-- Posted Monday, 21 January 2008 | Digg This Article | Source: GoldSeek.com
By: Vincent Bressler
With the implosion of the bond insurance industry last week, we are on the verge of a full blown financial panic. As bond insurance is downgraded, bonds that stand as collateral for trillions of dollars worth of loans are downgraded. Loans will be called, and there may be no saving the world financial system from implosion.
Since 1971 and the default of the US dollar's gold obligation, there has been no foundation under the world's financial system other than the full faith and credit of the US government. The only question since then is how much faith does the world have in the US government?
We will find out soon.
Yesterday Jim Cramer explained to the Boo-Yah crowd, that the Fed has to step up and buy the bond insurance industry NOW, or we are all heading back to the 1800s. Jim Cramer understands the current problem. From the US government we hear about plans to helicopter drop 1% of the US GDP in newly created money... quickly. The people behind the 1% plan don't get it.
If the Fed is unable to restore confidence in the faith based US dollar system, then very soon, they will have only one option, and that is to restore an official relationship between the US dollar and gold.
Officially, the US still has something like 237 million ounces of gold reserves. At $900 an ounce that's only $213 B. Given a current world GDP of about $55T, the US gold reserve is 0.4% of the world's GDP. That's not nearly enough to inspire confidence in the dollar under current conditions.
For perspective, in 1950 the US gold reserve was about 590 million ounces at $35 per ounce. That's $20 billion, and the world's GDP was about $1 T. Therefore in 1950 the US gold reserve was about 2% of the world GDP.
Just to get back to the 1950 ratios, the price of gold would have to go up by a factor of (2/0.4) = 5, from $900 to about $4500 per ounce.
Realize also that in 1950 there were only about 1.2 billion ounces of gold in the world, now the number is close to 4.8 billion ounces. So the official US gold reserve has gone from 1/2 of the world's gold to about 1/16 th. Add to this the pressure now being put on the US by GATA, and you have the makings for a real explosion in gold, with time and room for the Fed to maneuver, quickly running out.
There are two stories here, one is the decline of the USA relative to the rest of the world, the other is the threat to the whole world's financial system. If the Fed tries to save the dollar system by letting gold fly, and then restoring some sort of dollar/gold relationship, the Fed will lose its license to print money and the US GDP will decline dramatically and quickly, relative to the world GDP. If the Fed waits too long, then even the disposition of the US gold reserve will be thrown into doubt, and the Fed will have no way to save itself.
Finally, I realize that some may believe that aside from the US government, aside from the Fed, another group has been vacuuming up gold for the last 50 years, waiting for and creating just the situation that we have now. We shall see.
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