Gold price fundamentals have strengthened, vaulting the price of gold through $1,100 per ounce, and the recent release of America’s budget underscores why gold has risen and confidence in global currencies has waned. Governments and central banks across the globe have plugged the vacuum in private demand with public funds in order to prevent the recession from turning into a depression. As is the case with most things in life, there is no free lunch. Gold has begun to reassert a monetary role as the sovereign balance sheets deteriorate across the globe. While nations such as Greece have been front page news lately due to the immediacy of their fiscal issues, the United States faces a similar fate - a fact that is evident in the release of America’s budget.

The rising federal budget deficit has contributed heavily to the debasement of the U.S. dollar and has benefitted the gold price - which in turn has driven funds into gold stocks, gold ETFs, and gold bullion. The gold price and gold stocks were two of the top performing asset classes over the past decade, occurring against the backdrop of steady monetary inflation, budget deficits, and rising debt levels. President Obama’s release of his administration’s budget has been the subject of much debate over the last few days - with many highlighting the potential negative impact on the U.S. dollar if spending is not contained.

While the issue of the budget deficit has been a concern for quite some time, Gerald F. Sieb wrote an editorial in the Wall St. Journal focusing on the seriousness of the subject, calling it a “national security threat.” Sieb described the trillion-dollar figures in Obama’s recently announced budget plan as “mind-numbing.” The deficit under the President’s plan is expected to rise to $1.6 trillion in 2010, $1.3 trillion in 2011, and $8.5 trillion over the next ten years combined.

Sieb pointed out that the mounting deficit has reached the point where the federal government will, in 2010, borrow one out of every three dollars it spends - with a large portion of the borrowed funds coming from foreign nations such as China, Japan, and oil-rich countries in the Middle East. This staggering ratio has begun to threaten the U.S.’s standing as the world’s pre-eminent superpower, Sieb asserted, as it puts America’s ability to finance its defense at risk and makes the U.S. more vulnerable to policies of foreign nations. As support for his argument, Sieb cited Richard Haas, a senior national security advisor in each of George W. Bush’s presidential terms and the current president of the Council on Foreign Relations, who stated that “We’ve reached a point now where there’s an intimate link between our solvency and our national security.”

The $3.75 trillion in accumulated debt held outside of the U.S. has exposed the U.S. to the risk of being dependent on foreign nations and foreign central banks to finance America’s deficits. This puts the U.S. dollar at risk. Foreign nations have already begun to diversify out of U.S. dollars, as the percentage of global foreign exchange reserves held as U.S. dollars has been steadily dropping over the past decade.

With other currencies facing similar structural issues, foreign central banks have begun to bolster their gold reserves. India, China and Russia have each added to their gold reserves. Gold demand from emerging nations has helped drive the price of gold to its recent all-time high of $1,226.50 per ounce. Sieb warns that a “debt-ridden U.S. is vulnerable to a run on the American dollar that begins abroad.” This could cause a flurry of demand for gold and gold-related investments.

Using history as a guide, the U.S. government must keep its financial house in order and running trillion dollar deficits as far as the eye can see is not sustainable. While central bankers and politicians were able to stave off a second Great Depression and fuel an economic recovery for the time being, the question remains - at what cost? The longer-term health of the U.S. dollar and the future standard of living of its citizens have been put at risk. An increasing gold price is a warning signal that the purchasing power of the U.S. dollar is under pressure. The stakes are rising and the inability of America’s government to restrain spending has ominous implications and consequences.