Gold or Dollar, Up or Down

By Greg Hunter    Dec 16 2009 10:07AM usawatchdog.com

Alex, a good friend of mine, sent me an email with just one sentence.  It said, “Did you read this?”   It was an article published this week by NYU Economics Professor Nouriel Roubini titled, “Roubini: Here’s Five Reasons The “Barbarous Relic” Gold Is Going To Tank.”  Alex and I like and respect Roubini because he was one of the few economists to call the coming financial crisis well before the meltdown.  Alex knew I would be taken aback, like he was, at the bearish call on gold.  I’ll take the liberty to summarize the five reasons the Professor feels will “tank” the yellow metal. (for the complete article click here)

“First, the dollar carry trade may at some point unravel…Second, central banks will eventually need to exit quantitative easing and effectively zero policy rates… Third, bouts of global risk aversion may occur… thus leading to a rise in the U.S. dollar that would drive down prices of commodities and gold in dollar terms.  Fourth… some of the recent rise of gold is also bubble driven by herding behavior and momentum trading…But all bubbles eventually crash and the bigger the bubble the bigger the eventual crash.” 

All are good points that I cannot deny from the Professor.  But the Fifth point, as I told my friend Alex,  is not a reason at all.  It is a hedge that gold might go higher if central banks monetize debt.  (Print money to pay bills) 

“Fifth, the effect of rising sovereign risk on gold prices is ambiguous, as the events of recent weeks suggest. A risk in such risk could push up the price of gold if it leads to expectations that central banks will eventually monetize those fiscal problems. But in practice it has weighed on the price of gold because it has increased investors’ risk aversion and led to a rush into a different (and more liquid) asset than gold—e.g. the U.S. dollar—thus pushing gold prices down. In general, gold always competes with fiat currencies and anything that is dollar bullish—like repeated bouts of global risk aversion—tends to be gold bearish.”

Check out the hedge line again,” A risk in such risk could push up the price of gold if it leads to expectations that central banks will eventually monetize those fiscal problems.”  Isn’t the U.S. Congress planning to lift America’s debt ceiling $1.8 trillion to a debt load of nearly $14 trillion bucks?  (Read complete story here)  That doesn’t sound like a contraction of spending to me.   

The U.S., without the additional $1.8 trillion in new spending limits, has $5 trillion in debt to finance in 2010.  Try to grasp this very big number, $5,000 billion divided by 52 weeks. The amount America has to finance comes out to $96 billion a week, each and every week!   Do you think that foreigners will finance all of that?  I say no.  If foreigners go on a buyers’ strike, then the Fed will be forced to be the buyer of last resort which means monetization, quantitative easing, or simply money printing.  That will surely “tank” the dollar and give gold a boost. 

I am not the only one that thinks something bad could happen to the U.S. dollar. Professor Roubini said just a few months ago, “If markets were to believe, and I’m not saying it’s likely, that inflation is going to be the route that the U.S. is going to take to resolve this problem, then you could have a crash of the value of the dollar.”  I wrote a post about the problems facing the dollar in a September post called “Somet hing Wicked This Way Comes.” 

Obama said just last week that the U.S. is going to “spend” our way out of the stubborn economic downturn we find ourselves in now.  That sure sounds to me like more money printing.  When the money printing stops, gold will drop.  Do you think Obama is going to stop printing money before the 2010 or 2012 elections?  

Oh, by the way, the FDIC has at least an $8 billion negative balance.  There are hundreds of banks that will likely fail according to experts in the coming months.  Where is the FDIC going to get the money to pay depositors in all these bank failures?  Anyone holding U.S. dollars should be asking that question. 

And what about the trillions in derivatives the banks have in worthless debt bets?  Are we going to let the banks finally take their medicine and suck up big losses or keep bailing them out? Those are just a few of the many black holes in the U.S. economy that the administration will shovel printed money into. 

Roubini adds “…Thus, the gold bugs are wrong—or at least very, very premature—in justifying buying gold as an attack on fiat currency. The velocity of money is still low or falling—the opposite of a currency crisis or run on the dollar.”

I respect Professor Roubini but, in this case, all the evidence shows the government is going to take the path of least resistance and expand the budget and print money.  I talk all about what will probably happen to the dollar in a well sourced post aptly called “The Fix Is In.”

I am betting the dollar will be sacrified on the cross of endless debt.  I would rather be a year early that just one day too late. 

Greg Hunter

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Hunter joined ABC News in 1999 from WTSP-TV in Tampa. He has earned a “National Headliner Award," an International “Freddie Award” for health and medical reporting, as well as investigative reporting awards from both the “Society of Professional Journalists” and the “Radio Television News Directors Association.”