Smith Faculty Opinion Article
September 28, 2010
Why Gold is $1300 an Ounce!
Gold is approaching $1300 an ounce for good reason. The Obama Administration
has flooded the world with greenbacks and Treasuries, global investors have
little confidence in the management of the U.S. economy, and investors have
taken refuge in gold.
Since President Obama took the helm, the U.S. trade deficit increased 60
percent. At more than three percent of GDP, it drains off more demand for U.S.
made goods and services than the President's stimulus spending has added.
America's chronic trade imbalances stem from dysfunctional energy policies
imposed by Democrats in Congress, and continuing tolerance for Chinese
mercantilism. As the U.S. economy recovers, oil and Chinese consumer imports
rise, choking the expansion-that's why demand and economic recovery are
flagging, stocks can't sustain momentum, and industry won't invest or add jobs.
Democrats in Congress insist on energy policies that limit domestic oil and
gas production, and rely on higher prices that instigate conservation. Those
have failed to stem dependence on imported oil, the outflow of dollars, and the
chokehold Middle East investors, and now China, have attained in global capital
markets and on U.S. government finances.
Cheap imports from China have chased millions of Americans from manufacturing
jobs, as the U.S. purchases from the Middle Kingdom exceed sales there by more
than four to one. The trade deficit with China is about $300 billion and
continues growing year after year.
China has engineered this competitive conquest by keeping its yuan
artificially inexpensive against the dollar and euro. Annually, it sells at deep
discount about $450 billion worth of yuan for dollars, euro and other currencies
in foreign exchange markets. That provides a 35 percent subsidy on Chinese
exports and keeps Chinese goods deceptively cheap on U.S. store shelves.
The Bush and Obama Administrations have sought changes in China's currency
policies through diplomacy but have failed-and will continue failing as long as
the rhetoric of appeasement and restraint from self help are the cornerstones of
Instead of advocating strong U.S. action against Chinese mercantilism, the
U.S. Treasury has tarred as protectionist those who propose substantive American
The huge trade deficit must be financed by attracting foreign investment in
new productive assets in the United States or by printing IOUs. Investments have
only provided a small portion of the necessary cash, so each year the United
States sells currency, bank deposits, Treasury securities, bonds, and the like
to foreigners. Those claims on the U.S. economy now are about $7 trillion.
That floods world financial markets with U.S. dollars and paper assets that
function much like U.S. dollars-what economists call liquidity. All that evokes
an iron law of the universe: if a government prints too much money, it won't
have any value.
Add federal budget deficits exceeding $1 trillion a year for several years to
come, and an economy that can't produce enough to sustain Barack Obama's
appetite to tax and spend, and investors are simply smart to short the dollar by
loading up on gold.
That's why gold is $1300 an ounce!
Peter Morici is a professor at the University
of Maryland School of Business and former Chief Economist at the U.S. International