If one percent of the global value of stocks and bonds, roughly $960 billion, went into gold, it is entirely rational that the price of gold could rise to $10,000 an ounce. Shayne McGuire makes a convincing case for owning the precious metal in his new book titled Buy Gold Now.

Some 60 percent of paper dollars circulate outside the United States while foreign investors own the majority of US Treasury bonds. If all faith in the US dollar were lost, there would be no one to finance our $650 billion account deficit. Interest rates and inflation would inevitably soar and financial markets would implode, thus leading us down the path to a severe recession.

The US government confiscated gold in 1933 just as US citizens and foreigners were attempting to flee the major paper currencies. Unlike most authors who suggest investing a portion of one's portfolio in exchange traded funds and gold stocks, McGuire suggests an entirely practical approach -- owning gold coins. In the 1960s, Warren Buffett escaped the financial markets to the shelter of dollars. As we carry on our discussion, we will learn why this is a particularly unwise strategy in today's market.

Sheryl Sostarich

The most alarming document in history has to be the letter of December 14, 2005 from the comptroller general telling us that every full-time worker in the U.S. owes $375,000. Equally scary is the request from Treasury Secretary John Snow asking to raise the federal statutory debt limit for the fourth time during President Bush's term in office.

While the federal debt has passed the $9 trillion mark, this is miniscule compared to the total national debt of $65 trillion, which takes into account what is owed Social Security, Medicare and Medicaid recipients. Is the entitlement panic blown out of proportion? In McGuire's opinion, yes, because the government can simply break its promises to the tens of millions of Americans on the verge of retirement. That is to say, entitlement benefits like Social Security are not contractual obligations and we can claim no legal right to Social Security.

Sheryl Sostarich

For the first time in history, the household debt is nearly equal in size to what we produce in a year. Far more of our earned income is going into real estate than is going into the bank. Now that we have tied up $5 trillion in mortgage debt and locked it into the hardest asset there is to sell, have we become sitting ducks?

Roughly 40 percent of all corporate profits are derived from financial activities. Since debt is a big driver of the American economy, what will happen if credit capacity shrinks and we are forced to borrow less?

The U.S. level of consumption, which now stands at 70 percent of Gross Domestic Product, is considerably higher than in Japan, China or Europe. These formidable nations have two things in common -- ample savings and no trade deficits that need to be financed. Indeed this is something to be concerned about.

Sheryl Sostarich

Our rising current account deficit (a broader measure of the trade deficit) shows that our economy consumes 6 percent more than it produces each year. What is more astounding is that our current account deficit, which is funded by $2 billion in foreign capital, absorbs most of the world's net savings.

Shayne McGuire believes that the U.S. has avoided a severe devaluation because of the trusted economic foundations laid down decades ago. Though the U.S. is the world's largest debtor, it remains the lender of last resort to all nations.

Japan has not collected on the debts it has made to the United States. The reason is, by cashing in dollars for yen, Japan would make the yen appreciate and squeeze the profits of its major exporting companies, namely Toyota and Canon. To keep its economy running as it does, Japan must maintain a massive current account surplus that encourages the U.S. to consume beyond its means and borrow even more from the rest of the world.

China, Russia, and Brazil have been amassing trillions of dollars in reserves. The tradeoff for the declining dollar is the continued lending by foreign nations in the U.S. economy. But the question on everyone's mind is, what if these nations suddenly decided to cash in their dollars?

Sheryl Sostarich

The world's smaller nations have been forced to buy trillions of dollars from the United States, not to defend their curencies from devaluation, but to defend the dollar from a collapse. In the words of Shayne McGuire, "the galloping dollar reserve accumulation, the funding of American deficits, and the accumulation of dollar debt has gone from a healthy international balance of payments to a potentially fractal situation."

The Bretton Woods Agreement has created a monetary paradigm where deficit countries needing investment capital must attract funds from suplus countries to survive.

Politically, China has bargaining prowess over the United States and could just as well stop lending to us if we were to impose trade sanctions against them. Or, China could unexpectedly stop buying our currency to, instead, spend these funds on its own infrastructure needs.

In the 1970s, American families saved eight percent of their take-home pay. Today, that savings rate is virtually zero.

Coming off the longest property boom in our history, it is clear that the bull market in real estate has ended as currencies continue to fall. That is to say, the problems emerging in real estate, which are closely tied to debt, could be the prime catalyst for a dollar collapse.

Sheryl Sostarich 

Thanks to a simple transaction at the bank, Americans have extracted close to 3 trillion dollars from their home values. American equity as a percentage of home values is at an all-time low of 52.7%. In other instances, home buyers have negative equity in their homes, either because they did not make a down payment at all or they made a very small down payment.

Beginning in 2004, one in four houses bought were purchased for investment purposes while another 13 percent were purchased as vacation homes. It became commonplace for Americans to cash equity out of their homes and invest it in something of higher returns. An increasing number of Americans were taking on more debt to invest in lucrative real estate deals.

Homeowners generally get back only 70 to 80 cents on each dollar of the cost to add a room or remodel a kitchen. A $40,000 investment immediately shrinks to $32,000 as mortgage payments, property taxes and utility bills become larger due to the equity cash-out. And the return was even worse if the home was sold shortly after making the improvements.

Can we really consider the home we live in as an investment? When real estate values were high, real estate was perceived to be a substantially better investment than stocks. In fact it is extremely difficult to turn a profit because of marketing fees, mortgage payments, property taxes, and maintenance costs, all of which reduce the expected return.

Sheryl Sostarich

Gold's value is derived in part from its rarity. The metal cannot be corroded by natural acid nor will it lose its shine, even after being submerged in the cabin of a sunken ship.

Gold thrived during the recessionary era of the 70s and languished during the locomotive bull run of the 80s and 90s. In the words of Peter Bernstein, "gold is the ultimate escape from risk." Every paper currency, bar none, has devalued against gold and gold is regarded as the foundation of the global financial system.

Gold has risen to new highs due to simple supply and demand metrics. Gold has risen to new highs for lack of any other investment alternatives. In this decade, stocks and bonds will be under pressure as the consumer-driven economy weakens, as corporate profits peak, and as financial stimuli from the Fed fails to have the desired impact.

Finally, gold has risen to new highs because of the unchecked use of derivatives. Derivatives are the least understood and most difficult asset to value. Long Term Capital Management, with its $1.25 trillion derivatives portfolio (leveraged at 100 times its underlying equity), nearly collapsed the global financial system.

Herein lies the challenge for the new century: the dollar's vulnerability could restrict the Fed's ability to head off the next financial crisis. Like everyone else, Shayne McGuire had amassed a portfolio in the 1990s that was over-weighted in equities. He is worried today about the escalating national debt, the weakening prowess of the Fed, and the temperamental foreign creditor to the extent that he cannot think of a better time to buy gold.

Sheryl Sostarich