The U.S. Dollar's Demise Is Sealed
By Patrick Heller, Liberty's Outlook
In my judgment, October 6, 2009 will go down as one of the most important days in history. It will be remembered as the day that the collapse of the US dollar became inevitable.
I am deeply grieved and sad to come to this conclusion.
At the longest, the US dollar might survive until 2018. But I think it will fail much sooner as the general public sees a growing number of other countries abandoning the US dollar and assets valued in the dollar.
Toward the end, there will likely be a panic as dollar holders try to dump them before they become worthless.
In the past six weeks, there has been an extraordinary amount of major news affecting precious metals, culminating in the October 5 report in The Independent in London about secret meetings involving China, Russia, Japan, France, Saudi Arabia, Kuwait, Abu Dhabi, and Qatar about abandoning the use of the US dollar for payment of oil contracts which rocked the financial world.
As soon as the news spread, buyers jumped in to buy gold. Gold's price has soared to close at an all-time high (ignoring inflation). Every attempt to hold down the rise was quickly overcome by even more buying activity.
As early reports of this story spread, people were told to expect high placed denials that these meetings had taken place.
Naturally, governments were quickly working behind the scenes to do damage control. The occurrences of these secret meeting were denied by Saudi Arabia central bank chief Muhammad al-Jasser, Japanese Finance Minister Hirohisa Fujii, and Kuwait Oil Minister Sheikh Ahmed Al-Abdullah Al-Sabah.
The original news story cited unidentified Middle Eastern officials and Chinese bankers in Hong Kong as confirming the story.
Max Keiser, who broke the story this year about the German central bank gold holdings stored in the New York Federal Reserve vaults, said his contacts in Paris, the Middle East, and in Russia confirmed the accuracy of the original story.
Details of the plan are not complete. Broadly, by 2018 the member nations of the Gulf Co-operation Council, China, Russia, and France would agree to no longer use the US dollar for pricing and payment of oil contracts. Instead, payment would be made by a new currency whose value would be determined in relation to the value of gold, the Euro, the Japanese yen, the Chinese Yuan, and the new GCC currency.
Apparently, Brazilian officials had attended at least one meeting but were not yet committed to be part of the plan. Officials from India have also requested to be part of these meetings.
Why This Development
Kills The US Dollar
The US government has been actively inflating its currency for decades. In a large part, the US has benefited from the status of the US dollar serving as a world reserve currency. In return for exporting goods and services to the US, foreigners had received - paper!
In theory, this paper currency and debt could someday be redeemed for goods and services. While some redemptions have occurred all along, the US government has been pushing ever greater amounts of paper assets to foreigners.
As long as foreign dollar and debt holders perceive that the US is sufficiently prosperous and fiscally prudent, they are inclined to pay relatively little attention to the growing amount of foreign- held paper.
Starting in 2007, growing in 2008, and soaring in 2009, the US government's size of expenditures and the net budget deficit have grown. Foreign governments and private citizens have become more worried about the amount of foreign-held dollars and dollar denominated debt.
These foreign parties now face a situation where they realize that if the US government doesn't do something to control this financial mess, the dollar could become worth a lot less and maybe even worthless.
The current administration is quickly making a bad situation spiral into an uncontrollable disaster. The only possible way out that I see would be by the adoption of prudent, responsible fiscal policies that would encourage foreign creditors to wait long enough for current problems to be managed.
These secret meetings are a sign that time has run out for the US dollar. A significant coalition of foreign governments are making plans which will result in massive quantities of US dollars and debt being repatriated to American in return for goods and services. The only way this can be done is through a sharp long-term contraction of the American standard of living.
The only other alternative to redeeming all these dollars for full value would be to inflate the US dollar to such an extreme degree that it becomes practically worthless. Like Zimbabwe, you can repay a trillion dollar debt when a trillion dollars is only enough to buy a cup of coffee.
Unfortunately, I think the revelation of this plan to displace the US dollar in a significant percentage of international transactions will push down the value of the dollar long before the actual program is implemented in full.
The existence of this plan will now push all other foreign creditors of the US government to expedite their repatriation of dollars.
As the value of the dollar sinks, Americans will also realize that holding dollars and dollar-denominated paper assets is a losing strategy. Retirement funds invested in most stocks and bonds will lose their value.
At some point I would not be surprised to see the price of gold rise by at least $100 a day, and that time could come before the end of 2009. I also see silver rising 5-10% per day at about the same time.
We saw a similar situation in Indonesia in 1997, during the Far Eastern currency crisis. Indonesian citizens who owned gold saw their lifestyle largely unchanged. Those who owned only the paper currency became destitute.
Maybe things won't get as bad for the dollar as I fear. But my expectation is for the US dollar to fail before 2018, to be replaced by something else.
Gold and silver bullion-priced coins and bars would be excellent assets to have in your personal custody to protect yourself. There are many other physical goods, personal skills, and a network of relationships that would also be important, but they are beyond the scope of this essay.
Right up into the mid-1800s, Americans were used to a wide variety of coins and currencies in circulation. I don't think there will be any one form of gold or silver to own for trading purposes. Instead, I expect that a wide selection of coins and ingots will be readily exchangeable.
Because I think many forms of gold and silver will trade, it makes sense to look for the forms with the lowest premiums, where you get the most metal for your money. I also like the idea of having some smaller, more divisible, forms, even though they might cost a higher premium above metal value. Between gold and silver, I recommend a split of 40-50% in gold and 50-60% towards silver.
My recommended form of silver to purchase is US 90% Silver Coin (2.6%). It has the lowest premium except for US 40% Silver Coin (1.6%). 90% Coin is the most widely traded form of investment silver, the most liquid, and is highly divisible. The 40% Coin has the disadvantage of requiring the storage of the 60% copper-nickel content, which also runs up postage costs if it is shipped.
Right now, most gold and silver bullion priced products are readily available at reasonable premiums.
Demand for the uncirculated US Silver Eagle Dollars (12.9%) has been so strong that more than 20 million coins have been sold already, an all-time annual record with two months left to go. Because of this strong demand, the US Mint recently announced that it will not strike a 2009 Proof Silver Eagle Dollar.
The US Mint said they will produce both uncirculated and proof US Buffalo One Ounce Gold coins this year. I expect demand to be strong, so I'm not sure that they will stay at their current relatively reasonable premium levels.
Once the dollar really starts to drop, I would expect product to be snapped up by worried people. During one of the worst parts (so far) of the financial crisis a year ago, just about all forms of physical gold and silver disappeared within a matter of days.
If you don't yet own your core position of gold and silver bullion, I urge you to do so quickly - while you still can.
Editor's Note: Patrick Heller is editor of Liberty's Outlook, published by Liberty Coin Service, 300 Frandor Ave., Lansing, MI 48912, 1 year, 12 issues, $129. Liberty Coin Service has been a dealer in rare coins and precious metals since 1971. 1-800-527-2375. www.libertycoinservice.com.
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