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Greenbacks make a better mattress stuffer than gold bullion.

September 19, 2011 - Gold bullion prices are once again flying in the face of common sense. The Greek crisis is stealing all the headlines and again there is panic on the Street, even as the next pronouncement of the Great Bearded Hope draws nigh.

Of course there’s lots of other ugly news. The Economic Cycle Research Institute’s (ECRI) growth index keeps heading deeper into negative territory, heightening the recession risk. Jobless claims are on the rise – 428,000 more are now out of work – and retail sales have stalled after a brief revival ushering in a new school year. Income has fallen back to where it was 15 years ago and over 15% of Americans are now living in poverty. Any doubts as to why consumer confidence is stuck at recession levels?

How is it possible that the price of gold bullion could fall under these conditions? Actually it hasn’t. Gold is exchanged for dollars and when panic takes over the mob always heads for the shelter it knows, like horses running into a burning barn. They sell off everything and stuff their mattresses full of greenbacks, which, by the way, is the only thing they are better for than gold.

A lot of the current dollar demand has come from Europe, where the banks are trying to ease up a dollar denominated liquidity crisis, and that brings up an interesting question. Suppose the world were to agree that moving away from the dollar standard is too costly and too risky right now so they set the value of the dollar to some arbitrary elevated number. After all, would that be any different than how the price of gold bullion is reached?

There’s one huge difference: gold sets the price of currency, not the other way around. We saw in Switzerland what happens when a currency gets overvalued – inflation rushes into the source of the currency. If the world were to overvalue the dollar by 10% prices here would instantly shoot up by the same amount, wiping out demand for American products abroad and crushing what little hope remains for recovery.

So as always, the Fed will do whatever it can to make sure the dollar stays on the skids. The dollar will fall, gold will rise, and before long folks will once again start pulling their bucks out of the mattress to buy gold bullion.

Daily Updates Archive

Jonathan Monroe

Senior Staff Writer -

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