The Building Storm: Gold, the Dollar and Inflation


"Gold's monetary value is not limited to protecting only against a failure in the U.S. dollar, but against any faltering fiat currency."

Gold investors have suffered a little more than a "bit of pain" over the past month. More like a good kicking as gold moved down about 20% from its high of $986 last July. Those of you with an interest in gold are likely concerned over the latest setback. Don’t be.

A good analogy to the global currency devaluation is a slow-moving hurricane that, when over warm water, gains energy. Right now, the global inflation is a huge storm circling off the proverbial coast and gathering strength from the hundreds of billions of dollars being fed into it by governments desperate to avoid economic collapse.

Now, the skies are dark, the wind is rising, and torrential rains are beginning. The radio broadcasts warnings to move to higher ground, but the hurricane has yet to hit the shore. When it does, it will be a Category 5 and maybe worse. In addition to the consequences of the government monetary prolificacy and businesses raising prices to stay afloat, something else is feeding the storm—the rising odds that the global fiat currency system will fail.

In recent years, the global financial community, reflexively looking for an alternative to the obviously damaged U.S. dollar, has settled on the euro. But the euro is equally flawed—and maybe even more so than the U.S. dollar. The euro sinks, the dollar goes up. And so gold, viewed by these same traders only in terms of its inverse relationship to the dollar, gets hammered.

Rushing back into the dollar is akin to heading for the vulnerable coast, and not to the higher ground now prescribed. Gold's monetary value is not limited to protecting only against a failure in the U.S. dollar, but against any faltering fiat currency.

Gold is viewed as tangible money around the world, and has been for millennia. When the trading herd wakes up to the fact that neither the U.S. dollar nor the euro, nor any fiat currency, will protect against the impending monetary storm, they'll rush to something that will: gold and other tangibles.

If you think the thing through, precedent to the global monetary crisis, the euro first had to stumble. Well, it now has. The next stage will be the realization that there is no safe fiat currency. At that point, the massive hurricane, a crisis of confidence in the entire fiat system, will begin ravaging the global economy in earnest. The best way to view this latest correction in the price of gold is as a temporary setback of no real consequence from an investment perspective (unless you use it as a buying opportunity).

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