Why the National Debt and Trade Deficit is Good for Gold Prices

DEBT

Debt by whatever name you call it — Trade Deficit, Account Balance Deficit, Public Debt, Mortgage Debt, Subprime Debt, Margin Debt, and/or Corporate Debt — continues to implode. The national debt in 1995 was around $4 trillion.
On July 27, 2007, the National Debt Clock read $8,915,799,737,286.85 ($8-plus trillion). That is $2 trillion more than it was on April 10, 2005, just a little more than two years ago. At that time the National Debt registered $7,782,816,546,352. The estimated population of the United States is 302,545,457. That means that each man, woman, and child’s share of this debt is $29,469.29. Since September 29, 2006, the national debt has continued to rise by an average of $1.36 billion a day.

This enormous mountain of debt is especially astounding when we consider that the United States was a creditor nation just 30 years ago. Today, it is the largest debtor nation the world has ever known. Debt does matter! Over time it has killed every currency on the planet.

I liken it to people who receive credit card offers in the mail each month. In the short run, by making borrowing easy, they can prop up their living standards. In the long run bills come due, and the debt has to be paid. The more debt one has, the more vulnerable the individual becomes to economic shocks; and creditors begin to demand higher rates of interest to offset their risk. That is one of the real dangers here in the US, because there is going to come a time when borrowers (China) will demand more interest to lend America money! When a country
has as much debt as the US, higher interest rates are a killer! Do you see why I call it a “Catch 66”?

GOLD

There are, of course, many factors currently driving the gold market, including geopolitical influences. Specifically, the dramatically-enlarged, global economy has added new groups of people into the equation. China and India are both nations of increasing concern to the world’s economy. Both are looming in growth and power, and we are all aware that both are in the race to become global economic powers. These are countries with billions of people, and their respective economies are growing by leaps and bounds. The race is on for the earth’s natural resources. This new phenomenon is still in its early stages and has been reflected in commodity prices across the board. Oil and gold prices have risen dramatically. China’s citizens have only been allowed to own gold in the last few years. On the other hand, the citizens of India are big buyers of gold. As the standard of living for these folks continues to rise and their disposable incomes increase, they will certainly take more and more natural resources off the planet, including gold. So say the Adens: “Remember, in all of world history no country as large as China, with its over one billion population, has grown as fast and strong as China has in a short time.”

In the June 2007 Aden Forecast newsletter the Adens characterize the current global boom, which is coinciding with a mega-commodity cycle, as THE PERFECT STORM! And they point out that it is not just China, India, and the former communist nations that are bidding for the world’s natural resources — the whole world is doing well. Over 100 countries are growing at an annual rate of 4% or more. The Adens went on to say that this global growth fuels demand, which is good for commodities and, therefore, good for gold.

The Aden Forecast further noted: “We continue to believe gold will likely rise for years to come, eventually reaching at least $2,000 and it probably will go even higher.” For those of you who have been reading this newsletter for sometime, I will remind you that both Richard Russell (Dow Theory Letters) and Charles Allmon (Growth Stock Outlook) have said on numerous occasions that they believe gold will reach beyond $3,000 an ounce.

During an interview with the late, great Albert Sindlinger, he had shared his conviction that gold would rise within a range of $3,000 to $5,000 an ounce; and that was in 1995, when our National Debt was only a little above $4 trillion. At that time, NAFTA was an infant; the World Trade Agreement was years away from its inception; China was an economic, sleeping giant that had not yet demonstrated its ability, or its desire, to become an economic world power; and the stock market was only hovering around 5,000.

I often wonder what Sindlinger would think the ultimate price for gold would be today. Terrorism wasn’t even on his radar screen, nor was the war in Iraq or Afghanistan. Yet, history has taught us that military spending always equates to inflation. You can count on that, and it seems that the war on terrorism will last for many years to come. I wonder what Sindlinger would think the long-term potential for gold would be today. I believe he would be tying it to the long-term destruction of the dollar!

For those who still question the wisdom of owning gold for the long-term, I offer some advice from the Aden sisters: “Holding gold is the best long term investment you can make. Bumps in the road shouldn’t sway you. This is a mega trend based upon fundamental factors that are not going away anytime soon. So again stay invested and we feel strongly that you will be glad you did.”

RARE COINS

In 1971 Nixon closed the gold window and made it legal for US citizens to own gold once again. Gold had been fixed at $35 an ounce for 38 years. Over the next nine years gold rose to $850 an ounce, 24 times its 1971 price. During that period, most rare coins outperformed gold by wide margins. From August 1999 through May 2006 many rare coins again outperformed gold.

As the bull market for gold moves into its final phases, which may take several years, I believe rare coins will once again outperform gold bullion by a wide margin. Rare gold coins are a very popular way of holding gold today. Each year more and more investors and collectors come into the rare coin market. Like gold, rare coins have risen substantially since August 1999, but, unlike gold, they are not trading anywhere close to their bull market peaks. For instance, as of this writing gold would only have to rise a little over 19% to reach its all-time high.

MS64 $20 Liberty coins would have to rise 3.75 times higher than they are today to reach their all-time high. Yet, these coins outperformed gold during this first phase of the bull market for gold. Remember, the public doesn’t really get involved in a bull market until its third and final phase. However, when the public does fully embrace this bull market for gold, I expect that rare gold and silver coins will once again explode in price and outperform gold bullion by a wide margin!

Allow me to share one more critical point before I conclude this newsletter. During the summer of 1989, MS64 $20 Liberties reached their all-time peak. At that time, although gold was selling for $360 an ounce, gold bullion was actually entrenched in a full-blown bear market. In other words, there have been periods in history when rare coins did extremely well in spite of the fact that the price of gold was flat or declining in value.

We are all aware that we don’t mint rare coins anymore! As gold prices increase, supplies get squeezed. So, call and check our Dated Gold availability before it’s too late. Dial us at 1-888-O-W-N-G-O-L-D (1-888-696-4653)