal reserve. The current head of the fed, Ben Bernanke, believes that the great depression only ended when the US weakened the gold content of the dollar, devaluing the currency. Let me repeat that , the current head of fed, Bernenke, believes the solution to deflation is to devalue the dollar in order to keep prices from falling.

When physical demand overwhelms the COMEX gold market and gold prices explode, it will blow a hole in the whole deflation argument. Investors will ask, "If the purchasing power of the dollar is supposed to increase, why is gold skyrocketing?" They will look back to what happened in1929 and discover that the dollar's purchasing power only increased back then because it was limited by the gold supply. In horror, they will realize that the true safe asset today, as it was back in 1929, is gold. It is this realization that will trigger the collapse of the dollar.

Without the expectation of deflation pushing thousand of panicking investors into dollars and US treasuries, the US dollar will revert back to its fundamentals, and these fundamentals have grown MUCH WORSE in the last three months.

By Eric deCarbonnel
http://www.marketskeptics.com

Eric is the Editor of Market Skeptics

© 2008 Copyright Eric deCarbonnel - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Eric deCarbonnel Archive

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