Reviewing the systemic case for gold investment

However, the point that should not be lost on potential gold investors is that the systemic problems of the US dollar show no signs of going away, and that this structural weakness is already reflected in a rising gold price, and will probably end in a spectacular gold price blow-off in a dollar crisis.

Paul Volcker is the man who steered the US out of high inflation in the early 1980s, although his handling of the US economy did not prevent the 1987 Wall Street Crash. Robert Rubin was behind the Clinton balanced budget of the late 1990s and yet his call for fiscal prudence is likely to fall on deaf ears in Washington.

US dollar crisis?

For the stage is being set for a US dollar crisis of major proportions. The US consumer boom of recent years has been supported domestically by a housing boom and internationally by the willingness of foreign countries to hold US Treasury bonds.

Now the US housing market is crashing, and China has signaled its intention to diversify away from its $1 trillion foreign currency holdings. The risk is that at some point there is a disorderly devaluation of the US dollar.

Indeed, this is probably essential for the US to recover its competitiveness in world markets and to rebound from the economic slowdown or recession into which the world's largest economy is now moving. Devaluation is a quick way to scalp global creditors whose debts will be worth less than before.

Now in such process precious metals are a surefire winner. For gold and silver will take on the role of quasi currencies with a fixed supply of specie, and the US dollar will deflate against precious metals, inflating their value.

No way out?

So far the US has organized an orderly devaluation of the US dollar which has fallen by almost a third in value this century. However, in all market mechanisms there comes a tipping point where a trend becomes a rout - and it has to be said that expecting global creditors to continue to accept falling real debts is not sustainable.

This is why an authority as eminent as Paul Volcker forecasts a dollar crisis within the next two-and-a-half years, and why he is unwilling to extend that timeframe according to recent statements. But surely that also makes investment in gold and silver a one-way bet for this period?

Old hands in the gold trading community like Jim Sinclair are rubbing their hands at this prospect, and his formula predicts a domino effect of economic factors forming a downward spiral that results in surging gold prices, with silver a likely co-beneficiary.

His only worry is that his forecast of $1,650 an ounce gold could prove too conservative!