Clearly a reckless federal government is good for gold - or more accurately, our collective can kickers in Washington, DC, are very bad for the dollar. Take a look at the very telling graph below.
Contrary to the disinformation campaign of Wall Street, and their Federal Reserve sponsored economists, gold is not a bubble. Central banks are now net buyers of gold, and not because of tradition, as Mr. Bernanke would have you believe.
They are buying gold because it is the foundation of the global monetary system. It is the only form of money that can extinguish debt. Paper money that is piled up in foreign reserves is simply an IOU that may or may not be good in the future. Gold held in foreign reserves has no such counterparty risk.
The bottom line is that we are heading into a period where the seemingly endless expansion of paper, be it debt instruments or fiat currencies, can no longer be sustained. Short term machinations aside, the relative value of gold will continue to increase until the unsustainable levels of debt have been cleared from the system.
Gold recognizes the fact that our debt levels have passed the point of no return. The current "debates" over the debt ceiling in the US and bailouts for the PIIGS in Europe are just noise. In the coming storm of debt destruction, wealth will continue to seek safe harbor in the form of gold.
Paul Carter is a former process engineer in the semiconductor industry and self taught Austrian-style economist. He has a MS in Materials Engineering from the University of Illinois and a BS in Materials Engineering from The Ohio State University. He regularly does research for CMI Gold & Silver Inc. This commentary was first posted on CMI's Bill's Blog.
