Actually that's not fair. Rallies don't last forever. If you go back to March 6th, the ASX 200 closed at 3,145. It's up over 1,000 points since then-or 32.5% if you're trading at home. You'd expect a correction or consolidation at some point. We may be at that point.

But let's not leave Mr. Stevens out altogether. The Governor of the Reserve Bank of Australia gave a fascinating speech yesterday in Sydney. The market reacted to the speech by pushing up the Aussie dollar. It did so because Mr. Stevens said that Australia's economy and financial system have, "been travelling rather better" than other industrial economies.

This leads some people to believe the next move for Aussie interest rates is up, which is bullish for the currency (given that interest rate differentials to the U.S dollar and the Japanese yen are currently the big driver for the Aussie). Another way of looking at it is that interest rates are rising because the economy is healthier than we all thought.

We'll see about that. Stocks are certainly pricing in a profit recovery (about which we have our doubts). But Mr. Stevens also had a bit to say about credit markets and balance sheets, in comments that were not as widely reported as his comments on Australian housing. More on housing in a second.

But what about our claim this week that corporate cash flows are headed back to early 20th century level growth rates because of the burst credit bubble? Does the Governor of Australia's central bank agree? Judge for yourself.

Stevens writes that, "The pace of global growth, and the easy availability of credit, seen in the period up to 2007 was not the norm. It is unlikely to be seen again any time soon." So far so good?

"The path to economic health for the major countries of the world will still be a difficult one, because the legacy of the crisis will cast a shadow for some time." Could he mean that the destruction of bank collateral (commercial and residential real estate loan books) is still a problem restricting the availability of credit, or will restrict future lending?

"Major international banks will remain diminished in stature and balance sheet capability, and will be required to devote more capital to their strategies in the future. If global regulators have their way, the world will be characterised by less leverage and more expensive credit, than in the earlier period. We here in Australia have to accept that fact and accommodate it in our thinking."

Bravo! We reckon that means that Aussie bank profitability-indeed the profitability of the whole real estate, finance, and insurance sectors-will never again reach the 2007 highs, or not at least for a very, very long time. And if that's the case, it means that income investors used to counting on dividends from safe bank stocks may need a new game plan.

One other non-housing note from the Governor, this one on debt and the changing nature of global capital markets (due to the massive destruction of global capital). "Government and government-guaranteed debt of one form or another is rapidly increasing globally...Certainly people will worry, longer term, about increases in long-term interest rates potentially 'crowding out' private borrowers. To date, though, long-term rates remain historically low for public borrowers, despite the prospect of very large debt issuance."

The important words in that sentence are "to date." If historically low interest rates do not stay historically low, the cost of government-guaranteed debt is going to rise along with interest rates. And if the government itself maintains and increases its role as middle-man lender in the capital markets, we can't see how government borrowing wouldn't crowd-out borrowing by smaller businesses and even households.

We all know how efficient the government is at spending money and allocating capital to productive enterprise, don't we? This puts Aussie banks in a tough spot. They can use the government-guarantee to borrow. But who are they going to lend to? Households?

"The prominence of household demand driving the expansion from the mid 1990s to the mid 2000s should not be expected to recur in the next upswing," Stevens said. "The rise in household leverage, the much lower rate of saving out of current income, and the rise in asset values we saw since the mid 1990s, are far more likely to have been features of a one-time adjustment, albeit a fairly drawn-out one, than of a permanent trend."

Now that's a bit of a bomb shell. Stevens describes the whole model of getting rich in the Western world for the last twenty years and says it was a one-off, not to be repeated. But if you can't borrow, leverage, and spend your way to wealth as your stocks and houses go up in price, how are you going to get rich and retire?

Stevens says that, "The households of the Western world are currently feeling that they can no longer consume as they did, in part because the earlier spending is now seen to have been based on an unrealistic set of assumptions about long-run income and wealth. To that extent, there is no real way around a period of adjustment involving lower consumption for awhile." What about lower standards of living too? Hmm.

This is remarkably frank talk from a central banker. Stevens paints a picture in which business confidence has recovered. But he also shows that systemic leverage will have to be reduced and that the economy will enter a period where households lower their consumption "for awhile"-even as the government is forced to withdraw its support for "aggregate demand" through cash giveaways s mis-directed stimulus splurges.

All of that leaves us with a question about the Australian economy: who is going to be borrowing and who is going to be spending? What is going to drive the growth? If banks have to repair balance sheets by being more guarded with capital, and if consumers tighten their belts because their real net worth is falling (along with their real wages), why would a business borrow for demand that isn't there, assuming it could even get a loan from a bank reluctant to lend?

Our guess is that Aussie banks don't want to lend to businesses because there's too much risk in that. Besides, Aussie corporations have successfully tapped the equity and bond markets for new capital in last year, leaving the banks out of the loop. But one asset class Aussie banks are keen to lend to is residential housing. Why?

The destruction of bank collateral is what's behind the shrinking of bank profits and balance sheets. The largest part of Aussie bank collateral is in property, especially residential property. If banks don't keep lending to the property market to support demand and prices, prices will fall, damaging bank collateral and forcing the banks to tighten credit (housing finance) which leads to even further house price declines. Vicious circle. Feedback loop. Take your pick.

We were discussing just this subject earlier in the week over lunch with Phillip J. Anderson. Phil is the author of a new book called "The Secret Life of Real Estate." He's also one of our panellists for this Friday night's Debt Summit and the State Library of Victoria. He had some forecasts about the Aussie housing and stock markets that some investor might find...surprising.

Incidentally, if you can't make the Debt Summit, Phil is signing copies of his book tomorrow between noon and 1:30 pm at the Educated Investor Bookshop at 500 Collins Street. We recommend dropping in if you're in the area. It's a great book shop. And Phil's written a book about the real estate cycle that Aussie investors can't afford to miss.

Glenn Stevens says now is the perfect time to build more houses in Australia and hopes that the "ready availability and low cost of housing finance is translated into more dwellings, not just higher prices." He seems to be arguing that the Aussie property market could be in strife if someone doesn't start building more homes ASAP.

"If all we end up with is higher prices and not many more dwellings-then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track."

Dan Denning
for The Daily Reckoning Australia

• IMF Report Concludes Aussie Banks are “Very Sound”…
• Central Bankers Encourage Debt Booms That Become Debt Bombs
• RBA Rate Cut Does Little to Unlock Credit Market
• Australian Banks Must Increase Fees or Expand Loans to Remain Profitable
• Biggest Factor Affecting Consumer Price Inflation is Growth in Bank Credit

It is my contention that we will get neither hyperinflation nor deflation.

What is more likely is that over the coming months, we will get another deflationary scare. Any sell-off in the markets later this year will be met by an even larger stimulus from the policymakers and this will ultimately result in high inflation.

So, I maintain my view that due to the unprecedented policy responses around the globe, the world's economy will face high inflation over the medium to long-term. And the general price level will double over the
coming decade.

In the near-term however, we will probably get another period when the market will (once again) become concerned about the prospects of a lengthy economic contraction. It is conceivable that the 'green shoots' hype currently doing the rounds will soon be replaced by more economic worries as a second wave of foreclosures hits America later this year. So, it is possible that before year-end, we will witness large corrections in stocks and commodities. Conversely, we are likely to see big rallies in U.S.
government bonds, U.S. Dollar and Japanese Yen.

This near-term vulnerability in the markets is the reason why I have recently liquidated my 'long' positions in resources and emerging markets and gained a heavy exposure to long dated U.S. Treasuries. In my view, a
defensive investment stance is prudent at this juncture, as it will protect our capital and allow profit from the expected contraction. Once the pullback in the markets is complete, I will liquidate my positions in U.S. Treasuries and re-invest our capital in our preferred holdings in energy, materials, mining
and emerging Asia.

Look. In the business of investing, the tape never lies and it is worth remembering that Wall Street is littered with the graves of those who got married to one particular outcome and then held on to their ill-conceived
notions. At this point, when private-sector debt contraction in America is locking horns with central bank inflation, I prefer to have an open mind. Therefore, I am maintaining a defensive near-term investment position. If the market corrects over the following weeks, I will be in a position to profit from such a decline. On the other hand, if the major indices simply consolidate here and break above the recovery highs recorded last month, then I will have no hesitation in changing my defensive investment position. Put simply, I am currently watching and waiting patiently for the market to reveal its hand.

Coming back to the subject of this essay, the reason that I don't foresee immediate hyperinflation is because the velocity of money is currently weak. In other words, at least for the moment, the private sector in America isn't participating in Mr. Bernanke's inflation agenda. Despite the fact that Mr. Bernanke has injected a massive amount of reserves in the banking sector, this money is currently sitting as excess reserves within the American banking system. The fact that this money isn't being lent out rules out immediate hyperinflation. However, once the American economy stabilizes and the velocity of money picks up, these excess reserves will trigger a massive inflationary wave.

As far as deflation is concerned, I am of the view that the policy responses and our fiat-money system will ensure that the purchasing power of cash will continue to diminish over the medium to long-term. In fact, I am willing to bet that cash will probably be the worst performing 'asset' over the coming decade. Remember, in today's monetary system, central banks and governments the world over are free to create money out of thin air and this will prevent outright deflation in the global economy.

It is worth noting that in the past six months alone, China's commercial bank credit has expanded by a whopping US$1 trillion! Figure 1 highlights the surge in Chinese bank lending. Furthermore, credit is also expanding frantically in other Asian nations. So, contrary to the West, monetary policy is still alive and well in the developing nations and this factor also rules out outright deflation in the global economy.

In my opinion, rather than hyperinflation or outright deflation, we will witness elevated inflation after the American economy has stabilized. In the interim however, investors should be prepared for another deflationary scare and the associated market panic.

Regards,

Puru Saxena

for The Daily Reckoning Australia

• Inflation or Deflation?
• Hyperinflation and the Dollar’s Monetary Destiny
• Why Inflation Or Hyperinflation Lies in Wait for the U.S.
• Inflation is Our Future
• Hyper-Deflation on the Streets of Paris

For now, at least for this week, it sure does look like the appetite for risk is back. The U.S. dollar and Japanese Yen are weak, while commodity currencies like the Australian, New Zealand, and Canadian dollars are up. Bond prices are down, stocks are trending up, and even oil is creeping back over $50, looking to make a breakout. All of this confirms that we may have a "second wave rebound" from the March lows.

We have grave doubts about the durability of this rebound, given the state of the economy (unemployment, debt, and rising deficits). However we're not going to bother with any of that today. If you traded the rebound for profits, good on ya! We are using this moment of relative tranquillity to ponder what's just around the corner.

One object bearing down on the Aussie economy is a 'temporary' deficit that may last until 2016. Liberals, Labor, Republicans, Democrats...they all know how to spend money they don't have. All political parties appear to support big government these days. It's so trendy.

But you wonder if the Australian is starting to worry that the current government is writing checks the future will have to cash. Today's Australian Financial Review reports that next year's Federal budget deficit will be at least $70 billion. It says that Treasurer Wayne Swan has told his state counterparts that, "tax collections would fall by $200 billion over four years, worse than a $115 billion write-down in February."

"There is no doubt that the deficit will last longer, the temporary deficit will be longer, as a consequence of the revenue downgrades imposed on this country by the rest of the world," the Treasurer said. The AFR says the government plans to return the budget to surplus...by 2016.

Here's a stupid question: is something really temporary if it lasts for seven years?

However long it lasts and however big it gets, the deficit (and growing debt) mean Australia will be borrowing more to support its current lifestyle. This is an alarming trend. Temporary government spending and revenue programs almost always become permanent. And that's what would worry us about this deficit: it's the beginning of Australia's long road to debtor status.

But hey! Judging from the hate mail in the mail bag, people are tired of hearing about the long-term consequences of making promises you can't keep. It is not fun to think about the transfer of national income that occurs when you rack up debts to bond holders. And it's not fun to think about what happens when the government is unable to fulfil the promises it's made. So let's not think about that, shall we not?

Instead, let's go straight to the mail bag. Lots of good stuff. And finally, some contempt!

--Hi team,

Your comment "Copper rises on Chinese buy prospects" is interesting except that Chinese are buying copper ASSETS and will no doubt dictate the future price they pay from their owned Australian producers (refer Oz minerals buyout and others).

JHM

--Actually, we were quoting a headline from an article in The Australian, but your point is well taken. China is doing both. It's stockpiling raw commodities. And it's buying shares in publicly listed commodity producers. However, there's a big difference between a customer of an Aussie resource producer buying the producer, and another producer buying the producer. If the customer is buying the producer (iron ore), then it's conceivable the Aussie firm will be run not to maximise shareholder value but to give the consumer (who owns a sizeable chunk of equity) bargain basement prices. When a producer buys a producer, the interests of the two parties (getting the highest price of the commodity produced) seem more aligned.

--Dear DR,

I'm still curious as to how can we have hyperinflation and a property market crash at the same time. While I understand the logic, I still can't wrap my head around how the also heralded hyperinflation will come into this. Please end my suffering by addressing this in your next issue as this enigma just keeps me wondering.

Kind regards,

Susanna

--Ah. Two good questions. A real hyperinflation destroys wealth and puts a premium on real goods that are tradable (liquid). A house is not tradeable. So while the value of mortgage might quickly be inflated away in the early stages of a hyperinflationary scenario, we would not recommend it as a way to get rich. With prices so surreal, the value of large assets in hyperinflation becomes volatile. We'd suggest this makes for an illiquid market, and doesn't help you at all with respect to day-to-day economic activity (where you can barter liquid tangible goods for other goods or services). Try bargaining your rumpus room.

On the other hand, at least you have a roof over your head. It's a subject we need to more research into. But to be as clear as possible, we don't believe buying a house is a real hedge against hyperinflation. Not much is.

The other question you had is how it all begins, this hyperinflation. We would argue that the expansion of the global monetary base has been so large that it's going to be nearly impossible to reverse. So far, the huge expansion by the Fed and other central banks has not made its way into the real economy. Its being held as "excess reserves" at those central banks rather than loaned out into the economy where the multiplier effect would quickly lead to inflation.

The Fed thinks it can soak up these excess reserves before the banks loan them out. After all, the banks would only do so once they thought the economy was safe enough to lend into again, as my colleague Gary North points out. The Fed can try and prevent this increase in the money supply by raising reserve requirements (effectively forcing the banks to keep the cash parked). But if it does so, it risks derailing the so-called recovery. The whole point of the Fed's balance sheet expansion was to create a recovery anyway.

The Fed is hoping that it can reduce bank reserves before they hit the economy. It thinks that the demand for its short-term lending programs will go away as the economy recovers. It also says it can conduct "reverse repurchase agreements." This essentially means the Fed will be SHRINKING the money supply as the economy recovers.

Our guess? The Fed is going to have a devil of a time preventing excess bank reserves from departing the monetary base into the money supply and the real economy. New bank lending and higher interest rates will fuel even higher prices. And down the rabbit hole we go.

--Dan,

There has been a lot said about the problems easy credit has caused. But what is the solution to easy credit? How do you suggest credit is made harder to get? Is there any other ways than just lifting interest rates?

Glenn D

--Taking the power to dictate the price of money away from a cartel of bankers would be a good start. There is a market price for money, or a natural rate of interest required by lenders to make surplus capital available to borrowers. This natural interest rate is what Central Banking is designed to distort.

The government prefers a monopoly on money because two institutions stand to benefit the most from "just a little inflation;" the government and the banking sector. A free market for money would mean that the supply of credit would probably not exceed available savings. At the very least, the collateral required to secure a loan would be more substantial that it has been for the last twenty years.

Is there a cure, then, for credit excesses? The Austrian economists say no. The only cure is prevention. One the disease has been unleashed, you can only deal with the misallocated capital and try to liquidate the losses and begin again. Ludwig Von Mises argued that the government control of the interest rate is what sets off the boom/bust cycle to begin with. With a market rate of interest, these booms and busts would be moderated. But that would destroy the illusion that central banks can carefully manage an economy (price stability and full employment) by manipulating interest rates.

This was the subject line of an e-mail this week: "Stupid remarks from DR"

For example: "This represents a $50 billion deficit. Compare that to last year's $22 billion surplus. Not a good look for K-Rudd's CV."

What a truly mindless buffoon you appear to be.

Doubtless you also supported your erstwhile heroes who sat on an unprecedented minerals boom, passing the surplus out to their mates instead of investing the surplus in Australia's future.

Do you really believe that Rudd caused our current problems? Really? Maybe his solutions will prove inadequate or wrong but unlike you and your cronies he is doing something. And what suggestions have you got to get us out of the problems caused by your like thinking mates??

None, except the greed based "look after yourself and to hell with everyone else".

As I am sure even you have realised by now I am less than impressed by your vacuous political drivel.

Leave comments to those who are at least prepared to try and do something about the situation and stop the cowardly firing at their backs.

Contemptuously yours,

Alex Millar

--We don't support politicians in anything, ever. If more of us looked after ourselves and our neighbour and families instead of looking to government to "do something" the world would be a lot better off. Does this mean you'd like to unsubscribe?

--Dear Sir,

Your newsletter is really up with the best. My question is since most governments are going broke and most banks are broke where is all the money coming from? The Australian banks have $7-$14 trillion of toxic debt, the world supposed to have over $1000 trillion, ten times more than all the GDP of all the world. If this is the case, where is the money coming from? Who or what is holding up the economies of the world? If the money is just being printed which I believe it is there is no way out but a TOTAL collapse.

If you can answer me it would be really appreciated.

Thanks,

Rafael C.

--We're not sure about your toxic debt figures. But you ask a good question. Asset values-as we've found out in the last year-are largely bogus. They are deflating. As for what's holding up the economies of the world? Well, there are real industries and demand for real goods. But if you mean all this deficit spending and bail out money, that either is borrowed (mostly from Japan, China, institutions, and private investors) or its printed out of thin air by central banks.

--Hi,

Thanks for your constantly interesting pieces. My question is - why should we really believe gold has any value? For most of the last 5,000 years, animals were the key mode of long distance transport - they no longer are. Why will gold not go the way of the horse and cart?

I understand the reasons behind why you think the gold price will rise. However I think there is a flaw in your logic. You say that "But just remember, this whole experiment with fiat money is not even one hundred years old. Just because it's all we're used to doesn't negate that for 5,000 years of human history, people have been using gold as money". This always seems to be the argument for gold. The fact that it has always been used as a currency, therefore it is what will keep its value.

For gold to store value, don't people need to agree that gold is valuable? I have never understood why people put a value on gold. I agree it looks nice and is useful in jewellery and fillings, and I think it's also a reasonable conductor of electricity - but that's it.

If tomorrow, someone succeeds at alchemy, or the world just decides that gold isn't it anymore, it will be absolutely worthless - and it will go down the path of the Zimbabwean $. Wouldn't we be much better off storing some real, useful commodities (copper, tin, tarmac, soy, hogs, OJ - of course limited to the practical problem of actually storing these things). It seems to me that to believe gold will increase in price, requires other people to believe it will increase in price and has a real value/use - whereas actually it doesn't.

Thanks,

Samant

--Gold has four physical properties that have made it extremely useful as a medium of exchange over time. It is durable. It's divisible. It's convenient. And it's consistent. That doesn't mean other things haven't or can't be used as a medium of exchange. It just means these physical attributes of gold make it especially useful. That's not a matter of mystical belief. It's a practical benefit.

The fact that you can't "succeed" at alchemy is also what makes gold desirable as a medium of exchange: it's supply is relatively stable because it cannot be counterfeited by governments. The usefulness of any medium of exchange would decline if a person or a small group of people could easily increase the supply. It would make the unit less stable. Gold supply varies with mine production and above ground sales from central banks. But you can't just drop it from helicopters like brand new paper money. Well, you could, but it might hurt.

Does that mean it has intrinsic value? Well, if by intrinsic you mean that its unique physical properties make it useful as a medium of exchange, then yes. But value is only ever determined in an exchange. Gold is useful only as long as people believe it to be a useful medium of exchange. We think more people will realise that in the coming years.

--Dan

Are you an optimist, a pessimist or an economist?

Larry

--We're Catholic.

And one last note on property.

If we are already "smack in the middle of the biggest economic collapse in 80 years", this economic collapse is not that bad after all! In the worst case scenario; today's people living in the industrialized countries are unlikely to go begging for foods, unlikely to go through winter without enough clothing.

This financial collapse is largely on paper (or computer screen); the transfer of assert ownership from someone to someone else.

The world's factories are still standing, infrastructure are still there to facilitate economic activities. Demand is still there, the population in China is a few times that of the United States; with ever improving production technologies, they will not allow their living standard to be substandard for long.

Wherewithal is still there, if someone owe [sic] someone else three trillion dollars, that someone else must be rich, has plenty of money to spend and invest!

Even confidence is still there; for sure the share market will go down after ups, but the surge in the last two weeks indicated refreshingly, more investor [sic] than not don't share the dim view of the Daily Reckoning.

For those unfortunate home owners being foreclosed, many may not be eligible for a home loan in the first place.

I think you are wrong.

David Tam

--We'll drink what you're drinking. But fair enough. If we've learned one thing in the last year, it's that we can be just as wrong as the next guy. That's why we reckon it up every day. Keep thinking!

Dan Denning
for The Daily Reckoning Australia

• World Economy Faces Hyperinflation or Deflation?
• Brazil is a Good Place to Become Rich
• June Producer Price Index Indicates Slower Inflation in Australia
• Now is the Time to Find Out About Gold as Money
• We Don’t Serve Hamburgers

"The value of gold, as the only true 'hard currency,' is coming to the fore, as evidenced by the investment choices of some of the world's most seasoned investors."

- AngloGold Ashanti Ltd. Chief Executive Officer Mark Cutifani

For the first time in a couple of decades, some of America's most successful, big-name investors are buying gold. David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time. And then there is John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis.

Paulson just plunked down $1.3 billion for an 11% stake in AngloGold. He's also got a big position in Kinross Gold.

Peter Munk, the 82-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold's broadening appeal. "I have had more phone calls in the past six months than ever before - from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions," he says. "I am not saying George Soros, but people of that caliber have told me they are buying gold."

You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world's greatest investors may be the leading indicator for a quick 116% climb - to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed.

Why? The biggest reason is that the value of the dollar looks about as brittle as a 90-year-old's hip socket. And if you worry about the value of the dollar - or any paper currency - then gold is a good alternative.

In fact, gold has held up well while most everything else has taken a beating over the last year. On a recent conference call with investors, First Eagle fund manager Abhay Deshpande points out that gold is at a new high in just about every currency apart from the U.S. dollar and Japanese yen. "It has performed its job for everyone in these countries," he says. "It has held its value."

Take a look at the nearby chart and you can see the falloff of the dollar in recent years and the rise of gold.

"But there have always been worries about the value of the dollar," you say. "That's not new." True. What is new is a global financial crisis unlike anything we've seen in the post-World War II era. And that crisis has brought with it serious doubts - the most serious in decades - about the dollar's ability to keep its top perch in the aviary of world currencies. As that doubt increases, gold gathers new fans.

As I write, the headlines are abuzz with China's proposal to replace the dollar as the world's reserve currency. (The U.S. Treasury secretary, in a weak moment, said: "We are quite open to that." He took back those words, but the hammer had already hit the nail.) China and other countries hold a lot of dollars. And they are not too happy to see the U.S. government handing out bills like after dinner mints. America's $2 trillion (and ballooning) annual deficit and ballooning national debt causes them to wonder about the value of all the paper they hold.

They are not the only ones worried, as I noted up top. Many top investors are already buying gold.

It is easy to buy gold today with gold exchange-traded funds (ETFs). They are like mutual funds that hold gold. As investors pile into these ETFs, the ETFs' gold holdings also go up. It's one way to see the dramatic increase in demand for gold in just the last few quarters. (See chart below.)

So we have to ask: At $900 per ounce, are all the fears baked in or are we on some new history-making path?

I have a good friend who advises institutional clients on investing. As he reminds me, the really big money hasn't started buying yet. There are no big pension funds or endowments with significant gold holdings. That could change. If so, the gold price will go wild.

"Gold is a small market," Munk notes. Munk's career spans 60 years and he knows the gold market as well as anyone. Says he:

"Let's say a small percentage of the world's central banks - or simply the United Arab Emirates itself - do not believe President Obama's pledge that he will halve the U.S. deficit by the end of his first term. They shift some of their dollar reserves to gold. It would not take many decisions of this kind to push the price above $2,000 per ounce."

That's how gold gets to $2,000 per ounce - just a bit of doubt turning into action. The mind boggles at what would happen if China decided to hold more gold! Gold could well hit $5,000! As long as President Obama, Fed Chief Bernanke and pals treat the dollar like confetti, gold should continue to gather new fans. And gold stocks should do even better.

Gold stocks are supposed to do especially well as gold rises. But that has not been the case over the last year and a half. Mostly, this was because mining costs were rising as fast as, or faster than, the price of gold - thanks in part to record-high energy prices. But as Deshpande points out: "These things have reversed in recent months as gold stocks became quite cheap relative to the underlying value of the gold in the ground."

The case for gold and gold shares is a nice and clean setup, like one of those toy houses in the window at Macy's on Madison Avenue. The world order will not always hinge around the dollar. Global finance will not always find its center on Wall Street. As Munk pointed out: "Look around Davos this year. So Goldman Sachs cancels its dinner party. In its place, a Kazakh company has a dinner party."

As the dollar goes bust, who knows what will replace it? With gold, you don't have to worry too much about the answer.

Regards,

Chris Mayer
for The Daily Reckoning Australia

• ETFs Are Now Available in Australia
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• Exhausted Gold Shares
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• Gone Fishin’ Investment Strategy