Gold in today’s environment still has great potential should the extreme occur such as overseas buying of U.S Treasuries falling for 3 months running below the level of the U.S trade deficit. This is the Current Account (balance of payments) showing that the money flowing out of the U.S far exceeds the flow coming in.

This illustrates that spending is greater than earnings … and thus government earnings are also far less than then the debt they owe making bills due unserviceable. Like the ordinary householder if you cannot pay your bills your credit rating is lowered and thus your ability to gain extra funds is slowly diminished.

The ‘point of no return’ as described by “Mr. Sinclair” would be considered as three consecutive months where the inflow of funds did not meet the required spending in the U.S on a Federal level.

This situation would be a massive ‘dent’ in the U.S economy and that is when Gold rises in price within the ‘U.S Treasury’ by the amount of Gold it has stored times the ‘market price’ equal to the value of all the outstanding liabilities of the U.S Treasury globally. It must be noted “NOT” at the level the U.S Treasuries are ‘trading’ but rather at the level of the borrowing itself at par which is a $1000 per bond.

The level of the USDX in comparison to 1979 when calculated to “TODAY’S” real value would be equivalent to the value of .56 to the Euro. The U.S Dollar has traded above 1.20 level to a low of .80 and certainly threatens that low again in the very near future.

The question remains can the U.S Dollar return to the .56 level???

According to Mr. Sinclair “of course it can, it has been there once and it can do it again.”

Gold hit its high of $887.50 oz. at the same time the U.S Dollar hit the .56 level and the U.S official interest rates hit 14 7/8% yield on 10 year Federal Paper.

At that point in time the value required of Gold times the amount of ounces held by the U.S Treasury in order to equal what was owed to non-U.S owners or Treasury instruments calculated not at the value of the instrument but at the price of the loan at $1000 per bond was $901 an oz.

You got to admire the caliber of Mr. Sinclair for the high reached $887.50 … not to “shabby” wouldn’t you agree!!!

So Gold only requires 3 months of the amount the U.S economy borrows internationally, that is the inflow of capital does not equal what the U.S economy spends, the economy’s outflow.

A little “Gold” goes a long way …

Gold represents an alternative currency to all currencies but especially to the currency you buy your goods and services that is where you spend your hard earned. Thus it is an insurance against the depreciation of ones local currency a role it has played throughout history, especially during times of uncertainty.

Depreciation of ones local currency can be looked upon in the terms of less buying power and the decaying value of that currency against other foreign currencies. Gold through out history has worked perfectly to offset such depreciation of the local currency by increasing its value and thus its ultimate buying power.

In Gold’s modern history there is evidence of a very close inverse relationship to the U.S dollar. So Gold would only rise because of the decrease in value of the U.S Dollar both in buying power and most certainly in its value against other currencies.

So Gold has historically protected the individual at whatever level of society of economics one ‘resides’ at against actions and activities that impact the buying power and the relative value against the other currencies of the U.S dollar.

Again Gold has been an insurance policy so to speak throughout history and will continue to do so now and into the future when the health of the world economy justifies Gold’s need to increase in value against the local currencies suffering the most.

The U.S Government manipulates its printing press to great effect allowing it to produce as many U.S Dollars out of literally thin air and without any substance or productivity as guarantee as it wishes at essentially no cost.

A process instigated by no other than the current Federal Reserve Chairman, Ben Bernanke.

This process of printing no end of paper money without some kind of productivity backed by the Japanese (something I will attempt to explain in a separate post) simply poured money into the ‘world’ economies at a speed and volume never, never, ever experienced in the history of the “mankind”.

Such out pour of liquidity obviously needs to find a home and thus inflationary bubbles were caused and are continually growing as the liquidity has little chance of being funneled out of the system without causing irreparable damage for generations to come …

This is because the manner in which Bernanke injected this liquidity into the system it requires the same intensity to suck it out. This would cause interest rates to rise violently because that kind of supply of ‘bonds’ for sale would totally outweigh the demand side of the equation leaving it heavily lopsided like a ship without a rudder so to speak.

Can you imagine interest rates at say 15% in today’s terms … ???

You need to understand interest rates are not determined by any country’s Central Bank, this is, in the U.S the Federal Reserve but are the product of the activities in the “BOND” market. The Central Banks merely follow the lead at a significant lag …

Historically the manner in which liquidity was added to the economy in order to assist a “sluggish” economy was through giving the local bank extra liquidity to give to general populace.

In the U.S this was accomplished by those member banks of the Federal Reserve System which have an account with the Federal Reserve and are obliged to hold within those accounts reserves in the form of Government Bonds.

To add liquidity into the system some bonds were converted to cash leaving less as reserves and more in cash for the banks to lend.

As the economy becomes overheated you simply reverse the play taking liquidity (cash) out by converting it back to bonds held as reserve.

The Federal Reserve does not need to ask for permission it has the authority to do as it pleases … for better or worse. This affords the Federal Reserve control to stimulate or contract the economy when it feels it is required in their humble opinion.

However the effect of the “non-traditional” Bernanke’s liquidity drop via the Japanese was to dump so much liquidity into the “entire” system overflowing it into a severe flood with no way of controlling it or taking it out of the system.

So the reason for Gold is the impact that the “non-traditional” method of making everything appear “good and well”. Because when things are “BAD” people dislike their leaders and when things are “GOOD” they worship them … yes!!!

Thus, we now have an exploding money supply which has and will continue to lead to the danger of ‘hyper-inflation’.

Now the question could be asked was this injection a one off affair???

Well if you try something once and it appears in the short-term to work, would you not try it again and again and again???

The answer is “YES” … in any event which significantly impacts the U.S treasury market because the U.S has a deficit that requires it to be financed by foreigners with deeper pockets.

Now this brings up an interesting point in that how long and how far will such foreigners carry the burden of another’s debt when the rewards are of diminishing returns???

No one, not even Central Banks who are basically investors on a larger scale, buy into or continue to buy an investment that continues to go down, that’s just the way it is !!!

Central Banks panic just like anyone else they have in the past and will do so again when circumstances warrant it.

So the non-traditional methods will have non-traditional circumstances and in the case of the Bernanke liquidity explosion it may well prove to be a strategy that was given little thought as to its effects or bringing it to a logical end.

That end being how do get that liquidity out of the system in order to bring it back to equilibrium. Thus the dilemma has and will continue to lead to price inflation as the excess liquidity searches for a home to camp by at any given time.

One needs to understand that inflation is not the price of things going up but an explosion of liquidity which in turn determines the level of prices, because as mentioned above it needs to find a home to rest.

As Mr. Sinclair has alluded to many times there is an inflation in price on the horizon that very few expect and very few can explain and will take many by surprise.

Are we sitting on the crest of this wave here and now???

I believe so … thus it beckons to ask how far will the wave take us before it implodes???

It is all in the future price of “GOLD”.