KEVIN KERR: Dollar Demise Practically Ensures Gold's Rise

NEW YORK (Dow Jones) -- In the currency world, the dollar is often referred to as "invincible" or a "flight to quality" instrument. Don't bet on it.

A country saddled with debt, ongoing problems with global diplomacy and an economy almost solely based on credit -- and the dependence on the ability to print more money at any time -- hardly exhibits the traits of a "flight to quality" instrument.

In his eye opening book "Demise of the Dollar," Addison Wiggin writes "The Great Dollar Standard Era is a direct result of the removal of gold as the underpinning of the world's currencies... The vast overprinting of currency will inevitably debase the value of the U.S. dollar, because so many foreign currencies are pegged to the dollar, the currency of those nations as well."

Throughout the 1970s and early 80s, U.S. investors were filled with fear that the greenback would continue to lose purchasing power. Few had confidence in the government's ability to limit the expansion of the money supply, culminating in a rush to buy precious metals from 1979 to 1980. I remember my father buying gold ingots and Indian Head gold coins. Everyone had them.

At the time, the Federal Reserve did what it could and put the brakes on money supply growth by putting extremely high interest rates in place. The Fed's goal seemed to have been reached by 1982 and the rate of increase in the money supply was on a downtrend as interest rates fell from their highs, and the specter of inflation evaporated.

This was the end of the commodities boom cycle and investment capital began moving from commodities into other financial assets. The great bull market in equities was underway while commodities more or less languished for the next two decades.

Chris Mayer, editor of newsletter Capital and Crisis writes that, "Since the end of the Bretton Woods agreement in 1971, the dollar has been an irredeemable currency, no longer defined or measured in terms of gold. Nonetheless, in an ironic twist, it has become the world's dominant currency and the core reserve asset of central banks all over the world. It has replaced gold as an international currency. The transformation has not happened without consequences. One of these is that the discipline imposed by the gold standard is no longer operative. Another consequence, related to the first, is the profound effect this has had on international trade."

Recent exploding interest in gold is no coincidence. "Gold is the best money, because for centuries, as a result of countless individual choices, it has evolved as such," Mayer reasons.

Gold may seem antiquated and a relic of days gone by; an impractical alternative -- but it's far from that. Central banks are adding to their reserves -- and so are individuals. Remember, gold has been around for millennia while the mighty U.S. dollar has only managed to survive a couple of hundred years -- a rough couple of hundred years at that.

Mayer puts it best when he quotes Murray N. Rothbard, "Though the old classical gold standard was not perfect, it was, in Rothbard's words 'by far the best monetary order the world has ever known, an order which worked, which kept business cycles from getting out of hand, and which enabled the development of free international trade, exchange and investment.'"

Gold may not be on a perfectly straight road to higher prices as evidenced by the volatility of late, but one thing is clear, gold is the best alternative to the current fiat fiasco of fiscal policy.

The U.S. dollar is on trial in the world financial markets and I for one am not waiting for the verdict. I am hedging the outcome with gold now while it's still very cheap.