By Kishori Krishnan Exclusive To Gold Investing Newswidth=300

The Emperor is naked. The debt of the US government is turning out to be in fact irredeemable. And gold is poised to break out. Remember, gold outperforms in a crisis.

The inconspicuous beginnings of irredeemable debt have blossomed into a colossal edifice in the United States, a fantastic debt tower that is soon set to keel over. And to top it all President Barack Obama on Saturday further raised the debt ceiling.

Congratulating Congress for restoring a requirement that the federal government spend only what it can afford - a day after authorizing $1.9 trillion more federal debt, the President signed on the dotted line. And set the tone.

That one step has raised the government’s debt ceiling from $12.4 trillion to $14.3 trillion.

Remember just one point - As long as the US monetary and fiscal policies remain debt-based, all the signs herald that gold’s bull run is just around the corner.

The US debt crisis has also posed the question of how long the world’s leading power can remain its largest borrower.

Carmen Reinhart, an economics professor at the University of Maryland and a former IMF official, has been quoted by AP as saying that the nation’s fast-growing indebtedness may not have a visible impact at this point on ordinary Americans. But some day it will.

“Markets can turn very quickly. And a high debt level makes us very vulnerable to shifts in sentiment that we cannot predict.”

It is clearly a crisis of confidence. When investors find that their faith in paper currency is shaken, the value of that currency erodes. Additional sovereign-debt downgrades from ratings agencies are but one potential trigger of a currency crisis. Look at what happened when the EU pledged to aid Greece.

At such time and under similar conditions, gold soars, as investors seek to protect their purchasing power.

Debt tower

Back in the US, a spokesman for House Republican Leader John Boehner of Ohio has criticised Obama for the move.

“Why did President Obama choose to sign the largest increase in the debt limit in history behind closed doors?” said Michael Steel, the spokesman. “Perhaps because he just proposed a budget with deficits that his own administration officials define as ‘unsustainable’.”

The deficit is projected to hit a record $1.6 trillion this year, or 10.6 per cent of the economy.

The debt limit bill also enacts into law pay-as-you-go budgeting rules, intended to make it harder for lawmakers to add to the deficit.

Obama wants to reduce, what he on February 1 called “a decade of profligacy”. But by signing on the dotted line, he has projected the government would run $8.5 trillion in deficits over the next 10 years.

And what does this mean for gold? A clear bull run.

Many analysts insist that gold’s rise above $1,000 an ounce was due to investor concern over the debasing of the US dollar. However, the very same policy prescription that caused the meltdown over a year ago is being used once again to refloat the economy.

Also, remember the downgrades in December last year, to government debt for Greece, Spain, and Portugal. All of them signalled upcoming debt related earthquakes.

Get ready for the aftershocks now.

Irredeemable debt has been with mankind for many years. Before August 14, 1971, debts were obligations, and the word `bond’ was just that: the opposite of freedom. The privilege of issuing debt had a countervailing responsibility: that of repayment.

Do you see any of that happening over the next couple of years?

Ron Holland in his piece, has even suggested secession as a solution to what he terms the Washington Debt Threat.

“Breaking free of the false chains that threaten our economic future from the likely Washington debt/dollar collapse might be our la

st chance to safeguard our financial security and liberty from the hyperinflation and crushing new tax increases to be forced on this and future generations from the bailouts and national debt,” he wrote.

All the new debt being created represents an equal amount of new dollars being created and going into the financial system. And the US dollar is bound to collapse under the weight of the massive deficit.

Remember the autumn of 2008, when the world stood on the brink of financial collapse, gold had plunged. It fell to $712.30 an ounce on November 12 2008, as investors repatriated risky assets, prompting the dollar to rise.

Juxtapose this against America’s debt load, that exploded during the financial crisis, with unprecedented government spending and by underwriting of private sector’s debt obligations. What happened to the dollar?

The US has reportedly sold more than $2.1 trillion of treasury notes and bonds in fiscal 2009, more than the previous combined two years.

Also, do not forget gold’s role as an overlooked benchmark, that shows the greenbacks’ rapid loss of purchasing power.

Gold is a barometer of investor anxiety, and clearly today, there is too much anxiety.