CautiousInvestor

What's Next for Gold and the Dollar?

Gold is up the most in US dollars and in other currencies its up 8% to 12% and in Australian dollars its down or flat. More than an inflation hedge, gold is a US dollar hedge. The answer to your question rests on the direction of the dollar.

In his most recent book, Monetary Regimes and Inflation: History, Economic and Political Relationships, Peter Bernholz analyzes the 12 largest episodes of hyperinflations - all of which were caused by financing huge public budget deficits through money creation. His conclusion: the tipping point for hyperinflation occurs when the government's deficit exceed 40% of its expenditures. By the accounts of the OMB we will be there this FY and next, dimming the outlook for the dollar.

And over the weekend John Mauldin, in addition to commenting on Peter Berholz's book, observed there is every likelihood our debt will exceed 100% of GDP by 2015 or sooner. This is a critical threshold at which interest payments and ongoing borrowing needs becomes so burdensome that the process become unsustainable unless taking place within the confines of high savings rate. Thus, the US is not an exception.

So we meet two critical devaluation thresholds........making it very likely the US dollar will continue its steady descent downwards even though there may be fright-based rallies here and there where safety is sought in an increasingly vulnerable sanctuary. Following the inverse path, gold must go up.