The mighty U.S. dollar is under siege by potent forces that could end its world domination. It won’t be the death of the dollar, but in decades to come the greenback will have to share the power with other contenders. One of the essential elements in the new ruling elite of money could very well be gold, and the value of gold should rise high on its reclaimed status as the only true money in history.

Since the demise of the gold standard in 1971, the dollar’s strength as the most trusted of fiat currencies made it king of the mountain as the de facto world currency. The dollar reigns as the premier reserve currency for central banks; nearly two-thirds of all global currency reserves are held in dollars. Oil and most other critical commodities are denominated in dollars.

But the mountain on which King Dollar’s fortress has stood for nearly four decades now rumbles and shudders as a $12 trillion earthquake of debt shakes its foundations, threatening to crack it asunder. As the fault line rips wide, a seismic shift in economic power from west to east will dramatically alter the landscape of global money regime.

Confidence in the American financial system and the U.S. dollar has been seriously eroded in the wake of the most massive financial meltdown since the Great Depression. Not only can people no longer trust the value of their dollars but now they must keep a watchful eye on the institutions they once trusted to store their money. At the end of August, the Federal Deposit Insurance Corporation (FDIC) reported 416 U.S. banks on its “problem list.” More than 100 U.S. banks have collapsed in the last two years, nearly 80 of them in 2009 alone. The strain on the FDIC’s funds has been so severe that the agency recently said it may have to borrow money from the banks to stay afloat. That’s like demanding that shipwreck survivors throw their life preservers back to the sinking ship.

Bad for the dollar. Good for gold.

The decline of the dollar’s purchasing power over the last eight years helped multiply the value of gold fourfold. The unwritten law of dollar-gold polarity is that the two move in opposite directions. Further weakening of the dollar should send gold prices to heights that only a few years ago would have sounded like lunatic ravings.

The daily noise of brief ups and downs in the dollar and gold markets is of interest only to traders and gamblers (it could be said they’re one and the same). If you’re a serous investor in gold with a long term outlook, come with me to look at the view from 30,000 feet, high enough to escape the noise distraction and concentrate on the genuine big picture. I think you’ll find the view of gold from this altitude inspiring.



Though the dollar isn’t the only factor influencing gold prices, most of the time it is the dollar’s behavior that exerts the greatest impact on gold markets. Supply and demand dynamics, deficits, inflation, interest rates, the price of oil and basic commodities, the stock market, and geopolitical events also come into play. However, all of these other factors link directly or indirectly to the dollar, either affecting the dollar’s movement or being affected by it. In a sense, the dollar serves as a summary proxy for all of the components that drive gold values.

So if we understand the long term direction of the dollar, we get a strong indicator of the probable future course of gold’s value.

I’m not talking about daily market gyrations or weekly or even monthly ups and downs. I’m looking at the long view – five years or more.

The long term perspective looks past the breathless headlines of a dollar rally versus the euro or the random atypical times when the dollar and gold seem to be moving in the same direction. While the talking heads get all lathered up over such things, what’s good for ratings has little to do with market realities in the long run.

Except for occasional brief hookups where the dollar and gold run in parallel, over the long haul they generally move as mirror opposites. When the dollar falls, gold rises, and vice versa.

There’s nothing mysterious about this relationship. Historically gold holds a fairly stable value in purchasing power relative to other tangible goods that people want. As the dollar loses power to purchase these goods, it takes more dollars to buy stuff, including gold.

And the dollar is losing purchasing power at a tummy-turning free-fall pace.

Since its last major peak in 2001, the New York Board of Trade Dollar Index has dropped by one-third. But that index only compares the dollar to other fiat currencies, which are themselves subject to the same fundamental weaknesses common to all IOU-based currencies – especially inflation.

In terms of REAL money – gold, that is – over the last eight years the dollar has shrunk by a jaw-dropping 75%!

In 2001, $1,000 bought about four ounces of gold. Today a thousand bucks buys about one ounce of gold.

DOLLAR DEMON #1

HYPERINFLATIONARY STIMULUS BAILOUT LIQUIDITY

Since the financial crisis erupted, the federal government has committed $11 trillion to spend on economic stimulus schemes and bailouts of crippled banks and profligate corporations. That is equal to the entire U.S. national debt, which has already shattered all records in America’s 233-year history!

This record-smashing paper blizzard of federal stimulus/bailout liquidity still blowing across the economic landscape won’t just evaporate magically as many economists apparently seem to dream. No new wealth or anything of value has been created to improve the economy, just a whirlwind blitz of worthless paper that so far has done little but reward inefficient industries and incompetent bankers. As the printing presses spew out a nonstop blur of greenbacks, the junk money piles up to become dry tinder for a wildfire of potential hyperinflation such as we have not seen before in the U.S.

International investor Marc Faber, editor of the Gloom Boom Doom report, warns that we will see price increase shocks “close to” those in Zimbabwe, where inflation shot up to 231 million percent. “I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate,” Faber said. Extreme, perhaps, but Faber is right more often than he’s wrong.

Former Fed chairman Alan Greenspan doesn’t go that far, but he predicts double-digit interest rates in the near future. "The U.S. is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation,” Greenspan said in Financial Times. "Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge...If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012. Earlier if markets anticipate a prolonged period of elevated money supply."

It’s hard to grasp the idea of impending hyperinflation when current headlines report inflation as tame, and the worry at the Fed is about deflation, not inflation. But the laws of gravity and economics have not been repealed despite reassurances from the three stooges – Ben, Timothy, and Barack – that they know how to make the economy levitate with no strings attached.

DOLLAR DEMON #2

ASTRONOMICAL U.S. DEFICITS

Washington’s chronic prodigal splurge under both Republican and Democrat regimes over the last three decades has swelled the U.S. national debt to nearly $12 trillion – that’s 12 with a dozen zeroes behind it. Uncle Sam’s total debt now equals more than 80% of the country’s GDP, a level not seen since WWII. This year alone, the U.S. budget deficit will add a record $1.6 trillion, more than three times last year’s bloated deficit.

The White House revealed in late August that another $9 trillion will be added to the deficit over the next ten years, DOUBLING the national debt by 2019 and equaling three quarters of the entire U.S. economy.

And that doesn’t include the cost of Obamacare, the socialized medicine scheme that the President and Democrats in Congress are trying to ram down the throats of a public that mostly doesn’t want it. The price tag for proposals so far have ranged as high as one trillion dollars or more over the next decade. Faced with public outrage expressed at a wave of town hall meetings across the country in August, the most recent Senate version of healthcare reform has been pared down to “only” $856 billion. Regardless what the final cost of Obamacare is projected to be, it’s a cinch that won’t be the REAL ultimate cost. You can count on it escalating dramatically over the coming years...that’s just the way it always is with government programs. Expect more swelling of a budget deficit already so huge that it numbs the mind.

A recent report by the non partisan Congressional Budget Office (CBO), which is usually more realistic and less optimistic than the White House, warned that unless something changes drastically, the U.S. national debt will reach 100% of GDP by 2023 and explode to more than 200%of GDP by the late 2030s. That’s less than 20 years from today.

How is it possible to repay a debt that equals everything you can produce? Warren Buffett said in the New York Times: “An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money.”

Foreigners, who have been the biggest lenders to the U.S. – especially China – have grown weary of Washington’s cavalier financial irresponsibility and are backing away, looking for ways to dump their dollars quietly without causing a stampede. At home, American taxpayers show only tepid interest in loaning Uncle Sam money. That leaves the printing press as the only real weapon Washington has to reduce the debt.

DOLLAR DEMON #3

WASHINGTON WANTS A CHEAPER DOLLAR

Left with only one way out of the debt mess, Washington has systematically taken every opportunity to undermine the value of the dollar and deflate away the massive federal budget deficit. Crank up the printing press and pay it back with cheaper dollars, in other words.

Simple arithmetic: If I loan you $100 and you pay me back $100 that will only buy one-fourth as much as it did when I loaned it to you, you’ve effectively reduced your debt by 75%. That’s the scam Washington has been pulling for years, under both Republican and Democrat regimes.

The Fed has another sleight-of-hand trick to evaporate the IOUs – monetizing the debt. This is a smoke-and-mirrors illusion where Treasury issues bonds to borrow money, and if the public doesn’t buy them, the Fed buys them with dollars made up on a ledger entry (they don’t even bother to print the money). Wouldn’t it be great if you and I could do that? Actually, it would be disastrous, which is the case with the Fed’s practice because it undermines confidence in the entire financial system.

A bonus benefit of a cheaper dollar – to a select group – is that it helps American exporters by making their goods cheaper for foreigners to buy. Good political capital for the Washington insiders among home grown manufacturers and labor unions. Bad political capital with the creditor countries who are getting the shaft. The world has wised up and wants to change things...more on that in a minute.

The Washington money policy makers have every incentive to continue debasing the dollar. They’ll talk a strong dollar but walk a weak buck. A rising dollar is deflationary; a falling dollar is inflationary. Inflation looks like economic progress. Deflation looks like they’re screwing up. Which do you think they often prefer?

DOLLAR DEMON #4

INFLATIONARY DEMAND FROM ECONOMIC RECOVERY

The economy will recover. That much we know for sure. What is not so certain is WHEN it will get its feet back under it. The debate rages about what letter it will be – a V, a W, a U, or an L-shaped recovery. Some say it’s already underway and just as many say no, not yet. Whatever shape and whenever it happens, there WILL be another boom ahead at some point.

When that boom comes, the normal cycles of rising inflation and rising interest rates will return. If the recovery gets too far ahead of itself and if the Fed drags its feet too long in making the necessary corrections in money policy, we could be back in bubble country very suddenly, as we did when the Fed left interest rates too low too long after the recession of 2001 (which led in part to the whole mess we’re in now).

It may be a little different this time. Consumers have been burned badly in this prolonged recession. Millions have learned for the first time that spending more than you make can bite, and bite hard. They won’t forget the lesson soon. Savings have been growing while deleveraging of credit card and other debt has accelerated. The government wants consumers to borrow and spend to get things rolling again, but they may not be so eager to obey.

Consumers account for 70% of the American economy. Only when consumers resume spending will the economy advance. When that day comes, inflation comes with it. More demand always means more inflation.

What’s different this time from past recessions when the consumer pulled the country’s bacon out of the fire is the $11 trillion overhang of bailout/stimulus liquidity that will be mixed in with renewed consumer spending. It’s a double whammy of inflationary pressure. “Miracle Ben” Bernanke, who claims to have saved the world from economic destruction, now also claims the Fed can handle it. This from the same guy who told us everything was okay even as the banking industry was caving in around him two years ago.

DOLLAR DEMON #5

POWER SHIFT FROM WEST TO EAST

Few will dispute that the balance of economic power is rapidly shifting from West to East.

The U.S. economy has grown flabby and soft around the middle as it advances into middle age. Europe’s socialist choked economy suffers from hardening of the arteries.

Meanwhile, China and India blaze ahead as the two fastest growing economies in the world. The global recession was only a speed bump to them. Not only is China the fastest-rising but is projected to surpass Japan this year as the second largest economy in the world. China is forecast to climb past the U.S. to the top economy in the world by 2035, just 15 years away.

China and India aren’t the only boom economies in Asia. Taiwan, South Korea, Thailand, Indonesia, Vietnam, Singapore, and Malaysia buzz with activity and prosperity. Though not to the same level as China and India, they are more vigorous than most Western economies, and each has the potential to become The Next Big Asian Thing.

The major development at the Pittsburgh G20 summit in September handed emerging nations a much larger voice in global economic policy decisions. The G20 has replaced the G8 elite club of “rich” countries as the primary body addressing world macroeconomic issues. In the G20, emerging economies outnumber the Elite Eight that had excluded three of the hottest economies on the planet – Brazil, India, and China. They’ll now have a lot more say about global economic directions, including monetary policy.

As the Asian bloc of emerging economies exerts ever more influence on the world trade balance, the scales will inevitably tip to the East. The impact of Asian currencies and money policy will grow sharply over the next decade and lead to a whole new world order of currency power sharing in the world currency system. Move over, Buck, there’s a new sheriff in town.

DOLLAR DEMON #6

RESERVE CURRENCY REBELLION

A “grassroots” rebellion against the dollar hegemony as a reserve currency has been brewing for some time among countries grumbling about the dollar’s slide, but now it’s coming out into the open. China, India, Russia, Brazil, France, and Japan speak bluntly and publicly of their displeasure with what Washington is doing to the dollar.

These countries have been the vocal leaders of a growing number calling for a new global currency regime that provides an alternative to the dollar. At the July G8 summit in Italy, Russian President Dmitry Medvedev even posed for photos with a sample coin he said represented a “supranational united future world currency.”

“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations.” People’s Bank of China

The crux of the rebellion is summed up by a statement from the People’s Bank of China: “To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations.”

The leading candidate for a dollar replacement at present centers on using International Monetary Fund (IMF)  SDRs – Special Drawing Rights – as the basis of a new world currency for trade settlement and national reserve accounts. SDRs are based on aweighted average of the dollar, euro, pound, and yen. China wants its yuan added to the mix. Some analysts argue that gold should also be a component of a new one-world currency as a tangible asset backing, not a gold standard, per se, but a stabilizing counterbalance to the fiat components.

An SDR-based global currency would allow countries like China, which holds more dollars than any other foreign country, to convert their shrinking dollar assets into more stable SDRs. China isn’t waiting for the New World Order in currency exchange. They’re cutting bilateral deals with trading partners to cut out the middleman dollar and conduct trade through direct currency exchange. They’ve signed currency swap agreements worth a total of $95 billion with Brazil, Argentina, Russia, Hong Kong, South Korea, Malaysia, Indonesia, and Belarus.

These deals elevate China’s once lowly yuan to a higher level, giving it legitimacy as a reserve currency. Zhang Guangping, vicehead of the Shanghai branch of the China Banking Regulatory Commission, predicts that by 2020 the yuan will comprise more than 3% of world currency reserves. The Chinese are serious, and they want their currency to be taken seriously.

Whatever the new face of global foreign exchange takes, it’s clear that the dollar’s dominance as a reserve currency could become a thing of the past. How long it will take for the transition nobody really knows. But it is inevitable, as certain as the sunset.

THE FIAT CURRENCY FIASCO Ex Nihilo – something out of nothing We all know the term “fiat money” and wrinkle our noses at it. But it’s worthwhile now and then to think – really think – about exactly what it means. Sometimes we get caught up in the news of the day and get suckered into thinking the dollar is actually worth something more. We need to remind ourselves how fragile it is and how fragile are all the other currencies it is measured against daily. When you hear that the dollar is up or it’s down, remember that it refers to the dollar compared to a basket of other currencies. If you compare a rotten apple to a basket of rotten apples, it may be in better or worse condition than the others but all of the apples are rotten. The catch is that they are all FIAT currencies. None of them are redeemable for anything of value. They’re supposedly worth what the issuing government says they’re worth, but the market actually decides how much they’ll buy. If the market places high confidence in a currency, it is held in high esteem and buys more. If the market loses confidence in a currency, sellers demand more of it for their goods or may even refuse to accept it at all for payment (as is beginning to happen with the dollar in some countries). The arbitrary and capricious nature of currency values lies in the fact that they are unsecured IOUs, and there is no limit whatsoever on how much money can be produced...for FREE! The process is called “ex nihilo.” It means “out of nothing.” All it takes to produce fiat money is a printing press and a law that says you can declare that the paper you print is worth something simply because you say it is. If you did this as a private citizen, you’d risk being locked up for fraud. As Investopedia describes it, fiat money is “Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith.” The record of fiat money throughout history has been abysmal. Nick Jones of The Daily Reckoning calls it “Toilet Paper Money.” Says Jones, “The history of fiat money, to put it kindly, has been one of failure. In fact, EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.” The only real alternative to the dollar is not the euro or yen or even some supranational world paper currency...it is gold.

In a siege, victory is won by attrition, not in a dramatic battlefield triumph. The siege of the dollar won’t be won in a single stroke that flashes headlines in the news. It will take place gradually over time, mostly unnoticed by all but the perceptive and alert few like you who know what’s really going on. For most Americans, the possible revelation at some future time that the dollar is no longer king of the castle will come as a big, unsettling surprise. Though overpowering the greenback will be a gradual, measured process, it is likely to happen more rapidly than most people expect, even those who recognize that it’s probably unavoidable. The momentum of the currency rebellion is accelerating and intensifying. Some analysts speculate that the plan to replace the dollar is already being worked out behind closed doors at the IMF and out of sight in backrooms at the G8 and G20 summits. It could be three years or it could be ten years or even later, but it could happen: The dollar’s days as the world’s reserve currency maybe numbered. Whatever form the new world order takes, the decline of the dollar virtually ensures rising values for gold. If at some point gold becomes denominated in some other currency, either an existing one or a new supranational currency, it will still be a tangible asset versus an intrinsically worthless piece of paper (unless the new currency includes gold as a basis). If that is the case, we could expect the same kind of inverse relationship as we now have with gold and the dollar. Estimates of the future price of gold range all over the lot to extremes. My own analysis points to gold north of $1,500 in 2010 and ranging much higher over the next ten years. There are too many variables rattling around loose to make a pinpoint prediction. But the macroeconomic trends strongly suggest that the bull market for gold has many years still to run. There will be necessary and healthy corrections along the way, but the long term trend line points UP. You may think, “Well, there’s plenty of time, no rush for me to load up on gold right now.” To that I must ask, did you buy gold back in 2001 when it was $250 an ounce? If you did, good for you! If not, think how much more wealth you’d have today if you had – about four times richer on your gold holdings. Even with gold near $1,000 now, which may see mover valued if you recall the days of $250 gold, it’s all relative -- $1,000 will seem cheap when you look back at it from the $1,500 level. If you put it off until later, you may still see some gains if gold rises as I suspect it should, but not as much as you would get if you buy now. Actually, while gold and many coin values have been steadily rising, some coins have seen occasional “dips” in price as cash-strapped coin owners in distress from the recession cash in coins for liquidity to meet other obligations. It’s regrettable that some people are forced by circumstances to give up the one stash of wealth that’s really worth something. However, if you happen to be one of the fortunates who have managed to avoid the avoid the worst effects of the recession and still have cash on hand, there are coins available at what amounts to a bargain discount from true market value. Because the future transition away from the dollar will likely be evolutionary rather than revolutionary, the changes will be subtle. You probably won’t get an in-your-face signal alerting you that “Today’s the day you should buy gold!” Putting off buying more gold leaves you at risk of missing out, letting the rising trend move past without your noticing it. The cost of procrastination is the profit lost by waiting too long to buy gold. Woulda-coulda-shoulda can be expensive. BEST INSURANCE: BUY GOLD NOW.