Oct 21 a.m. (USAGOLD) -- Gold is edging lower once again, weighed by a firmer dollar. The greenback has been bolstered by heightened talk of another economic stimulus package, which has served to calm the stock market somewhat.

With volatility waning and the prospect of another huge influx of capital from Washington, foreign investors may be moving back into the US stock market. That has a supportive impact on the dollar. Gold tends to have a negative correlation with the dollar and therefore prices are lower today.

While the initial reaction of the buck to talk of a fiscal stimulus package has been positive, the longer-term implications are quite negative. Proposals for the package range between $150 bln and $300 bln.

Such an injection of capital, on top of all the liquidity that has already been pumped into the system so far this year, is likely to further debase the dollar. If the dollar resumes its long-term downtrend, we would expect gold to eventually resume its long-term uptrend.

We continue to see broad-based deleveraging of commodity positions amid ongoing worries about a protracted global recession. I saw an interesting piece of analysis in the wake of last week's abysmal retail sales number that suggested American households are deleveraging as well.

Basically, individuals are cutting spending in an effort to rebuild savings. Interesting thing though, as spending is reduced, income and savings fall as well. This is referred to as the 'paradox of thrift.'

Spending cuts on the part of consumers have a negative impact on the economy as a whole, and probably most importantly on jobs. As the economy slows, more jobs are lost, incomes drop and more individuals are forced to draw down savings.

Of course it is well known that we here in the US are not savers. Consumption drives our economy and saving has been systematically disincentivized over the years. Now that we're in this hole and it's getting deeper, it becomes increasingly difficult to get out of it.

Remember the adage I referred to in yesterday's comment? If you want to get out of a hole, the first rule is to stop digging.

The government's response to the current economic crisis is to dig deeper and faster. They further disincentivize savings with rate cuts. They flood the market with liquidity. They propose further fiscal stimulus with the goal of putting money in the hands of consumers so they will spend it.

All the while, our national debt and our budget deficit grow at an alarming rate. The national debt has recently exceeded the $10 trillion mark and the budget deficit is likely to exceed $1 trillion this fiscal year.

Of course over-leveraging is actually the source of the current economic crisis. Essentially encouraging re-leveraging seems like a clear effort on the part of the government to simply forestall the day of reckoning. In doing so, the risk we run is that the day of reckoning is substantially more devastating than the one that was perhaps just averted.

Given the current rate of inflation, yields in real terms on US treasuries, savings accounts and money market funds are currently negative. They are likely to remain so for the foreseeable future as inflation rises in reaction to recent massive liquidity infusions. Physical gold offers one of the best choices for wealth preservation in these circumstances.

Considerable systemic risks persist as well. The Fed just today announced a new Money Market Investor Funding Facility to address difficulties that have arisen in selling assets to satisfy redemption requests. Again, physical gold offers protection against these types of systemic risk.

I also heard this morning on NPR that banks are using funds provided to them by the government to encourage lending to instead further consolidate the banking industry. Instead of lending to businesses and individuals they are buying competitors at bargain basement prices.

The fact that many financial institutions had become 'too big to fail' was used as justification for the massive bailouts in recent months. Now we find out that these very banks are attempting to become even bigger. Once again, heightening the risk that the forestalled day of reckoning will be catastrophic.