The dollar is being killed by out-of-control spending

Since March 23, 2001, we have been holding goldgrams as our Core Currency Position. On May 4th traders sold the US dollar by shorting the Dollar Index at 83.97. Stop out this trade if the Index closes above 81.30.

This past Tuesday the Dollar Index made a closing low of 78.40, which was a whopping -6.6% drop from our short sale price in only twenty trading days. The dollar literally collapsed, so it is not surprising that the dollar finally bounced somewhat toward the end of the week. But it is just that – a bounce. It is not a reversal in trend, at least not yet anyway.

The important point is that the fundamentals for the dollar continue to worsen. The dollar is being killed by out-of-control spending by the politicians in Washington, D.C. and a compliant Federal Reserve that continues to make sure the feds have all the dollars they want to spend.

In this regard, it is important to keep in mind these words spoken by Ben Bernanke a couple of years before his appointment as chairman of the Federal Reserve. “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

This statement is important for a number of reasons. These include:

1) It shows the mindset of policymakers. They believe that they can create an unlimited amount of dollars without any consequences, which of course is completely false.

2) It is typical of central bank pronouncements that are designed to mislead and misinform. In this case, we know that there is no free lunch in the real world, so in contrast to Bernanke’s statement, there is indeed a cost. It’s called inflation, and it is a cost borne by everyone who holds dollars.

As I have been noting in recent letters, the dollar is headed for hyperinflation. The dollar is headed for the fiat currency graveyard. Avoid the dollar. To be safe and to protect your money (i.e., that portion of your wealth that you choose to hold as liquidity), hold gold and/or silver instead.