TREND #3: Decreasing appetite for US debt among foreign governments. China and others have been willing to prop up the dollar and buy treasuries because US consumption has fueled economic growth in their export sectors. However, as US consumption decrease, the incentive of foreign governments to finance US treasuries is also decreasing. If US consumption keeps droping off (economists are predicting first decline in consumer spending in years for the fourth quarter), then foreign interest in proping up the dollar will drop off too.



THESE TRENDS WILL CONTINUE UNTIL THE BREAKING POINT

Whether it takes three weeks or three months, these three trends will continue until the unavoidable conclusion: a loss of faith in US debt and the dollar. I am convinced that this loss of confidence will happen in the next three months, and, when it occurs, it will result in a sharp increase in the borrowing cost for the US (physical gold shyrockets above $1000 at that time).

After the loss of confidence, there are only two possible outcomes, both are disatrous for our economy and fantastic for gold investments:


1) Hyperinflasionary Collapse—Weimar Style self-destruction

In this scenario, the US doesn't have the will to allow the financial system to fail, and prints money to pay the high interest on its debt (just like the Weimar republic). This leads to the dollar's and the economy's collapse. I haven't studied hyperdeflationary collapses as much as deflationary collapses, but it isn't too hard to imagine what it will do to stocks:

Although most stocks don't collapse in dollar terms, hyperinflation will cause them to become worthless
Commodity stocks will maintain their value better (demand will still be down do to economic disruptions, counteracting the boost from the weakening dollar)
Unhedge gold stocks will soar because of gold status as a crisis and inflation hedge.

This is the worst outcome, because all the responcible Americans who didn't profit from wall street's and the government's exesses will pay the price as their savings are decimated by the worthless dollar. Hyperinflation would be far more painful than deflation.

Gold: It should be obvious that gold will do very well in a hyperinflasionary period. It's value would increase astronomically as the dollar becomes worthless.


2) Deflasionary collapse—The second great depression

In this scenario, the US allows the collapse of the financial system in order to save itself and the dollar. In other words, to restore investor confidence in the dollar and US treasuries, the US backtracks on all the steps it has taken to bail out the financial system so far (ie: guarantee of Freddie/Fannie Debt and money market funds). The government backtracking on its efforts to prop up the credit market will undermine confidence in the FDIC (removing one government guarantee undermines all the others), and depositors will begin withdrawing their money which soon leads to panic and runs on the bank. The economy gets caught in a vicious negative feedback loops which feed on each other:

As tax revenue falls, the government is cuts spending and increases taxes to restore confidence in governtment debt.
Job losses exacerbate foreclosures and defaults on debts like car loans and credit cards.
The effects of rising defaults, bankruptcies, and failures by companies and individuals spread to non-financial companies (big three and GE will be some of the first to fail)
Stock market crashes, which depresses spending
etc…

Basically the whole world gets caught up in something that looks very much like the last great depression, except worse in every way.


Gold: just like during the great depression, Gold's value will increase (1500-2000) while the price of everything else decreases due to deflation. From 1929 to 1934, gold went from $21 to $35 and its purchasing power rose 17 times.

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I recommend buying physical gold. Gold is the only asset which does well during both deflation and hyperinflation: