By Kishori Krishnan Exclusive To Gold Investing News

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Its all in good faith. To get the US economy back on track. President Barack Obama is expected to meet with chief executives of 12 major banks on Monday and is expected to urge them to lend more money to help promote economic recovery.

Monday’s discussions of the US administration’s financial regulatory reforms would necessarily involve thrashing out another plan to induce growth in the economy.

For Washington, a focal point has been the extent to which banks have been willing to lend. More so, after the US government pumped billions into the banking sector over the past year in a bid to get the economy back on track.

Monday’s meeting would mark the second time that Obama has conferred with leaders from the banking industry. In March this year, more than a dozen top executives met with the President, in a meet that turned contentious when the President told the assembled chieftains that he was the only thing standing between “you and the pitchforks”.

The meet led to outrage over bailouts and bonuses.

This time round too, new ways and means would surely be sought to expand federal regulatory powers over a broader swath of the financial industry.

Non lending banks

Incidentally, when President Obama visited Allentown, Pa, last week, he talked about the lending dilemma in detail. Banks, he said, were too easy on borrowers in the boom time but now have “swung in the opposite direction” and are not lending to creditworthy businesses.

“They used to say yes to everything; now they’re just saying no to everything,” Obama said. “…our message to the banks is, ‘The taxpayers were there for you to clean up your mistakes. You now have a responsibility to be there for the community, now that we’re bearing the brunt of a lot of these problems that you caused,’” Obama told the crowd.

Given this backdrop, and coming close on the heels of the announcement by the Treasury Department to buy up to $2 trillion in bad home loans and mortgage securities that has been like an albatross around banks, Monday’s meet is sure to be heady stuff.

What will this do for gold? Especially if more paper dollars are to be added to the money supply, as is being debated?

Gold price

Gold futures finished modestly higher Thursday, ending a four-day decline, after the US dollar weakend. The most-active February gold rose $5.30 to $1,126.20 an ounce on the Comex division of the New York Mercantile Exchange.

Though gold rose, crude oil suffered its seventh straight loss, ending the day at $70.54 a barrel, down 13 cents.

Gold has fallen 13.3 per cent since hitting a closing peaking for the year on October 21. On December 8, gold dropped 1.8 per cent to $1,143.40 an ounce in New York to cap the steepest three-day drop since October 2008.

The same day, Barrick fell to C$43.10, contributing the most to the S&P/TSX’s decline. Barrick Gold Corp (ABX: CN), the world’s biggest producer of the precious metal, dropped 3.4 per cent as bullion declined.

Goldcorp Inc (G: CN) the second-largest producer of the metal in Canada, retreated 3 per cent to C$42.24.

Silver reseller Silver Wheaton Corp. led the S&P/TSX with a 5.5 per cent plunge to C$15.81, after analyst Daniel Earle of Toronto-Dominion Bank cut his rating on the stock to “hold” from “buy.”

For now, gold appears to be a `risky’ asset, that has soared more than 30 per cent in a year and lost 4 per cent of its value in a day. Good enough reason to pause?

The recent sell-off in gold has spooked some gold investors. Point to note: a lot of money flowed to the dollar after last week’s release of better-than-expected employment figures.

Melting down

Its a short sprint tale. The US dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8 per cent so far this year (as of December 3). And the dollar is bound to get further diluted. And once the value of the US dollar falls, inflation rears its ugly head. And once inflation is out of hand and the currency continues to lose its value, devaluation of the currency begins.

When the dollar is “under attack at home, from a Fed that’s printing paper money like it has no value,” and hyperinflation sure to set in, and China’s actions are tipping the balance of the global currency system away from the US dollar, where do investors go?

Senior professor of Economics in Basel, Peter Bernholz, who has studied the world’s 12 most important periods of hyperinflation, has discovered that the tipping point occurs when deficits amount to 40 per cent of expenditure.

Incidentally, that is exactly where the US is now. The deficit of $1.5 trillion amounts to 41.7 per cent of the $3.6 trillion in expenses.

So, not only does one have to contend with a falling dollar which ensures that citizens lose purchasing power, what gets left, gets eaten away by inflation.

But, are you really surprised?

Signals abound

There have been signs, loud and clear, that economies are doubling over. The Dubai debacle was no one-off occurrence. The Greeks have snagged some trouble too, with rating agency Fitch downgrading Greece’s sovereign rating from a single-A-minus to BBB+.

And there are other overleveraged, undercapitalized economies waiting to come out of the woodwork.

The collapse of the US economy “is too close to the horizon, and the so-called developing nations will have problems equally severe”.

So, some free advice: if you consider yourself a good poker player, make bets when the odds are in YOUR favor. Avoid playing when the odds appear stacked against your better interest.

And if stashing up on gold was clearly meant to recession proof your portfolio, have you managed to do that?

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