Wednesday, October 7, 2009

More on Deficits, Dollars and Gold...

This is a small excerpt from the latest monthly newsletter pubished by Jim Dines.  Over the past 30 years, Dines has probably been the most accurate macro-trends forecaster on earth (

"Thus it was when the American Congress projected a cumulative 2010-2019 deficit of $9 trillion instead of the $7 trillion previously estimated, we were shocked that nobody protested or even gasped as the number was even greater than one light year! Personally, we believe that the deficit will be closer to two light years, and those who trust that this will end well are not on the same planet. Maybe we are the aliens, but we can hardly understand how Congress could vote for so much deficit spending with a straight face. Whether they just don’t give a damn, or hope to be safely dead by the time it hits the fan is beyond us to comprehend. Fair-minded people could object to that kind of spending no matter who the president is, but such spending deficits per se arouse in us a deep sense of foreboding. Worse, America’s deficit continues to widen, due to rising imports of autos, oil and computers, even while home foreclosures reach a new high. Jobless numbers are down, but Washington fraudulently excludes those who are so discouraged that they have abandoned looking for a job. How does America nonetheless thrive? By the sleight-of-hand trick of just printing money, America’s leading export, going gleefully ever deeper into debt and hastening the day of "The Coming Currency Crisis" for which we have prepared you with the long-term stocks in Supervised List #3, facilitated by a recently reappointed "Helicopter Ben" Bernanke who seems as blissed-out by out-of-control spending as a teenager with his/her first credit card. Unsurprisingly, gold bullion reached a new high at $1020.50/oz in London. One of the points in our recent (IWB) Interim Warning Bulletin, was the tremendous rally in gold bullion, having completely recouped its loss from the ’08 Crash, should now be outperformed by gold-mining shares as they catch up. America’s soaring debts could hardly be more bullish for gold, since the yellow metal is money that represents differing amounts of paper money in various countries."

I want to follow-up that prescient Dines' commentary with an anectdotal story about the U.S. dollar and it's worth as a currency.  This was a reader contribution to tonight's Midas report, available on

"On another note regarding the all mighty US dollar, I thought you might enjoy the following: My wife returned last week from a business trip to Madrid. On the way back she decided to stop at the duty-free store at the airport to pick-up a couple of bottles of one of Spain's great red wines. When my wife went to pay for the order with good ole American variety greenbacks, the cashier responded that she was sorry but that the store does not accept dollars for purchases but she could pay with either Euros, Swiss Francs, Yen or Yuan ! I guess the dollar really isn't the world's reserve currency afterall!"

Think about the implications of that story.  What is the true worth of the U.S. dollar if you are unable to use it to pay for goods and services outside of the United States?   I have heard several accountings of people who have been travelling through Europe over the past year in which local merchants in several countries refused payment for goods in U.S. dollars.  This problem for dollar-toting American tourists is going to become ubiquitous around the world.  What then?  I guess it is irrelevant as to whether or not the U.S. dollar is the global reserve currency when that dollar has absolutely no value anywhere except inside the U.S.

As for short-term and longer-term price targets for gold, right now it's anyone's guess.  To put a price target in terms of dollars is probably irrelevant, because - by the time the bull market in gold ends - I doubt the U.S. dollar as we know it now will exist.  If that's the case, the best exercise is to figure out your price targets in terms of euros, rupees or yuan.  But for now, I think the following chart is a good starting point for dollar-based guesstimates.  This was sourced, again, from tonight's Midas report:

"Relentlessly the dollar is being abandoned worldwide. Unfortunately, the other G-20 currencies are not much better and that is why gold is so important. Keeping liquidity running into the system hasn’t worked and can’t work"  - Robert Chapman, International Forecaster


  1. Dave,
    Great observations. While I would cheer for gold at $1500, I cringe as to what that would mean for our dollar. I once wrote an article called "DOW 30,000: Its Not What You Think":

    Looking back on it (written in December 2008) I think I could have avoided a bunch of my own confusion on things by reading it.

    For our dollar:
    "With dollars all over the place expect to see DOW 30,0000 just like in that year 2000 book. Soaring stock markets will have no positive effect as the currency debasement will make old market highs meaningless. Google at $3000 a share sounds great until you buy a loaf of bread for $2200. Like the title of this piece says;
    DOW 30,000! It's Not What You Think"

  2. gyc: how about writing this article: Wilkommen to Weimarika.

    The Dow can easily be inflated to 20k or 30k. But 1500 on gold is waaaaaay low in that scenario. Assume the 30k scenario. Also assume that history repeats and we see another 1:1 Dow/gold ratio. That's your target for the price of gold before the dollar completely collapses.

    This whole thing going on in our system is not about the dollar collapsing or this country collapsing under the weight of all of its debts and obligations. Everyone knows that is going to happen - it's unavoidable. This whole thing going on is about the bankers holding the system up long enough for them to completely confiscate the nation's wealth. Paulson got off to a great start by hijacking $700 billion in TARP money and other Treasury guarantee programs - which add up to trillions.

    Now we're stuck with this monkey, Tim Geithner, who clearly is no more than a brainless pawn for Goldman, JPM and Citi. Here, check this out: