It’s not only Wall Street that is being bailed out by the US taxpayer. They’re going to have to find another $25bn to save Detroit too.

This is another nail in the dollar’s coffin. And it will be fantastic for gold.

The House of Representatives is in the final stages of agreeing a $25bn package of low-cost loans to carmakers. It’s virtually a done deal.

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This loan is separate from $700bn bailout for the banking sector, which is still being debated in Congress. The bailout plan is growing bigger by the day.

This is another industry that has brought about its own demise. It failed to invest in fuel efficient cars – and now people can’t afford to drive their gas guzzlers. Corporate America screws up. US taxpayers pick up the pieces. It spells doom for the dollar.

The recent revival in the dollar’s fortunes appears to be over. Once the fall starts, it’s going to gather significant momentum.

In an interview with Bloomberg yesterday, Barrick Gold founder and Chairman Peter Munk said he now expects a move away from the dollar and into gold. I agree.

He was talking about what he called “major, major” holders of dollars. By this he means foreign governments and sovereign wealth funds.

Gold has added around 20% since the collapse of Lehman Brothers. As governments holding dollars all over the world see the scale of structural problems in the US economy, they will seek to diversify. They are likely to become strong buyers of gold.

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It is now more likely that the Fed will have to cut interest rates at its October meeting. US interest rate futures show that traders now see an 80% chance that the Fed will cut rates. On 23 September, futures contracts were implying a 58% chance of a rate cut.

The banking bailout plan will erode the appeal of US Treasuries for foreigners. Government figures show that investors outside the US own 56% of the $4.8 trillion in marketable Treasuries outstanding, up from 42% of the $3.4 trillion five years ago.

The countries holding the most US debt are Japan, China, the UK and all the oil exporting nations.

Both China and Japan hold more than $500bn of US debt. With the Fed printing money to bailout out Wall Street and Detroit, US bond holders will be nervous.

Expect a rush of capital out of US Treasuries and a rotation into gold. To discover more ways to profit from natural resources click here.

Regards,

Garry White
Editor
Smart Commodities UK

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