-- Posted Wednesday, 18 May 2011 | | Disqus

The US Federal Reserve sits on the world’s largest gold reserve in Fort Knox, while the Treasury Secretary Tim Geithner has just announced that the US debt ceiling will finally be breached on August 2nd.

Why not sell off some of this gold to keep the US Government going? Gold is after all the safe haven asset that central banks have for a rainy day, and it will be raining pretty hard after August 2nd if the US Government runs out of money.

Plausible scenario?

This intriguing scenario was suggested to ArabianMoney by a subscriber to our popular newsletter (click here) which has been taking a big interest in silver and gold investments recently. People forget it was Arab money behind the Hunt brothers in the silver bubble of 1980.

Now what impact would it have on the gold market if the US Government sold a couple of hundred tons of the stuff? Extra supply would immediately depress the gold market but the Fed would easily find buyers among the other central banks of the world, happy to exchange a depreciating paper currency for something trusted through the ages.

Indeed, that is exactly why the Fed would not dare to do it. For while gold would fall in price, it would gain enormously in credibility as a medium of exchange, and so by proxy would silver as poor man’s gold.

Everybody would then want gold and nobody would want the US dollar. The bond market would tank as investors fled for precious metals and the dollar become worthless. In one mad gamble the Fed would have destroyed its own currency, and the next thing to go would be the Federal Reserve itself – it’s not the first central bank in US history.

Therefore while we appreciate the novel concept, the idea that the Fed might start selling off its gold to pay for US social security entitlements is most likely rubbish, or at least we hope so for the future of the United States.

Budget crisis

This does, however, highlight the seriousness of the impasse now reached in US politics with Republicans pushing for deeper cuts in public spending to cut the deficit and Democrats still speaking as though reality only exists for other people. It also means that any thought of a QE3 economic stimulus is out of the question because it could never get past Congress.

So what will happen after August 2nd? Presumably the country and its financial system will be taken to the edge by Congress and pulled back, although there is plenty of margin for error, and the fundamental problems will still remain. The largest debt in history cannot be voted away.

It’s a formula that will take gold and silver prices very much higher as soon as this autumn. We still have silver as our top pick for 2011 and see no reason to change this (click here).

-- Posted Wednesday, 18 May 2011 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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