While the financial media is quick to dismiss the recent rise in the price
of gold as nothing more than nervousness over Iraq or North Korea, they fail
to understand the significance of this reaction. In previous periods of military
uncertainty investors bought the dollar as a “safe haven” or “flight
to quality.” Now, this “flight to quality” results in investors
buying gold or the Swiss franc. The significance of this development should
not be over looked. It shows that investors no longer regard the dollar as
safe. When viewed from this perspective the rise in the price of gold becomes
far more meaningful. It is a vote of no confidence in the U.S. dollar. That
is the real story. Considering the fact that foreign confidence is the U.S.
dollar is so important to funding America’s current account deficit, and necessary
to keeping interest rates and consumer prices low, the potential negative consequences
from this development are extreme.