The author does not give any evidence / explanation against the arguments put forth by the likes of Marc Faber, Jim Rogers etc. In this article I will try to explain the other side of why gold prices are soaring and at the same time counter some of the evidences author has given in support of his argument.
The author says, “But in fact, the US today, although in rotten economic shape, is struggling with deflation, not inflation…”. Deflation can be temporarily caused by flooding the market with goods bought on debt at a time when people do not have enough credit. But when debt becomes difficult what remains is scarcity of goods along with massive unemployment or no goods and no money. Why does US TRADE DEFICIT is high if there is surplus production causing deflation? Why does US not exporting its surplus and getting back its dollars to meet its welfare expenditure to create jobs, rather than increasing external debt and printing more money? The answer is simple that US is not producing but simply consuming on debt.
Today Japan, China etc are not only supplying goods to US markets but also investing their earnings into US treasuries. Exponentially growing US debt requirements has lead to inflation in emerging economies like China who are exporting to US. Because…
a) the good which otherwise would have been available to their own people are being exported to US consumers.
b) they have to print more money in line with falling dollar to make their exports competitive.
So more money and less goods is causing their inflation.
Now as the better sense is prevailing upon, China is slowly increasing its diversification out of US dollar. At the same time, debt requirements, to generate employment and to stimulate the economy, is increasing in US. This widening gap due to higher debt requirement and reducing Chinese (and other’s) investment requires more money printing or quantitative easing. We have seen 2 rounds already apart from TARP. And now I am sure we will see a 3rd round soon which is being called as QE3. I expect that to happen quite soon, timings may always be debatable.
US had clearly outsourced its production to countries like China and Services to India and have adopted an easy way to finance its expenditure, i.e., to print money. More dollars coming into world economy is making dollar cheap w.r.t gold and commodities. The INFLATION in US CAN BE PREVENTED TILL SUCH TIME WHEN THE LENDERS LIKE CHINA and JAPAN CONTINUES TO DEVALUE THEIR CURRENCY AND SUPPORT DOLLAR indirectly. The investors are already attempting to get rid of dollar. In the absence of any currency alternative, they are moving to commodities specially to Gold which has historically been the money for international trade. THEY ARE DOING IT TO PRESERVE THE PURCHASING POWER WHICH IS STORED IN THE FORM OF CURRENCY. BY CURRENCY DEVALUATION, IT IS THE PURCHASING POWER THAT IS STOLEN e.g., the currency becomes weak and your Rs or $ 100 can buy less goods than what it was previously able to do so.
The trigger of the real currency crisis could be anything such as OPEC stops accepting the dollar because of its constantly falling value. The Sheikhs of Arab eventually sees the loss of purchasing power of their dollar investments due to falling dollar. China realizes the reason of its rising inflation and start asking for something in return for the goods it is lending to US, that is not being devalued or loosing its purchasing power. When it happens heck of the crisis will come. GOLD MAY SKY ROCKET as not only investors but sovereigns will attempt to get hold of it to enable international trade. And Marc Faber is not wrong when he says we can even see war in future. Because Sovereigns nations interests will clash, specially arab’s, china (creditor nations) on one side and US, west (debtor nations) on other side. I am still leaving some dots to connect, hope you will be able to see that.
If we have the right understanding of economics it is not difficult to see the trends. Timings of events can be debatable but trends can be forecasted based on changing situations. GOLD IS GOING UP BECAUSE MONEY IS LOOSING ONE OF ITS KEY FUNCTION “STORE OF VALUE” which is much required in these days of growing uncertainties.