What If Doug Casey Is Right?

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by Jeff Clark: Competition
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Gold is once
again above $1,200 and making new highs. And yet, Doug Casey thinks
we’re just getting started, estimating gold could touch $5,000
before this is all over. A titillating thought, to be sure, but…
how likely is that?

Gold’s
latest rise stems from mounting fear that the Greek bailout will
be followed by other euro-area countries queued for a me-too handout.
In other words, gold is serving its historical role as a safe haven,
a store of value, and an alternate form of money when governments
recklessly plunge themselves heavily into debt and abuse their currency.

“But
Jeff, $5,000 gold is a long way up,” the skeptics observe.
“If you step back and look at the big picture, isn’t
the gold price bubbly here?”

One way to
test Doug’s thinking is to look at other simmering trouble
spots that would similarly impact gold should they boil over. So,
let us indeed review the big-screen events I believe could send
gold a lot higher. See if you agree.

ONE: The
PIIGS are not done squealing.

Greece’s
Gordian Knot of public debt has not been solved. In fact, Moody’s
is considering downgrading Greece’s debt to junk status, stating
that the announced €750 billion aid package will be “inadequate
to stabilize the problems in both Greece and Portugal.”

Ireland appears
next likely to be downgraded. Spain and Italy are not far behind.
And little reported is the European Central Bank (ECB) saying it
will purchase billions of troubled assets from Europe’s largest
banks as part of the rescue program. Where have we seen this before?
And gee, it’s worked so well; 68 U.S. banks have failed so
far in 2010, a full year after the government provided bailout
money.

But it’s
the long-term consequences of intended ECB actions that are most
worrisome. “The ECB is going to crank up the printing presses,”
says Anton Börner, head of Germany’s export federation. “In
five to ten years we will have a weak currency, with rising inflation
and higher rates of inflation that will act as a break on growth.”

Nouriel Roubini
notes that “rising sovereign debt from the U.S. to Japan and
Greece will ultimately lead to higher inflation or government defaults.
While today markets are being worried about Greece, Greece is just
the tip of the iceberg.”

So the obvious
question is, what happens to the gold price as debt contagion spreads
beyond Greece and the monetary effects of the bailout slam onto
the shores of other European countries?

TWO: Knee-jerk
confidence in the dollar keeps inflation at bay.

The U.S. debt-to-GDP
ratio stands at 90.1%, and the projected 2011 budget deficit is
$1.26 trillion or 7.1% of GDP. Total U.S. debt exceeds $55
trillion, over $180,000 per citizen, and the new healthcare legislation
is expected to add another $1 trillion burden on the economy. These
numbers put America in league with our squealing European friends
mentioned above.

Plus, the U.S.
monetary base was ballooned and remains over $2 trillion. Are we
absolutely sure governments are done printing money? How will government
leaders react if bank failures continue? Or commercial real estate
crashes? Or state pensions begin to fail? Or unemployment remains
in double digits?

It’s clear
the U.S. dollar will suffer inflation due to high and growing debt-servicing
costs, government payrolls, and unfunded entitlement promises. The
U.S. can either default or inflate, and the former is unthinkable
to a career politician. At some point – and we think it is
fast approaching – global investors will see that U.S. indebtedness
has reached unsustainable levels and exit the dollar, which today
means selling bonds. Interest rates will be forced higher, and the
U.S. will face its own Greek Moment.

So, what happens
to the gold price when the dollar starts falling in earnest?

THREE: The
public still doesn’t own much gold.

This may be
the biggest one of all. To show just how small the investment in
gold is on a worldwide scale, consider these facts:

  • Jim Rogers
    reported that at a conference of 300 money managers last month,
    76% admitted they still own no gold.
  • Fund manager
    John Paulson is having difficulty raising money for his gold fund.
  • Total investment
    in all forms of gold represents less than 1% of global financial
    assets. If investment demand merely doubles to 2% – something
    we see as easily attainable – it will have a powerful effect
    on the gold price.

What happens to the gold price when the public begins to clamor
for it and a true gold rush gets underway?

FOUR: The
Unknown Unknowns.

A boxing coach
will tell you rule #1 is to not get fixated on the hand that’s
punching you – because that’s when the other glove comes
flying in and decks you, sending you down for the count.

It’s the
unexpected event, the unforeseen catastrophe, the surprise punch
that could catch us all off guard and send gold higher. And while
we may like the green on our screen from a rising gold price, my
fear is that an unexpected economic or monetary ambush could be
serious enough that what the gold price is doing is a secondary
affair.

Prepare for
the unknown. And that, perhaps, is gold’s greatest strength
– not that it can make you rich, but that it protects you and
your family from unpredictable events that would otherwise be catastrophic.

Whether you
agree or not that gold will reach $5,000 an ounce, don’t miss
the point. Any number of events could send gold higher. And it is
during calamitous times of crisis, devaluation, debasement, inflation,
and the unknown that gold is needed most. Imagine the Greek worker
who has one-third of his assets in gold right now; he may be smiling
more than rioting.

I think the
rise in price is sending us a message. And this is what I think
gold is saying…

I won’t
always be this cheap. If you don’t buy me soon, you may regret
it. I may get less expensive in the short term, but don’t mistake
that to mean I’m losing value or that everything is fine with
your paper currencies or your economic future. What you’ve
done to your fiat currencies will hurt you. What is coming to the
price of things will overwhelm you. What the government has debased
will haunt you. I’m here to protect your finances. I may be
the only thing that can really do that.

You can
be cautious about the price, but don’t be short-sighted about
the purpose. Are you sure you own enough of me?

We review
and recommend a new gold fund in the April issue of Casey’s
Gold & Resource Report
. And you can access all our back
issues, including one that names the least expensive dealers for
buying physical gold. Get
a risk-free trial here…

May
17, 2010

Jeff
Clark is editor of Casey's
Gold & Resource Report
in Casey’s Daily Dispatch.

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