Gold Holds Steady Amidst Continuing Deflationary Pressures

By: Mark_OByrne

Gold was up marginally yesterday despite further strength in the dollar and a further sharp fall in the oil price. Deflationary pressures continue to be prevalent and central banks internationally continue to aggressively cut interest rates in an effort to stimulate credit growth and inflate their way out of a possible Depression.

Barack Obama looks set to become the 44 th President of the United States of America and there is a hope that he may regain America's respect in the world with a return to more restrained and sane fiscal, economic and foreign policies. However, the honeymoon is likely to be very short as the new President will face the greatest challenge since the Great Depression of the 1930's. Arguably, Obama has an even more challenging task than Roosevelt had.

In the 1930's, America was the largest creditor nation in the world and was soon to become the greatest superpower of the 20th Century. Today America is the largest debtor nation in the world. Indeed, America is the largest debtor nation the world has ever seen and it its global ascendancy is now threatened by this staggering debt  and by the emergence of new powers and a new multi polar world.

American consumers have $14 trillion worth of personal debt and the national debt has risen sharply to some $11 trillion ($5.7 Trillion when President Bush came to power) and projections that this debt could surge to as high as $20 trillion in the coming years. And this does not count the staggering unfunded liabilities of either Social Security, Medicaid and Medicare . T he head of the Federal Reserve Bank of Dallas, Richard W. Fisher has said that the unfunded liabilities from Medicare and Social Security adds up to $99.2 trillion.

There is absolutely no way that the American people can fund these Social Security and Medicare obligations.  The United States has been living way beyond its means and will become a third world country unless something is immediately done to drastically cut humongous military expenditures and government spending.

The demographic time bomb facing the US as 78 million baby-boomers begin to retire in the coming years may make the current financial crisis look like child's play.

Mr. David Walker, the U.S. Comptroller General, chief accountability officer and head of the U.S. Government Accountability Office (GAO) has drawn parallels between the U.S. today and the end of the Roman Empire, warning there are “striking similarities” between America's current situation and the factors that brought down Rome, including “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government”.

This is not “anti American” as “pro American” liberals and conservatives alike have echoed these warnings in recent years. The Government Accountability Office  (GAO) has rightly earned a reputation for professional, objective, fact-based, nonpartisan, non ideological, fair and balanced reviews of government programs and operations.

Walker has said that fiscal responsibility must be a top priority and if this is done the problems challenging the U.S. can be overcome but “if they don't, I think the risk of a serious crisis rises considerably”. This crisis would almost certainly be monetary in nature with a possible collapse in the dollar and the dollar losing its privileged status as the global reserve currency.

Even the most sanguine, tunnel-visioned bull would have to admit that the fundamentals of the US economy are bad and deteriorating.

The new President will face a herculean task if he is to succeed in preventing America becoming a second tier power as happened to Great Britain at the turn of the last century. This has obvious ramifications for investors who should focus on wealth preservation in the coming years.

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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