The Carlyle Group, which recently defaulted on $16 billion of bad mortgage debt, is on the verge of collapse after failing to agree to a new financing deal. This news shattered already fragile confidence and sent investors running into safe havens like oil and gold.
Gold is telling the world that inflation is back. In recent years investors have relied on real estate to serve as their primary inflation hedge, but now that housing is in decline, they're turning instead to precious metals.
The U.S. government's official "strong dollar" policy has failed. When the dollar traded at $1.18 euro in 2006, I said to expect $1.50 euro. The euro is headed toward $1.70 and oil is headed to $125 a barrel.
The Fed now faces a "mission impossible" task of navigating the U.S. economy between a recession and rising inflation. Expect tough inflation talk, but a flood of paper money in 2008. We also have trillions in bad mortgage debt and a ticking derivatives "time bomb."
In the 80's and 90's cash was king. But in the 21st century gold became an alternative to the soft dollar, lower returns and higher market volatility. A major economic paradigm shift occurred in 2001 and has gained momentum every year since.
The era of paper currencies and complicated structured investments is giving way to a new era of tangible assets. Gold is emerging as a preferred asset class in a world drowning in debt. Gold serves the public as a true barometer of the dollar's value worldwide.
In reality, gold's value hasn't gone up, it's the dollar's value that's gone down, thus driving gold prices up. For example, between 1792 and 1933 either a $20 gold piece or a $20 bill would buy a fine suit of clothing. A $20 gold piece will still buy a fine $1,000 suit, but today's $20 bill will not even buy a nice tie.
Long-term dollar weakness also puts U.S. security at risk. Trillions of dollars are now held by China and Mideast funds. CBS reports Israel and Iran are on the verge of war. Gold is the ultimate trump card against geopolitical wild cards.
