Bullish On Books

Published: Thursday, 8 Oct 2009 | 12:02 PM ET

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The new gold rush is on so you better be prepared to see a lot more of those "cash for gold" neighborhood parties.

Gold rose to an all-time high of $1,050 on Thursday.

Simon Rose, CEO of Dahlman Rose believes it has the potential to go much higher - perhaps as high as $2000.

It all sounds so exciting doesn't it - Gold at a thousand dollars!

But words of caution from our guest blogger today.

Gold - The Canary in the Coal Mine by Charles Goyette author of the upcoming book, The Dollar Meltdown

Before modern ventilation systems, coal miners would often take a caged canary underground with them. In the presence of deadly gases, the canary would first stop singing and soon die. That was all the evacuation warning early miners needed.

The price of gold is a referendum on the quantity and quality of paper money and, like the canary in the coal mine, it is signaling a warning: there’s trouble with the dollar reserve standard. Around the world the alert are looking for ways to abandon it.

• End the Fed, Save the Dollar: Ron Paul

Americans have had a pretty good, if undeserved, deal since the end of World War ll.

First the dollar exchange standard buttressed the value of the US dollar as other nations began to hold their reserves in dollars and issue their own currencies against them – as they once had issued their currencies as a claim check for precious metals.

The idea was that they could hold these dollars without fear because the dollar would forever be exchangeable for gold held in the depositories of the United States.

That didn’t last.

The United States issued more dollars than it could possibly redeem at the fixed rates.

In fact, on a single day in March, 1968, private buyers took 400 tons of gold from the London gold pool. With the demand to exchange dollars for gold beyond containment, in 1971 Nixon closed the gold window and abandoned any pretense of dollar convertibility.

So what has acted as a restraint on the issuance of more dollars since then?

Nothing.

As long as the rest of the world was willing to continue holding dollar reserves, their demand for the dollar would bid its price higher than it would otherwise be.

As long as oil producers were willing to sell their depleting commodity for a depreciating, irredeemable currency, Americans were the beneficiaries of this added dollar demand.

If the world would just continue to go along, the Federal Reserve could accommodate spend-thrift US politicians and create new dollars at virtually no cost.

• Track Gold On CNBC.com here

But to mix our ornithological metaphors, the chickens have begun coming home to roost. There is no reasonable prospect of the federal debt being paid down, at least if both the visible ($12 trillion) and the hidden ($100 trillion?) debt are taken into account. Nor can anyone possibly believe that today’s government bonds can be paid except by issuing new bonds tomorrow.

It is this reckoning that had gold pierce the $1,000 mark in 2008 (while oil soon surged ahead for the same reasons to $147). And despite the scramble for liquidity with the mortgage meltdown last year that drove gold briefly down to almost $700, it didn’t take long for gold to work its way back up and to new highs.

The dollar bubble may not pop suddenly like the dot com bubble or the housing bubble. But like the miner’s canary, the gold price is warning that our monetary system is toxic. The alert will heed the danger signals and evacuate, protecting themselves with the kind of simple strategies I recommend in my book, The Dollar Meltdown. While most will eventually get out of the way, the less fortunate will not. At their peril they will continue to descend with the dollar into the toxic depths only to find themselves rewarded with an abandoned mine - shaft and all.

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Charles Goyette

Charles Goyette has long been known in Phoenix as “America’s Most Independent Talk Show Host!”

With years of hands-on experience as an investment professional, he brings a welcome dimension of foresight and clarity to his political and economic commentary.

Goyette has been called on often to share his views with national television audiences repeatedly warning before the current economic turmoil of the “economic calamity the Republicans and Democrats” were creating.

He is the author of the upcoming book, The Dollar Meltdown.

For more information, visit http://www.thedollarmeltdown.com/

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