Back in 1975 I was a senior officer with the world’s oldest and largest dealer in precious metals and foreign currencies, Deak-Perera. I learned this lesson firsthand and it forever taught me about the importance of the “barbaric relic”… gold!

Deak-Perera was one of the few financial institutions in the United States with a combined expertise in precious metals, foreign currencies and international banking. As a result of this knowledge the company was invited by the State Department in April 1975 to assist the South Vietnamese refugees that were pouring into the U.S. as Saigon fell. The company became the exclusive “moneychanger” for all five of the Vietnamese refugee camps.

You may recall that, as of Jan. 1, 1975, Americans could once again legally own gold bullion. It had been illegal to own gold since 1933, when President Roosevelt took the U.S. off the gold standard and ordered all privately held gold coins and bullion be surrendered to the government.

Unaccustomed as we were to handling displaced persons, it was nonetheless clear that even the most prominent of these refugees would be arriving at the camps with little more than the clothes on their backs and whatever valuables they could carry. And who knew just how valuable some of their belongings would be?

Only one thing was certain: They wouldn’t be drawing checks on their local banks. All banks in Vietnam had been taken over by the communists, along with the rest of the economy. At the time, the cruel joke was Vietnam was a true “cash-and-carry economy.” If you had the cash, you got to carry off anything you wanted.

A Day that Changed My Life

May 1975 found me at Eglin Air Force Base, Fla., one of the five refugee camps. I will never forget my experience with two families in particular. The experience is burned into my mind forever.

A middle-aged man, trim and well-spoken, was wearing what had once been an expensively tailored suit. He obviously cared deeply for his bedraggled family. He had been a businessman in Vietnam. In fact, I was later to learn, he had been a very successful banker. But now all his family’s wealth was in the small dingy canvas bag that he was hanging onto for dear life.

Even through all the adversity he and his family had recently experienced, there was still a glimmer of hope in his eyes. Despite losing his job, his home and his country, he still wore a relieved expression whenever he gazed upon that canvas bag. It was his key to a new life in a new country. It was, quite literally, a golden anchor.

Gently, carefully, he poured the contents of the bag onto the table in front of me. There, gleaming in the sun, was an enormous collection of golden taels. For those of you who are not familiar with taels, they are a form of gold bullion indigenous to Southeast Asia. Each tael was 1.2 ounces (37.5 grams) of .9999 pure gold. They looked like tiny wafers—thin sheets of gold, delicately wrapped in paper.

It was Deak-Perera’s job to buy the gold taels from the refugees, and, with the proceeds, issue traveler’s checks.

A Lifetime of Savings, Now Worthless

Further back in line there was another refugee who was less fortunate than the banker carrying the golden taels. Much like the banker, he was a successful businessman before he and his family were uprooted by war.

He approached my table with two suitcases in hand. Like his countryman with the taels, he had worked very hard, saved extremely well and carried all his worldly wealth in those satchels.

But there was one major difference. His wealth was in the form of piasters, the currency of the Republic of Vietnam. These were paper promises of a government that no longer existed. I had to tell this man his piasters were worthless. They would not buy anything—not even a Coke or a pack of cigarettes—in his new country.

Can you imagine toiling and saving for a lifetime for two suitcases filled with worthless currency?

Sad to say, other formerly valuable pieces of paper were now worthless as well. One was the Military Payment Certificates (MPC), issued by the U.S. military. Each one carried the likeness of a famous Hollywood movie star. Now they would not buy admission to a show.

Other items, even valuable diamonds, jade and loose gems, were hard to exchange on the spot for a fair price. Only gold had an immediate market at a fair price.

Before that day I always knew that precious metals were an important asset. But, after looking into the eyes of these two men and their families, I knew firsthand the value of gold and other precious metals. Gold holds its value when nothing else will.

Does gold in 2010 offer the same peace of mind and protection to Americans that it has through 5,000 years of history? Absolutely!

As an American, there are many threats to your hard-earned wealth. The most insidious is not military in nature. It is the weakening of the U.S. dollar.

In the past year these mounting costs exceeded our government’s revenue by more than $1.4 trillion. Meanwhile, the Federal Reserve loaned or guaranteed another $2 trillion. How will this debt ever be repaid? The only politically acceptable solution is to print more money. But creating more dollars means, inevitably, that each one is worth less. The dollar is being devalued right in front of our eyes.

Get Ready for Fireworks in the Gold Market

My friend Doug Casey likes to say that the price of gold is not only going to the moon, it’s going to several planets beyond.

When this happens… when gold prices double from where they are now and continue rising… when the dollar falls into the abyss… which would you rather own? Which do you think will better protect your life’s work?

Would you rather be holding two suitcases full of worthless U.S. paper? Or a canvas sack full of gold?

I’m going to choose the latter. I hope you will, too.

If you’d like to know about the safest, most secure way I’ve found to own gold, let me tell you about the Perth Mint Certificate program.

It’s one I helped develop 12 years ago, and it comes with the most rock-solid guarantee you’ll find anywhere. In case you’re not familiar with it, the Perth Mint is wholly owned by the Government of Western Australia. It has been storing and dealing in precious metals for more than a century.

The Perth Mint is the only depository operating today that can offer you a comprehensive storage and trading program, with the unconditional written guarantee of one of Australia’s wealthiest states. In addition, all precious metals stored at the Perth Mint, including your metals lodged under this program, are insured (at the Perth Mint’s cost) by Lloyds of London.

When we designed this storage program, we wanted to make sure it was SAFE. That is, that it offered Security, Affordability, Flexibility and Exclusivity. The Perth Mint Certificate Program has our highest endorsement on all counts.

Purchasing gold or other precious metals through the Perth Mint Certificate Program requires an initial investment of $10,000 or more. Sale amounts or additional purchases must be for $5,000 or more. There is no additional cost for unallocated storage; the one-time administrative fee is a very reasonable $50 per certificate.

When you are ready to dispose of some or all of your holdings, the Perth Mint will arrange to purchase them back from you at the then-current market price. Or you can take delivery of your holdings at the Mint or via insured delivery to most any location in the world.

To learn more about how the Perth Mint Certificate Program can help you find a safe haven for some of your assets in an increasingly troubled world, please contact my company, Asset Strategies International. You may email us at info@assetstrategies.com, or call us at 1-800-831-0007 or 301-881-8600.

Please let us know how we can help you achieve your financial goals.

Live Strong,

Michael Checkan
President
Asset Strategies International

Gold futures for December delivery briefly hovered at a high of $1,119.10 an ounce on the New York Mercantile Exchange in morning trading, before falling back and settling at $1,114.60, which represented an increase of $12.10 from Tuesday’s closing, according to the Associated Press.

The development comes as the Federal Reserve announced it would keep interest rates low to aid the sluggish economic recovery, sending the dollar to a 15-month low.

This, coupled with government economic stimulus measures, has rekindled fears of inflation and prompted investors to seek safety in commodities such as gold.

"If [the DXY U.S. Dollar Index Future] fails or extends lower we could easily see gold push on to new highs above the $1,150 level," said James Moore, analyst at TheBullionDesk.com, quoted by TheStreet.com. His sentiment was echoed by experts such as Jim Steel, senior vice president and metals analyst at HSBC, who spoke to the Wall Street Journal.

Meanwhile, the WSJ reported that gold got an additional boost last week on news that India’s central bank bought 200 metric tons of the 403.3 tons the International Monetary Fund put on the market.

The AP says gold prices are up 26 percent from last fall.

After devastating losses that pushed the Dow Jones Industrial Average to 6,440 in early 2009, the Dow broke above 10,000 last month for the first time in 53 weeks. All thanks to President Obama and his bagmen at the Federal Reserve.

You see, President Obama and Federal Reserve Chairman Ben Bernanke have already injected more than $1 trillion in new money.

Part of this has been in the form of bank bailouts. More has been given to Detroit automakers. And finally, Washington has inserted a whopping $850 billion directly into the U.S. banking system. It is this final act that will wreak the greatest havoc on the U.S. stock and bond markets.

When the credit crisis hit last year the Fed began “running the printing presses.” We are talking about the creation of hundreds of billions of dollars, so presses aren’t really running. Instead, the Fed has created all this money with the touch of a key-stroke. Soon this mountain of money will spill over into the economy and the markets.

The graph above shows the Fed’s unprecedented creation of U.S. bank reserves.

In his Nov. 2, column, Robert Murphy of PrisonPlanet.com explained: “The United States has a ‘fractional reserve’ banking system, meaning that if you added up all of the checking account balances for the customers of a given bank, the total amount of deposits would far exceed the amount of cash reserves in the vaults of the bank.”

As a result, said Murphy, all this fresh Fed money will soon be lent out at a multiple. A conservative estimate is five times the amount injected. That means that the $850 billion in new bank reserves will be transformed into more than $4 trillion in new money. That would take M1 money supply from $1.7 trillion to $6 trillion in just the next few years!

To read all of Murphy’s story, click here.

Even before the avalanche of new money, M1 has risen 50 percent since January 2001 (see graph M1 Money Supply).

With all this fresh cash on the bank’s books, M1 could easily double to more than $3 trillion in the next two years. That would make M1 money supply almost 10 times higher than it was when Ronald Reagan took office.

We haven’t seen this kind of excess monetary growth since the stagflationary 1970s. It was bad for stocks and bonds then and it will be just as bad for them today.

A Short History of Stagflation
Between 1970 and 1981, M2 money supply tripled. A record amount of liquidity was being injected into the economy by the Fed. But all this money wasn’t helping an economy that was just limping along.

From the beginning of 1971 to the end of 1979 the gross domestic product (GDP) rose by just one-third—from $3.9 trillion to $5.2 trillion (in constant dollars).

As the amount of money in the economy vastly exceeded the goods and services being produced, inflation was inevitable.

The consumer price index for the 1970s rose by a staggering 6.5 percent each year. By 1980 a 1970-dollar that had been stuffed in the mattress would buy you just 52 cents worth of goods and services. It marked the end of dollar stability and the post-war economic boom that fueled a bull market in stocks.

In January 1950, the Dow Jones Industrial Average was under 200. In January 1966, it breached 1,000 for the first time. Over the next few years, the Dow moved sideways, twice testing, but never again breaking above the magic 1,000 point level.

Stocks fell into a funk. Money supplied by the Fed was not producing real gains and the stock market reflected this.

In April 1980, the Dow was trading at 759. That might not seem too bad compared to its 1966 apex, but factor in inflation and the 1980 Dow, measured in 1966 terms, was really trading at $329. In real terms the Dow had lost two-thirds of its value in 14 years.

Bond investors also did poorly. In the late 1970s prices on 30-year Treasury bonds fell more than 25 percent as the yields-to-maturity on the bellwether 30-year Treasury bond climbed from a rate of 7.75 percent in 1977 to 14.7 percent in 1981.

The end result was a massive renunciation of paper as investors began switching out of dollars and buying real assets.

Yet while many Americans lost their savings in Big Board stocks and bonds, some investors made incredible gains in precious metals.

Pitfalls and Profits
I first began investing in gold when I was just a teenager and it was selling for $35 per ounce. I kept that gold until it topped out at $840 and corrected back to the $650 per ounce range. So even though I didn’t get out at the top, I did get an 18-fold profit.

If that sounds like ancient history and something that can’t be repeated, don’t be so sure. Nine years ago last month I started writing Outstanding Investments. I told subscribers then to buy gold, silver and platinum as well as precious metal equities. At the time gold was selling for less than $280 per ounce.

Today bullion is trading back over $1,050 per ounce and I have been bullish on the precious metals throughout the decade. I still believe that bullion prices could very well double in the next two to three years. Given the excess of Obamabucks, I can see gold trading for more than $2,000 per ounce by the end of 2012.

And don’t be surprised to see silver rising to $80 per ounce (versus $17 today) and platinum to more than $3,000 per ounce.

In fact I am so convinced of this situation that I have just completed a 100-plus page Special Report for Personal Liberty Digest. It is titled: Profit with Precious Metals During the Coming Dollar Meltdown. In it I delve into the history of gold and money, how the Obama administration is killing the dollar and how you can best profit from the growing crisis by owning physical precious metals as well as a select group of gold, silver and platinum stocks.

To learn details about my new Special Report including how to order it click here.

Action to Take
It is imperative that you get out of Big Board stocks and all long-term debt instruments including Treasury notes and bonds. Look for a major correction to come in the Dow, the S&P and the NASDAQ in early 2010. I wouldn’t be surprised to see the markets hit new lows. At the same time, bonds are just as susceptible to huge losses as I expect interest rates to go up. I urge you put your money into cash in the form of three-month T-bills.

A T-bill is simply a short-term debt obligation backed by the full faith and credit of the U.S. government. The key to a bill is that it’s very short-term (and pays an incredibly small interest return). It has a maturity of less than one year and is sold in denominations of $1,000. You can buy maturities of one month, three months or six months. I like the three-months T-bills because you are not locked in very long but you don’t have to constantly roll them over.

Three Ways to Buy T-Bills

1. Go to your local bank and ask to buy Treasury bills. This may be the easiest option because you already make periodic trips to your bank.
2. Call your investment broker. Tell him or her that you want to purchase three-month T-bills and roll them overuntil further instructions.
3. Buy Treasury bills directly from Uncle Sam. The Treasury Direct Website will guide you through this process and give you lots of information as well. You can access that site at: www.treasurydirect.gov.

I also urge you to buy some physical gold. If you are just starting out, I suggest you buy 1-ounce U.S. American Eagle coins as well as 1-ounce Canadian Maple Leaf and South African Krugerrand coins.

—John Myers
Myers’ Energy and Gold Report

PS—Next week I will be writing the first of a two-part series on energy. If you think wind power is the answer to tomorrow’s problems you will want to read Part I. It will include why fanciful presumptions by the Obama administration are, at best, ignorance, and at worst, the purposeful deceit of the American public. In Part II, I will tell you the core truth about America’s dwindling petroleum reserves and I will give you a new energy stock pick that should be in your portfolio.

Media reports in recent months have suggested credit card companies have been hiking interest rates and fees in anticipation of the reforms that were set to take effect in February and August 2010 and bar them from similar practices.

The 331-92 House vote on the Expedited CARD Reform for Consumers Act—sponsored by two Democratic Representatives Carolyn Maloney of New York and Barney Frank of Massachusetts—has moved the effective date to Dec. 1, 2009.

In response to the vote, Representative Maloney said the companies "brought this on themselves" and the ban will crack down on actions that "have kept far too many consumers trapped in a never-ending cycle of debt."

News reports states that among the provisions that will become effective earlier than planned are a prohibition on arbitrary interest rate increases and universal default on existing balances and a ban on interest charges on debt paid on time. Moreover, issuers will be required to set penalties in such as way as to be reasonable and proportional to the omission or violation.

So why does a weaker dollar translate to strength in gold and equities? Because, on balance, a weaker dollar is a lubricant for a U.S. economy saddled with debt and low growth. It eats away at debts; it helps boost trade, and generally makes for a more ebullient economic environment.

But I believe that one of the primary reasons behind this relationship has escaped most analysts. Namely, the fact that economic growth will help burst open the dam holding back enormous U.S. bank reserves.

Investors are watching closely for any signs of an economic recovery because such a recovery could unlock the U.S. credit market… and unleash a flood of liquidity that—so far—remains safely dammed.

U.S. bank excess reserves have skyrocketed to truly unprecedented levels. (Essentially, excess bank reserves are reserves on deposit with the Fed over and above what the bank needs to meet its reserve requirements.)

Now, these reserves don’t impact the money supply—as long as they aren’t loaned out by the banks and thereby put into commerce. And these funds by and large have not yet been put into commerce, and therefore have had no effect on the supply of money or the prices of goods and services.

That may not last for long, however, as economic growth in the U.S. would, eventually, lead banks that are now risk-averse to begin lending. This, in turn, could quickly burst the dam holding back the enormous excess reserves of the U.S. banking system.

Some argue that the Fed’s newly gained power to pay interest on banks’ reserves will forestall any unwanted increase in lending. In practice, however, this will have little effect, unless the Fed is willing to pay interest at rates far above the Fed funds target rate.

As Frank Shostak, chief economist of M.F. Global, notes, “We… suggest that paying interest on bank reserves is not going to stop banks from expanding credit… After all, there are always opportunities to lend money at much higher interest rates than the federal-funds rate.

“We can thus conclude that the massive increase in banks’ excess reserves is a potential threat for an explosive credit creation some time in the future. Contrary to popular thinking, we suggest that the new setup, which gives the Fed total freedom to pump money, can only destabilize the financial system and the economy.”

Of course, this isn’t the last word. Only time will tell how we exit the precarious monetary situation that the crisis, and the Fed’s response to it, have created.

But those who argue that the Fed will be able to mop up the massive liquidity they’ve poured onto the economy ignore the fact that this institution, and governments in general, have never been able to escape from a monetary expansion without significant inflationary after-effects.

And because the Fed is now treading new ground in many ways, they cannot rely on past experiences to clearly guide them.

If we pull back from the economic intricacies and simply look at the big picture, does it seem remotely feasible that the U.S. and the world can employ such monetary and debt expansion without considerable inflationary consequences?

While I have many reasons to be doubtful that we’ll see 70s-era price inflation as measured by the consumer price index (CPI), I am absolutely confident that we will see price inflation in commodities and other assets.

And that will be good news for investors in gold and resource stocks.

Fed Admits Hiding Gold Swap Arrangements
Our friends at the Gold Anti-Trust Action Committee (GATA) have scored another huge coup. In response to a freedom-of-information (FOI) request, the Fed has essentially admitted that it has gold swap agreements with foreign banks that it doesn’t want publically acknowledged.

GATA had requested from the Fed any information or correspondence on gold swaps, which are transactions in which monetary gold is temporarily exchanged between central banks or between central banks and bullion banks.

But GATA’s request was denied, and the organization’s appeal was answered by a Sept. 17 letter from Federal Reserve Board member Kevin M. Warsh, who was formerly a member of the President’s Working Group on Financial Markets.

Warsh wrote that, “In connection with your appeal, I have confirmed that the information withheld under Exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you.”

As GATA secretary and cofounder Chris Powell notes, “The disclosure contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.”

GATA has the right to further appeal through the legal system, and plans to do exactly that. A federal lawsuit will be quite expensive, but well worth it for gold investors who need market transparency to unlock gold’s true value in today’s uncertain world.

As you may know, I’ve never been a big believer in day-to-day manipulation of the gold market by the “powers that be.” But I do believe that governments have and are acting over the long term to keep gold in chains. They’ve done it before, both covertly and openly. And they currently manipulate every other investment market. So why wouldn’t they also do it in gold, the very measuring gauge of their performance?

So I urge all serious gold and resource stock investors to help GATA out. It’s not just their cause—it’s a cause for all of us. GATA is recognized by the U.S. Internal Revenue Service (IRS) as a nonprofit educational and civil rights organization and contributions to it are federally tax-exempt in the United States.

Just as important, you can help by bringing this issue to the attention of news organizations and other investors. With the U.S. dollar at a crucial turning point, and with the International Monetary Fund (IMF) and other official organs needing to keep the gold price suppressed, it has never been more important to make the gold market open, transparent and honest again. To learn more about GATA, this issue and how to donate, visit www.gata.org.

—Brien Lundin

Yet in my lifetime, and that of many others now living, that is what we witnessed in Germany, Poland and the occupied territories during World War II. There was at first a gradual, and then the total, erasure of civil and economic rights. By war’s end in 1945, millions had died. But millions more, those lucky enough to survive, were displaced refugees who lost everything—property, homes and family.

Yet, when this turmoil began in the 1930s, there were those who were smart enough to realize early on what was happening. These people planned accordingly and escaped with their lives and their fortunes. They got out before asset confiscation, currency controls and financial restrictions were clamped down in their home country.

I don’t mean to belittle the heroic sacrifices of those who lived and died in that era. Nor do I want to overstate the seriousness of the current situation in the U.S. But I believe sovereign individuals have to accept the fact that our rights and liberties now are under attack by our own government. Equally alarming is the perilous economic state of not only our government, but our country as well.

Why You Need a Plan in Place
Consider the facts: Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy—26 percent—than at any time since World War II. Facing a $2 trillion deficit in 2009, a $12 trillion national debt and a declining dollar, the president calls for more and bigger programs for healthcare and just about everything else.

Higher taxes, inflation and economic collapse seem all but inevitable.

Given this dangerous state of affairs, common sense dictates that you should have an escape plan in place for your family and your assets. If the worst comes to pass, you will be ready.

While it may seem like an extreme step, expatriation—the process of giving up one’s citizenship—might not just save your wealth. It may save your life.

And the process, while dramatic, is relatively straightforward.

Every year about 250,000 U.S. citizens and resident aliens leave America to make a new home in some other country. More than 5 million Americans now live abroad. Only a tiny fraction of these people give up their U.S. citizenship, and of those, most do so for non-tax reasons.

Step #1: Find a New Place to Call Home
One of the first steps toward expatriation and escaping U.S. taxation is finding a new home country that best suits you and your personal tastes.

If you have a genuine interest in living offshore it’s best to take a “test drive” of at least several months by living in your chosen country before you make a final decision. Be sure to pick a country with a “territorial tax system” that does not tax offshore income—only income earned—within the country.

Most countries will welcome you as residents, but on their own terms. Some countries, such as Switzerland and Austria, prefer wealthy entrepreneurs willing to invest and create jobs in exchange for special tax and residency deals.

Other countries, notably Panama, Uruguay and Belize, take a different approach. They have special laws to attract foreign retirees of more modest means to take up residence. They welcome you, not just with a lower cost of living, by also with real estate and import tax exemptions, discounts on many goods and services, tax-free offshore income, and quick approval of resident applications.

While these so-called “pensionado” programs in Panama and Belize require minimal guaranteed annual income from established pensions, neither program leads to eventual citizenship. However, many of their immigration programs do. Uruguay’s retiree program does grant eventual citizenship.

Step #2: Secure a Second Citizenship
A second major step on the road to expatriation is acquiring a second citizenship. Simply put, this means that you are legally a citizen of two countries at the same time, qualified as such under each nation’s law. The U.S. Supreme Court has affirmed Americans’ right to hold dual nationality, although some countries do not permit it.

Millions of American citizens potentially qualify for various reasons—ethnic heritage, religion, country of birth or where their spouse was born. While it’s impossible to know exactly how many Americans have acquired another passport, experts put the number of U.S. citizens who either have, or are entitled to have a second passport at more than 40 million.

Based on your ancestry (parents, grandparents), several countries encourage foreigners to apply for citizenship. The most notable are Ireland, Italy, Poland, and with some qualifications, the United Kingdom, Spain and Israel.

If you don’t qualify for a citizenship thanks to your bloodlines, economic citizenships are available. If you want a fast second passport, two countries, St. Kitts & Nevis and Dominica, sell quick “economic citizenship” but at very high prices. However, both programs are perfectly legitimate.

It’s also important to note that dual citizenship might result automatically for some people. This can occur, for example, when a child is born in a foreign country or if a U.S. citizen acquires foreign citizenship through marriage to a person from another nation. Often these types of automatic options are overlooked, so check to see if you qualify.

Keep in mind that you can’t end your U.S. citizenship without having a valid second passport. You cannot be a proverbial “man without a country.”

The final step to freedom is to go to a U.S. embassy or consulate and hand in your U.S. passport. You will also need to sign an official document stating that you are renouncing your rights to U.S. citizenship.

Ultimate Estate Plan
Expatriation is indeed “the ultimate estate plan” in the very real sense that it gives you the legal right to stop paying U.S. taxes forever. However, it is a major step that will separate you from family and friends and treat you as a foreigner when you travel to the U.S.

Expatriation works best for those who have substantial liquid assets that can be transferred to the low tax country of choice. This process requires professional assistance for coordination of assets planning, assessing tax consequences and acquiring a second nationality.

A drastic plan? You bet. But for the person who wants a permanent and legal way to stop paying U.S. taxes, expatriation is the only option—and it could be a lifesaver in a crisis.

For information on offshore residence and dual citizenship, see my new 7th edition of The Passport Book. It covers some of the best offshore jurisdictions for whatever needs you have.

—By Robert E. Bauman J.D.

They weren’t alone. Investors and analysts were similarly surprised by the power and persistence of the rally in the broad U.S. equity market, and were left grasping for excuses.

The common denominator behind both bull moves: a declining dollar.

Bucking the Trend
Gold and stocks aren’t known as correlated asset classes, to be sure. So their almost perfectly choreographed moves in opposition to the dollar meant that analysts had to explain not only their individual moves, but why they were moving in unison.

Of course, it wasn’t too difficult to connect the stock and gold moves to the weakening dollar. But from there, most supposed experts were left scrambling.

They mentioned a growing dollar carry trade, wherein extremely low interest rates in the U.S. prompt investors to borrow dollars to fund riskier and higher yielding investments elsewhere.

This trade has, indeed, grown. And it will continue to have an impact, as long as the Federal Reserve Open Market Committee’s statements keep noting that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

If dollar interest rates are going to be low for the foreseeable future, why wouldn’t you arbitrage those low rates against higher yields elsewhere?

Another excuse put forth for dollar weakness has been the comparatively stronger economic growth rates in China and the rest of Asia. It seems obvious that Asia is far ahead of the West in the economic recovery, and this relative strength has been attracting capital to the dollar’s detriment.

But the columnists and talking heads on CNBC missed some of the most compelling reasons for the dollar’s swoon:

• The surprisingly broad push for a new global reserve currency to replace the dollar. China, Russia, Brazil, France and other nations have joined an international chorus calling for a new global reserve currency regime, one most likely based on a revamped International Monetary Fund (IMF) special drawing right (SDR).

The calls for talks on this issue have come so frequently, and the silence from the Obama administration has been so obvious, that what once seemed little more than bluff and bluster now appears to be the advance signs of an inevitable abdication of the dollar’s reign as the king of currencies.

I’ve covered this frightening development in recent columns so you know that if President Obama allows this to occur I’ll view it as one of the greatest foreign policy failures in American history. And the fact that the current administration doesn’t view it as such is what truly scares me.

• The socialization of the American economy. From bailouts to nationalized health care, from more steeply progressive tax rates to the assumption that government can dictate private sector compensation…and the myriad other assaults on capitalism and individual liberty now coming out of Washington, it’s obvious that the America of tomorrow will no longer resemble the dream of our founding fathers.

This concerns not only freedom-loving Americans, but also anyone anywhere in the world with assets in the U.S. When foundational principles are ignored as a matter of political expediency, when the rule of law offers protection only to favored classes or industries, then capital will flee to regimes that offer greater safety and certainty.

This is, in fact, a big factor behind the diminishing role of the U.S economy, and the decreasing relative value of the American dollar.

• The massive issuance of U.S. dollar debt and currency. I don’t want to belabor the point, but the world has been flooded with liquidity via the creation of unprecedented levels of new debt and currency.

The U.S. hasn’t been the only violator in this regard—only the most egregious.

Some argue that the Federal Reserve, having created much of the new liquidity with the figurative stroke of a pen, can mop it all up just as easily. They ignore the fact that if the Fed was so prescient and powerful it would have never been faced with having to create all that liquidity in the first place.

The Fed is so fearful of deflation, and has become so politicized, that it will almost assuredly overshoot the mark and leave its foot on the monetary gas pedal too long.

The bottom line is that the supply of fiat currency in the world at large has risen precipitously, but to a significantly greater degree in the U.S. While this will translate to higher asset prices generally, it will also translate to a lower relative value of the U.S. dollar.

The writing is on the wall, and investors know it.

A Battle Royale
In the meantime, the bulls and the bears have drawn the battle lines over gold and amassed on both sides what may be the most powerful forces we’ve seen for years.

Consider that the Large Commercial Net Short position in gold has risen to record levels, but on an absolute basis and as a percentage of total open interest. On the other side of the bet the speculative long position has also soared.

As long-time readers know, the large commercials are most often correct in their bets on gold. The reasons for this are two-fold: 1) Because they are so intimately involved in the gold market they understand the underlying forces much better, and 2) because they are typically hedgers who reflexively short gold in a rising price environment, their increasingly larger selling tends to create a self-fulfilling prophecy in lower gold prices.

So, again, when they pile on historically large short positions, gold usually heads south. However—and this is an important distinction—when they are wrong, they are wrong in a very big way.

As I noted last month, a prime example of this came in late 2005, when the large commercials were forced to cover their bets against gold en masse…with the result being a leap in the gold price from $450 to $700 over the coming months.

So the current situation is crucial. If the large commercials are forced to cover, they could send the price skyrocketing.

If the speculative longs are forced to sell out, gold could crater.

Ironically, some of the pressure has been let off by gold’s recent retreat below $1,000. The Commitment of Traders (COT) report for the week of gold’s highs shows that the larger commercials had added even more to their short positions, establishing a new record of 287,610 contracts net short.

However, this huge cumulative short position also acts as a cushion on any price declines. Undoubtedly, as the gold price fell from the recent heights, commercials began covering some of those short positions, helping to prevent further declines.

The physical gold market has also entered into this battle. Here we see a number of new factors coming into play…

First off, we saw the announcement by Barrick Gold that it had—finally, after a $750/ounce rise in gold from 2001—decided to buy back all of its remaining gold hedges.

Whether you think this announcement is bullish or bearish depends on your position in the market…and whether you’re a “glass-half-full” or “half-empty” sort of person.

In other words, once Barrick bought back all of its hedges (and it was rumored that they had already begun doing so in the preceding weeks), then that potential bullish factor would be removed. That’s the glass-half-empty view.

The glass-half-full view holds that Barrick’s upcoming buying will only add more pressure to an already drum-tight gold market.

Not long after Barrick’s announcement, we heard from the International Monetary Fund (IMF) that it was ready to begin the sale of 403 tonnes of gold. This didn’t have the bearish effect that similar announcements have had in the past when this issue has been trotted out to dampen gold price rallies.

It didn’t scare the market much this time because the sale would either come under the umbrella of the Central Bank Gold Agreement (where central bank sales had already slowed to a trickle), or the entire amount would be taken up by China or another central bank. The latter event would be net bullish for gold, by implication more than direct effect.

And finally, we’ve seen surprisingly strong physical demand from Asia, particularly India, despite the rising gold price. The reason? Festivals in India and government programs encouraging gold buying in China helped boost demand, and the weakening dollar meant that gold’s price rise was mitigated in local currencies.

So we can expect that any significant decline in gold, especially if it’s not accompanied by dollar strength of the same degree, will be met by increasingly large physical demand from Asia.

A Pressure Cooker About To Blow
So, the battle lines have been drawn, and it seems the gold price is destined to break strongly one way or the other.

Technically, the extensive consolidation pattern traced out by gold argues for a break to the upside. More fundamentally, the towering net short position of the large commercials seems to favor a correction, although the recent decline below $1,000 may have alleviated some of that pressure.

Regardless of the outcome, it seems safe to say that this rally has already demonstrated greater strength and resilience than anyone ever expected. Even if gold corrects, the price has spent enough time well above $1,000—setting new daily close price records in the process—to make this an important and confirming move.