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How will I know when the government spending crisis is going to implode?

*Dow Theory Letters, Richard Russell, April 15, 2006

“On another subject, a lot of smart people are saying for a long time that the negative US current account and trade balance acounts are “unsustainable.” I agree. No nation can run up international debts of $2 billion a day forever. It can’t be done. But it can be done for quite a while — a long while, in fact.

OK, if the smart buys are correct and the US negative trade balance figures are “unsustainable,” then how will we know when we’re getting near or actually to the inflection point?

Here’s my answer — we’ll see it in the action of gold. So far gold has been rising in a measured, systematic way. There’s been no hysteria, no panic, no hurricane-like wind. You wake up in the morning and gold may be down 2 points or up 3 points, but the moves have been relatively subdued.

The Fed may tell us that there’s no price inflation. The Fed may take away the M-3 broad money supply figures so that we don’t know what’s happening to monetary inflation. But the Fed is not going to fool gold. When inflation, galloping inflation occurs, we’ll know it. We know that during inflation it takes an increasing amount of junk paper to buy real money — gold

Therefore, my “crystal ball” for monitoring what’s going on in the money market is gold. If gold simply “works its way” higher, I’ll figure that the Fed is simply doing its thing, which is systematically inflating the money supply at a rate of around 6% to 8% a year.

BUT — if gold starts to spurt higher, if I begin to see gold advances of 15, 20, 25 points a day, I’ll know that something is changing and my gold “barometer” is screaming — “emergency, something is very wrong.”

*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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