Some believe the Fed would like nothing else but to inflate away our debt. Why? If today's debt, in dollars, can be paid back with future dollars worth less, inflation has then, effectively, discounted the debt.
For individuals, a good example is your mortgage. In a true inflationary environment, the cost of goods, services and wages all rise together. So, while your home value may rise, your mortgage balance did not inflate proportionately with the inflated value of your home. Hence, you are allowed to pay off your mortgage debt with dollars that have lost purchasing power in the case of almost everything except your mortgage balance.
Such is the same for the Fed/Government. If they breed inflation, it then becomes that much more manageable to pay off today's debt with future dollars that are worth less.
I hearken you back to August 15, 1971 when Richard Nixon announced he was taking the U.S. off the Gold Standard. At that time Nixon realized foreign countries were hoarding more gold and silver backed currency than could actually be redeemed by the precious metal's reserves we held. By taking us off the Gold Standard the U.S. was then free to print dollars backed by the full faith of the Government - NOT GOLD!
From that time to January 1980, inflation ran near 20% and so did interest rates. Gold prices climbed 1700% by some measure. To obtain a complete report titled, Will Rising Rates send Gold up 1700%? Click here to request the information offered.
By taking us off the Gold Standard, Nixon put the U.S. in a position of being able to pay off dollar denominated debt with dollars that became worth less once the gold backing was removed.
In a Reuters report dated Feb. 1, we find evidence the Fed is already pondering QE3. See Kansas City Fed President Thomas Hoenig's comments in this article. We're only about half way through QE2 and already QE3 is appearing on the radar.
In a November 5, 2010 report, I cited Goldman Sachs claims that it could take $4 trillion more of Quantitative Easing to get us out of this mess. Hoenig, regardless of his personal belief in QE, has now indicated it may be true that the stage is set for many years of additional QE.
Is it too much of a stretch to believe the Fed wants higher gold prices? As holder of the largest gold reserves in the world, (8966 tons worth some $387 billion) the benefit to the U.S., of gold prices double or triple where they are today, becomes apparent. Now we are looking at two benefits to inflation. One being, it allows you to pay off today's debt with future dollars worth less. The other is higher gold prices.
Some believe higher gold prices could put the U.S. in position to back the dollar, at least in part, by gold. This is rumored to be what some Arab nations intend to do with the Dinar. China is also rumored to be considering backing their currency with gold. If this truly is the case, the U.S. would have to be in a similar position to do the same with the dollar.
Of course this is all theory but it does go a long way toward explaining why central bank gold demand is soaring. It also gives good reason for all of us to own a few gold coins. Lear Capital