“In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil,” reported the UK Independent last week. According to the story, a number of secret meetings have already been held to hammer out the new monetary framework. The news sent shock-waves around, and understandably so, given the potentially cataclysmic implications of this development. Should it succeed, it would portend nothing less than the collapse of the global monetary regime which has for more than six decades rested on the dollar as its pillar and foundation.
As expected, the countries involved issued prompt denials once the story broke. Their protestations notwithstanding, there is every reason to believe that the story is, in fact, true. For one thing, it was penned by the Independent’s long-time Middle East correspondent Robert Fisk, one of Britain’s most respected and credible journalists. The recipient of more awards and prizes than any other British foreign reporter, Fisk is not known for putting out stories based on unverified hearsay. But even more importantly, the move away from the dollar would be the logical culmination of the stream of warnings and complaints which have been heard in recent months from experts and finance officials of foreign nations.
Spooked by the out-of-control deficit spending of the American government, the world has been growing gravely concerned about the viability of the US dollar. The reason is not difficult to see. America’s immense and growing national debt is about to top $12 trillion. Coupled with unfunded entitlement obligations, America’s indebtedness is – even by conservative estimates – more than $66 trillion.
Saddled with a debt burden whose size exceeds the world’s total yearly economic output, the world is increasingly coming to the realization that the United States will not be able to make good on its obligations. Instead, it is widely expected that America will inflate its currency in order to lighten its debt load. This, however, presents a major problem for oil exporting states, since international oil trade is denominated in US dollars. As such it is only natural that they would try to decouple themselves from the dollar regime and seek a new monetary framework within which to carry out oil trade. The fact that they have begun to take concrete steps toward this goal and that other countries are willing to give them support indicates something profoundly disturbing. It means that the the international community has ceased to believe that the United States can responsibly manage its debt and its currency.
In a clear sign that this is so, the price of gold reached an all-time record last week, trading at over $1050 per troy ounce. As a time-tested store of value, gold is commonly used as a hedge against dollar inflation. To put it another way, when investors sense dollar trouble, they turn to gold as a safe haven.
Charles Goyette, author of the upcoming book The Dollar Meltdown, explained this point in his Thursday’s commentary on CNBC:
“The price of gold is a referendum on the quantity and quality of paper money and, like the canary in the coal mine, it is signaling a warning: there’s trouble with the dollar reserve standard. Around the world the alert are looking for ways to abandon it.”
In light of this it is not surprising that Washington’s mounting fiscal woes have been accompanied by a simultaneous climb in the price of gold. Most observers hold the view that the current record highs do not represent a short-term spike, but are a part of a long-term trend. Jim Rogers, the famed Singapore-based commodity investor, told Reuters last week: “I cannot say what will happen to gold tomorrow. But if you ask me whether gold will go up in the long term… I would say yes.”
There is every indication that gold is poised for a long bull run as the dollar continues its terminal decline. This is no false monetary doomsaying, but merely a sober assessment of the fiscal disarray in Washington. “The U.S. dollar is headed for also-ran status, and it will continue to lose its value against many other currencies and assets,” says Peter Boockvar, equity strategist at Miller Tabak. Boockvar’s is but one voice in a growing chorus warning of the coming dollar collapse. Even the Washington Post can no longer ignore the news. It recently opened an article titled Fading of the Dollar’s Dominance with this sentence: “The days of calling the dollar almighty may be numbered.”
As the dollar continues its decline, it is very likely that gold rather than some other currency will emerge as the most universally accepted standard of value. This is because today’s currencies are in the final analysis nothing more than government fiat money whose value is ultimately determined by their exchange rate against the dollar. It is, therefore, almost inevitable that when the dollar sinks, other currencies will be pulled down in the ensuing vortex. At a recent international meeting where possible alternatives to the dollar were discussed, one of the participants demonstratively placed a large gold coin on the table. This was no joke, but merely an acknowledgement of the fact that gold is the safest and most stable type of money the world has ever known. As the global dollar-based monetary regime slowly unwinds, it is very likely that we will see a return to some form of the gold standard for money. Sensing this possibility, many central banks have been increasing their holdings of the metal. Last month, the Financial Times reported that this year central banks will become net buyers of gold for the first time in more than a decade.
The price of gold received another upward push when – in another sign of America’s fiscal difficulties – the Congressional Budget Office announced that the deficit reached $1.4 trillion for the fiscal year that ended on September 30. This is more than three times the previous record of $459 billion set by George W. Bush in 2008. At nearly 10 percent of GDP this is the largest deficit when expressed as a portion of the overall economy in more than sixty years. The number, however, is distorted downward, because it does not include the full amount of President Obama’s $756 billion stimulus package. So far less than $200 billion has been tapped from that immense authorization. If the full amount were factored in, the deficit would come close to $2 trillion. Needles to say, most of the remainder will be spent in the current fiscal cycle, which will make a sizable addition to the next year’s deficit figure.
There is every indication that the next fiscal year will be as fiscally disastrous as the one that just ended and that the dollar will continue its inexorable downward slide. Intent on passing healthcare legislation, Barack Obama has lately argued that the current economic and fiscal crises are due to rising healthcare costs. One can only wonder what happened to that previous culprit – the greed on Wall Street. Be that as it may, if Obama prevails universal healthcare will become the mother of all entitlements, as it will in one way or another involve every American, young or old. And if there is one certain thing about entitlements, it is that they grow unsustainably expensive over time. Given that America’s entitlement burden is already unmanageable, pilling up further surely cannot make things any better.
But Barack Obama is apparently unconcerned about this, but instead he claims that the healthcare boondoggle he is proposing is the magic solution to our economic ills. With politicians like this in charge of our fiscal house, is it any surprise the market thinks that gold is the safest thing to own?