Why Detroit is good for gold: Ron Paul

The Detroit bankruptcy has been called an American tragedy, and one of the most heart-wrenching financial stories of our time. But according to Ron Paul, America's biggest-ever municipal bankruptcy could actually give gold bulls something to cheer about.

For Paul, the Detroit bankruptcy is the first of many municipal bankruptcies to come, and could even foretell what will happen to the United States as a whole.

"Long term, you can expect governments not to change," said Paul, who predicts that the U.S. will print more and more money as it continues to take on debt.

(Read More: How your city might pay for Detroit's money mess)

"We're going to see more Detroits, and eventually the government of the United States will be somewhat similar to Detroit, because people will give up their confidence in us, they'll give up confidence in the dollar, and eventually they'll give up confidence in our military. And then you'll see some real, real changes in this system, which has been built on a fiat dollar for the last 40 years," the former U.S. representative said on Tuesday's "Futures Now."

Why does this matter to gold? Because Paul expects to see gold skyrocket as the dollar crumbles. As he said on June 16: "As long as we have excessive spending and excessive computerized money, you're going to see gold go up. And eventually, if we're not careful, it could go to infinity, because the dollar will collapse totally."

The point is that as each dollar loses value, it takes more of those dollars to buy an ounce of gold, so the dollar value of gold rises. If people stopped accepting dollars, then no number of dollars could purchase an ounce a gold, making the gold price "infinity."

(Read more: Ron Paul: Gold could go to 'infinity')

Ron Paul
Ron Paul

And for Paul, the Detroit bankruptcy could be the beginning of this dollar collapse.

"There's going to be more cities [that declare bankruptcy], and there will be a limit," Paul said. "If 10 cities declare [bankruptcy] tomorrow and the Feds say 'Well, we've got to bail them out,' that could do great damage to the dollar."

After all, "There's a limit to what the markets will tolerate," Paul warns. "I'm surprised that the markets have been rather tolerant." But "there's an end point, and nobody knows when that'll come, but I suspect we're getting closer and closer to it every day."

Perversely, gold owners might hope this "end point" comes sooner rather than later—at least when they have their portfolios in mind. And for that reason, they might see the Detroit bankruptcy as very good news indeed.

—By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex.

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