Gold to Outshine Dollar?

As the price of gold has gone up fivefold over the past 10 years, why would one buy it at today’s prices? For the same reason an investor would buy any other asset: if one believed it would be a good investment now, that is if one believed it may appreciate in value and add portfolio diversification benefits. A key reason to hold gold today might be to prepare for the crisis tomorrow.

By now it is no secret anymore that the finances of the U.S. government are heading towards a fiscal train wreck – a positive step, as at least the discussion on how to tackle the deficit has started to broaden. Each year, the Congressional Budget Office (CBO) is warning in ever-clearer terms that the current path is unsustainable. In its 2012 long-term budget outlook, the CBO is warning of a 199% debt-to-GDP ratio by 2037 under its “extended alternative fiscal scenario” that considers “what might be deemed current policies, as opposed to current laws, implying that lawmakers will extend most tax cuts and other forms of tax relief currently in place, but set to expire and that they will prevent automatic spending reductions and certain spending restraints from occurring.” With regard to the forecast, the CBO cautions “the projections… understate the severity of the long-term budget problem… because they do not incorporate the negative effects that additional federal debt would have on the economy.”

.... Different from the Eurozone, however, the U.S. has a substantial current account deficit. In our analysis, currencies of countries with a current account deficit are more vulnerable, because such countries are dependent on inflows from foreigners to finance the current account. While the debt crisis weighs heavily on the borrowing costs in the Eurozone, the euro itself has held on remarkably well; we have our doubts that the U.S. dollar would has benign a ride should investors shun U.S. bonds.....

               ..............Axel Merk