You may have heard the talking heads on CNBC spouting off about the recent 3% rally in the dollar. In fact, some Wall Street legends like Jim Rogers and Byron Wien, have recently been buying dollars in anticipation of a near-term rebound…
But they aren't holding dollars for the long term. In fact, they're ready to drop the dollar the instant the rest of the market decides to get in.
Don't be one of them.
These traders know that the U.S. Treasury is sitting on a ticking time bomb: Over $2 trillion in short-term debt needs to be refinanced in the next 12 months.
And there's only one way they can do that… by printing even more money.
Read on to find out how to grow your wealth… even as the dollar is driven into the ground.
Inflation's Already Raging
Inflation is already here. It returned to positive territory in November, according to a report from the U.S. Bureau of Labor Statistics. The consumer price index (CPI) increased 1.8% from a year ago, the first positive reading since February 2009. Prices increased 0.4% on a month to month basis, and 4.8% on an annualized basis
But this is just "core inflation," which excludes food and energy.
I don't know about you, but I have to buy food and gas every week… so my wallet takes a major hit every time these prices go up. But, the U.S. government conveniently leaves these out… painting an inflation picture that is far removed from reality.
Fact is, real inflation is rapidly approaching 10% and will only get worse. Inflation devalues the dollar by reducing purchasing power and driving prices up.
At some point, even if the economy is slowing, the Fed will have to step in and raise interest rates. This will cause the trade deficit to explode.
Then, hold on to your hat as rising inflation prompts employees to demand higher wages to keep up with consumer prices, adding fuel to the fire. It's a vicious circle that can turn the economy into a race to unload dollars for tangible goods.
Americans have doubled down on debt
Americans will be in for a rude awakening in coming months when they discover the true scope of the massive national debt racked up by the U.S. government.
The government's debt has almost doubled in the last two years alone. At the same time, Americans' personal wealth sank – along with housing prices.
But the U.S. debt bomb has only just begun to tick.
Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion this year alone.
So looking only at short-term debt, we know the Treasury will have to finance at least $3.5 trillion worth of maturing debt in the next 12 months, an amount equal to nearly 30% of our entire GDP.
Currency speculators have a rule: in order to avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities.
The U.S. holds 8,133.5 metric tons of gold worth around $300 billion. The U.S. has strategic petroleum reserves of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether… that's around $500 billion of reserves.
Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short.
So the question is: How in the world can the Treasury get $3.5 trillion in only one year?
The answer is obvious: the printing press.
The Fed will take up the slack by printing money out of thin air and exchanging it for IOU's from the Treasury, further devaluing our currency and government bonds.
When Will Creditors Unload Treasuries?
Around the planet, concerns are already mounting about the U.S. debt bomb.
The cost to insure Treasury debt with credit default swaps (CDS) on the over-the-counter market rose by a whopping 66% in the fourth quarter, according to an index compiled by CMA Datavision. The index is a benchmark for the cost of protecting bonds against default — an increase indicates a deterioration in perceptions of credit quality.
Only the U.K. and Greece had worse performing CDS'.
The biggest question is how long will it take for our creditors (mainly China) to wake up and wonder how they're actually going to get repaid. If you can't pay off all of your foreign debts in the next 12 months with hard reserves, you're a terrible credit risk.
Before long, speculators will start targeting our bonds and currency, making it impossible to refinance our debts. And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party's over.
As an alternative to U.S. debt China has already begun the process of diversifying its reserve holdings away from the dollar. And China isn't alone — other emerging markets are going the same route.
The Indian and Russian central banks have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tons in November. Sources in Russia say the central bank there will double its gold reserves.
Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.
All of this will lead to a severe devaluation of the U.S. dollar, or even a default. Based on our need to refinance over $3 billion in debt in the next year, expect it to happen within 18 months.
One Stock to Buy Now
When the dollar takes a nosedive and its prospects for a turnaround dim, investors will flee the currency and take refuge in hard assets – most notably oil and gold. But don't just buy gold bars or bullion… look for a company that leverages the price of gold for real gains.
That company is Yamana Gold Inc. (NYSE: AUY).
Yamana Gold is a growing gold producer with a $6.8 billion market capitalization that made an unexpectedly good profit in the fourth quarter of 2008. What's more, its gold production is expected to double to 2.2 million ounces per year by 2012, primarily from its Brazil and Argentina mines.
Yamana is also expanding both production and reserves (currently 19.4 million ounces) with operations in Canada and Latin America. That's because Yamana Gold went on a spending spree in the past two years, buying up junior mines around the world to lock in reserves.
Even better, because Yamana is a gold producer it benefits from leverage on the price of gold. Here's how: If gold trades at $1000 and it costs the miner $500 to produce, they pocket $500 in profits. If gold moves up to $1200, but production costs remain at $500, profits move up to $700 – without having to mine any more gold! That's $200 higher than before, or a 40% increase from $500 profits. The miner's shares are then likely to appreciate by some 40% as well, while gold only appreciated by 20%. Pretty good deal.
That means that Yamana Gold has a huge potential benefit from the coming increase in gold prices. Invest now and watch your portfolio grow.
Editor's Note: Of course, there is one other way to protect your portfolio from inflation. Gold Dollars. Using a secure transaction from your own computer that takes just minutes, you can convert your dying dollars into U.S. Treasury-approved "gold dollars." Use them as you would regular cash – except as the price of gold goes up, you'll be able to buy more with 1 "gold dollar" than you could with an old George Washington! It's so simple; we'll tell you how to do it for free. Just go here.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.