GOVERNMENT REVENUES DROP THE MOST SINCE 1932

Gold started out near unchanged today and moved into positive territory, climbing above $961 an ounce. Silver also posted a nice gain of $.13, while the dollar is down 2 basis points at 77.62 and oil is down $.86 at $70.74 a barrel. Most analysts thought the Dow would extend its gains today, but this morning it is down 12 points. While some analysts think gold may struggle a bit to break above the $962 resistance level, most think over the course of the next several months, gold will move substantially higher.

Among the reasons why analysts think gold will move higher is the inflationary pressure that comes from deficit spending. When the government spends more than it takes in, it must finance that either by borrowing money or by printing money. In the last several months the government has been printing money at an unbelievable rate. Money supply is expanding rapidly. At the same time, many central banks have reduced their dollar holdings. Those that retain dollar holdings have been shifting them from long-term government debt to short-term government debt. This implies that they are preparing to move out dollars and demand additional liquidity so they have the flexibility to do so.

Yesterday, the Associated Press reported that tax receipts for the Federal government are expected to drop 18% this year, the biggest single year decline since the great depression, while the deficit balloons to a record $1.8 trillion. Individual income tax receipts are down 22% and corporate taxes down 57%. Social Security tax receipts could drop for only the second time since 1940 and Medicare taxes are in place to drop for only the third time ever. The last time the government's revenues were this bleak was in 1932 in the midst of the depression. At this point, Social Security is in danger of running out of money by as early as 2012, just two years from now. In addition, Medicare has already run out of money and requires contributions from the general fund to make its payments.

With the situation as it stands, even if taxes were increased dramatically, we could not balance our budget. This country is in a dire financial situation and drastic change is going to be required. Whether the politicians like it or not, spending must be reduced or the dollar must be devalued, either informally or formally. A devaluing dollar is the essential definition of inflation. Therefore, those who study these issues and analysts believe gold will make a move upward in the very near term. Some analysts such as JP Morgan/Chase Bank believe gold will be above $1,000 an ounce by early September. Some think it will take a little longer, as Merrill Lynch estimates that gold will be above $1,000 by early October.

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