Golden Opportunities

"I hate to be the bearer of bad news," Kevin Kerr
apologized yesterday, "but the demise of the dollar is upon
us and the future may be bleak for the once worshiped and
almighty currency."

Kerr, whose knack for identifying important investment
trends has amply rewarded the subscribers of his Resource
Trader Alert, suspects that the dollar’s difficulties will
continue powering a long-lived gold bull market. "Keep an
eye on gold," he advises. "Yesterday’s big gold rally may
be the start of an important move in the precious metal."
No one knows, of course, the precise day when a long-term
macro-economic trend will begin to affect short-term price
movements, but that day for the U.S. dollar – and therefore
for gold – may have arrived already, even if very few
market observers realize it.

As the nearby chart shows quite clearly, the value of the
U.S. dollar has been sliding in step with America’s
deteriorating national finances. Perhaps it is no accident,
therefore, that gold has rallied sharply over the last four
years. In 2001, the U.S. government enjoyed a budget
surplus equivalent to 1.2% of GDP. Meanwhile, the current
account deficit in that year totaled a mere 3.5%. Thus,
these two deficit gauges combined, totaled a mere 2.3% of
GDP. But both numbers have been worsening ever since, such
that these "twin deficits" totaled nearly 10% of GDP in
2004! That’s a lot of debt to paper over with U.S. dollars.
No wonder that the Treasury will resume issuing 30-year
bonds.

"The dollar is the single biggest element of risk in the
world of finance today," writes Addison Wiggin in his
freshly minted book, The Demise of the Dollar…And Why
It’s Great for Your Investments. "Rearrange the current
system of world finance ever so slightly. Let confidence in
the greenback falter, and the mighty dollar could go up in
flames…There are many ways to hedge against this risk…
Better still, there are many ways to profit from the
likelihood the dollar will fall."

Wiggin does not divulge the precise profit opportunities
until Chapter 12, but throughout the preceding 11 chapters,
he argues persuasively that the dollar’s reign is ending.
Therefore, gold will once again usurp its rightful
authority over the world’s monetary regime.

"What is real money?" he muses. "This question should be on
the minds of every investor and everyone who observes what
happens at home and abroad. The U.S. government has done an
excellent job of convincing us that all of those dollar
bills being exchanged work as actual money. In fact,
though, everyone knows they have no tangible value. They
are backed only by (a) a promise by the government to honor
the debt, and (b) assurances from the government that the
money does have value, that one dollar is worth one dollar.
Both of these promises are questionable."

Indeed, especially in light of America’s worsening balance
sheet.

The Bush administration announced yesterday that it will
resume issuing the 30-year Treasury bond next year.
Treasury Secretary John Snow cheered the decision as
evidence of "our commitment to prudent debt management."
We are dubious. Prudent debt management seems a bit like
prudent alcoholism management. Wouldn’t the most prudent
course of action be to eliminate the vice that requires
managing? Unfortunately, now that our national debts total
nearly $8 trillion, debt-management has become an eternal
imperative.

However prudently the U.S. might manage its debts, it is
imprudently increasing them, which is not very prudent at
all. Extending the maturities of our debts out into the
future, while prudent, cannot possibly do the entire job of
managing our debts. That’s where the dollar comes in.
Nothing "manages" government debts quite as effectively as
currency-debasement. Such is the time-honored tactic that
all indebted governments have utilized throughout the ages.
The U.S. government will behave no differently, says
Wiggin.

It will satisfy its mounting liabilities with dollar bills
of ever less value. In other words, the dollar bills that
30-year bondholders would receive in 2035 will be worth
much, much less than today’s dollars.

"How can the government promise to pay its debts when the
total of that debt keeps getting higher and higher?" Wiggin
asks. "It’s already out of control. And in our fiat money
system, the implied promise that a dollar is worth a dollar
has to be looked at with suspicion as well.

"This is not just an exercise in economic theory. The near
future could prove to be a financial disaster for anyone
who continues to have faith in the strength of the dollar.
In fact, a collapse is inevitable and it’s only a question
of how quickly it is going to occur.

"The consequences will be huge declines in the stock
market, savings becoming worthless, and the bond market
completely falling apart. As the value of the dollar falls,
that dollar will no longer be worth a dollar; it will be
worth only pennies on the dollar. It will be a rude
awakening for everyone who has become complacent about
America’s invulnerability."

This is the part where gold rides to the rescue on a white
stallion.

"Gold ETFs are one of the simplest ways to position for the
dollar’s continuing slide," says Wiggin. "The two gold ETFS
that trade here in the U.S. both hold gold bullion as their
one and only asset. You can locate these two ETFs under the
symbol "GLD" (for the "streetTRACKS Gold Trust") and "IAU"
(for the "iShares COMEX Gold Trust"). Either ETF offers a
practical way to hold gold in an investment portfolio."

Wiggin provides several other profit opportunities as well,
of which all dollar-phobic investors may avail themselves.

Kevin Kerr, who specializes in trading option on futures,
has been advocating the purchase of long-dated call options
on gold. (We should mention that Kevin issued his most
recent recommendation immediately BEFORE yesterday’s gold
rally).

"Make no mistake," says Kerr, "gold is the real deal. Gold
doesn’t have a board of directors; gold doesn’t have
scandal; gold doesn’t have an expense account or one-time
charges. Gold is quite simply, gold.  We call it the
‘flight to quality’ instrument because in tough times,
times of fear and trepidation, investors flock to gold like
rednecks to a NASCAR race. Gold is relatively cheap right
now and options on it are a great deal. So it only makes
sense to add some gold calls."

Kerr suggests buying out-of-the-money calls on gold for
early 2006.

Perhaps yesterday’s $5.00 gold rally was just another
meaningless blip. Perhaps not. One thing is clear; gold
does not lack for reasons to move higher.