The Golden Fall of the U.S. Dollar

By Ferris Eanfar, Managing Partner, Vision Bancorp

Dollar crashing and burning

Would you rather have gold or dollars? People around the world are asking this question more and more as we enter the year 2012. In fact, Donald Trump already accepts gold as a form of payment from tenants in one of his buildings because Trump believes the U.S. Dollar is losing its value and its status as a credible international reserve currency. WikiLeaks leaked a 2009 cable from the U.S. Embassy in Beijing, China, which indicated that the United States and Europe have been suppressing the price of gold for many years to artificially prop up the value of the U.S. Dollar. The launch of the instantly popular Pan Asian Gold Exchange in July 2011 creates strong incentives for global investors to pull their assets out of the West and take their gold and capital to the vast Pan-Asian market. And China’s economic policy statements and insatiable gold-buying appetite in recent years clearly indicate they are working aggressively to release gold markets from the grip of Western control and manipulation. All of these events and many more strongly suggest that demand for gold will continue to rise to significantly higher levels in the months and years to come and the USD will likely collapse within the current decade.

History of Gold as Our Guide

History of Gold as Our GuideWe can analyze many of the current events above and extrapolate what the future will likely hold for the price of gold, but we can also look at gold from a number of technical economic historical perspectives that bring us to the same conclusion. In fact, based on various historical measures, the price of gold relative to other widely used historical benchmarks is substantially under-priced and is primed to rise dramatically in the near future.

M1 Money Supply vs. U.S. Gold Reserves: The U.S. M1 money supply consists of currency and bank deposits. As of 9/29/2011, the U.S. government currently holds approximately 260 million ounces of gold. If the government were to back each dollar in circulation with gold as numerous governments are now considering around the world, the result would be a gold price of $8,102 per ounce (M1 $2.1 trillion / 260 million ounces). This represents potential symptoms of ongoing inflation and corresponding near-future gold price increases.

Comparing Gold Bull Markets: Many gold experts agree that gold is currently in a bull market. However, to put the current bull market into perspective, in the 1970s gold prices rose from $35 to $850 per ounce, which was an increase of approximately 24 times. The low price of the current gold bull market in 2001 was $255.95. It is useful to compare magnitude increases between similar market phenomena to determine the potential phase of development a trend may be in within a given economic cycle. In this case, if we multiply today’s gold price of $1,620 (as of 9/29/2011) by the same factor (24), the current gold price would be $38,880 per ounce. This may seem high, but the inflationary environment of the 1970s triggered a flight to the safety of gold that has a high probability of occurring again.

Global Money Supply vs. Global Gold Reserves: As currency devaluation continues in many of the developed economies due to irresponsible fiscal and monetary policies, global governments may be forced to back their currencies with gold either wholly or fractionally. Assuming governments pay market prices to acquire their gold, and given total reported global M1 money supply of approximately $19.2 trillion, and given total reported gold reserves by all global financial institutions of approximately 930 million ounces, the resultant gold price today would be $20,645 per ounce.

The Dow/Gold Ratio: The Dow Jones Industrial Average converted into ounces of gold is commonly called the “Dow/Gold Ratio”. This ratio was at “1” when gold peaked in 1980, which indicated that the index value of the Dow and the price of an ounce of gold in 1980 were the same price. To bring the Dow/Gold Ratio back into balance today based on the Dow’s current level of 11,153 as of 9/29/2011, the price of gold would need to be $11,153 per ounce. This imbalance between the Dow and the price of gold suggests that the stock market is over-inflated and a significant downward correction is likely in the near future.

U.S. Trade Deficit vs. U.S. Gold Reserves: If the U.S. trade deficit is not reversed, the U.S. will eventually become insolvent because no individual or nation can survive by perpetually spending more than their income. However, if the U.S. trade deficit is reversed, dollars will flow back into the U.S. and contribute to domestic price inflation as the money supply expands. Based on the 2011 cumulative trade deficit of approximately $10 trillion (up from $6 trillion in 2007), and given U.S. gold reserves of approximately 260 million ounces, if the $10 trillion of foreign-held dollars were to be rapidly unloaded into circulation within the United States, the price of gold today could increase to as much as $38,462 per ounce.

U.S. Government Debt vs. U.S. Gold Reserves: According to the Government Accountability Office (GAO), as of June of 2011 the U.S. Government’s balance sheet is overwhelmed with approximately $61.6 trillion in future liabilities for Medicare and social security. If the dollars required to pay for those entitlement programs were soundly backed by gold, and given U.S. gold reserves of approximately 260 million ounces, the price of gold would need to be $236,923 per ounce.

Can We Predict the Day of the USD Collapse and the Price of Gold?

Gold chartNot exactly, but we can predict with a high degree of confidence that gold will rise to well above $2,000 per ounce and the USD will collapse if the economic trends described above continue to spiral out of control. Nobody can precisely predict the future price of any asset, but the objective benchmarks described above compared to their historical levels strongly suggest that the United States and other developed nations have severe structural economic problems that are likely to jeopardize the solvency of these nations and the credibility of their currencies. Under these conditions, I recommend to all my friends and clients that they move at least 20% of their assets into gold and ignore the weekly fluctuations in the price because there is no question that the long-term price of gold can only go up from here.


About the Author:
Mr. Eanfar is a Managing Partner at Vision Bancorp, which specializes in commodities-backed asset management, commodities trading. His professional experience spans diverse environments including technical development, media, finance, military and government affairs. Mr. Eanfar can be contacted at the website:

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