Why the US Debt Is a Boon to Commodities

Physician's Money Digest, March 2007, Volume 14, Issue 3

Our nation's finances arein serious trouble, and ifit feels like you're notgetting the whole storyfrom those in charge,you just may be right. But which investmentswill keep you afloat as the dollarsinks? Why, commodities, of course.

Would You Invest in It?

Imagine there's a company you'vebeen following, and a few months ago itannounced a dismal $318-million loss.The CEO promised a company turnaround.However the company was hidingan ugly truth from the public—theywere actually keeping two different setsof books. The first set held the numbersannounced to shareholders and lenders,while the second set had the real numbers,showing that the company hasbeen bankrupt for years. The companywas only able to survive because lenderskept loaning money. The real numbersshowed that the company hadn't lostjust $318 million, but closer to $760million. It is unlikely that you'd invest inthis company. The problem is, you'realready invested.

This company is the United States.And the numbers are far worse than theexample. The United States is "officially" $318 billion in debt, with the realnumber closer to $760 billion. And thatfigure doesn't include the future obligationsof Social Security and Medicare,which pushed the actual national deficitin 2005 to $3.5 trillion.

In fact, the US government is dependenton new lending to stay afloat, to thetune of $2 billion per day. Often, thatcomes from foreign countries thatwould like nothing more than to help usdig a bigger hole, such as Middle Easterncountries, Argentina, and Russia.

This debt exerts downward pressureon the US dollar. As more of the babyboomers retire, and more of thosefuture obligations become due, the governmentwill have to issue more dollars.This will lead to inflation and a severedevaluation of the dollar. Worse, currentgovernment bond owners maystart selling off their debt, driving thedollar down further and scaring awaynew lenders.

How to Take Advantage

How do you short the United States?By taking your current dollars andinvesting them in commodities, specificallygold and other precious metals,which can rise despite other externalforces. As a tangible asset with intrinsicvalue, commodities represent a saferefuge when other investments plungeor when geopolitical trouble erupts.

In the past this may not have beenenough to drive up commodity prices,as commodity producers generally producedas much as possible. Whenevercommodity prices moved up, theywould increase production, leading to aglutted market, and prices would againcome back down.

This is no longer the case. New managementteams are in place at manycommodity producers—executives withbackgrounds in investment banking.Only some of that money is going backinto increasing production. The rest isbeing used to buy back shares, pay offdebt, pay dividends, or acquire othermining companies.

All of these activities drive up thecompany's stock price, increasing shareholdervalue—but none of them increasethe world's supply of gold orother commodities (eg, Rio Tinto hasn'tdeveloped a new copper mine in over adecade, even though the price of copperhas quadrupled in the last 5 years).

All of this combined means that thiscommodity boom promises to be evenmore pronounced than past bull markets.I continue to believe that $1000per ounce of gold is not far away, andthat this is just a consolidation phasebefore its next blast upwards.

James DiGeorgia is editor and publisher ofthe Gold and Energy Advisor Newsletter(www.goldandenergyadvisor.com) and theauthor of the popular books The New BullMarket in Gold and The Global War for Oil.