Thursday, April 27, 2006

The Price Of Gold

(chart courtesy of www.kitco.com)

The price of gold is something in which I have taken a great interest as of late. Only recently having been educated about the link between the price of gold and the value of the dollar, the financial news makes more sense and connecting the dots is easier.

Rather than attempt to construct an economic lesson in this post, I offer the following excerpts from the April 25, 2006 speech of Republican Congressman Ron Paul before the House of Representatives, which offer great lucidity on this murky topic:

Holding gold is protection or insurance against government’s proclivity to debase its currency. The purchasing power of gold goes up not because it’s a so-called good investment; it goes up in value only because the paper currency goes down in value. In our current situation, that means the dollar.

One of the characteristics of commodity money – one that originated naturally in the marketplace – is that it must serve as a store of value. Gold and silver meet that test – paper does not. Because of this profound difference, the incentive and wisdom of holding emergency funds in the form of gold becomes attractive when the official currency is being devalued. It’s more attractive than trying to save wealth in the form of a fiat currency, even when earning some nominal interest. The lack of earned interest on gold is not a problem once people realize the purchasing power of their currency is declining faster than the interest rates they might earn. The purchasing power of gold can rise even faster than increases in the cost of living.

The point is that most who buy gold do so to protect against a depreciating currency rather than as an investment in the classical sense. Americans understand this less than citizens of other countries; some nations have suffered from severe monetary inflation that literally led to the destruction of their national currency. Though our inflation – i.e., the depreciation of the U.S. dollar – has been insidious, average Americans are unaware of how this occurs. For instance, few Americans know nor seem concerned that the 1913 pre-Federal Reserve dollar is now worth only four cents. Officially, our central bankers and our politicians express no fear that the course on which we are set is fraught with great danger to our economy and our political system. The belief that money created out of thin air can work economic miracles, if only properly “managed,” is pervasive in D.C.

***
But the fact that gold has gone from $252 per ounce to over $600 means there is concern about the future of the dollar. The higher the price for gold, the greater the concern for the dollar. Instead of dwelling on the dollar price of gold, we should be talking about the depreciation of the dollar. In 1934 a dollar was worth 1/20th of an ounce of gold; $20 bought an ounce of gold. Today a dollar is worth 1/600th of an ounce of gold, meaning it takes $600 to buy one ounce of gold.

The number of dollars created by the Federal Reserve, and through the fractional reserve banking system, is crucial in determining how the market assesses the relationship of the dollar and gold. Though there’s a strong correlation, it’s not instantaneous or perfectly predictable. There are many variables to consider, but in the long term the dollar price of gold represents past inflation of the money supply. Equally important, it represents the anticipation of how much new money will be created in the future. This introduces the factor of trust and confidence in our monetary authorities and our politicians. And these days the American people are casting a vote of “no confidence” in this regard, and for good reasons.

***
Beginning in March, though planned before Bernanke arrived at the Fed, the central bank discontinued compiling and reporting the monetary aggregate known as M3. M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation. Yet this report is no longer available to us and Congress makes no demands to receive it.

Though M3 is the most helpful statistic to track Fed activity, it by no means tells us everything we need to know about trends in monetary policy. Total bank credit, still available to us, gives us indirect information reflecting the Fed’s inflationary policies. But ultimately the markets will figure out exactly what the Fed is up to, and then individuals, financial institutions, governments, and other central bankers will act accordingly. The fact that our money supply is rising significantly cannot be hidden from the markets.

The response in time will drive the dollar down, while driving interest rates and commodity prices up. Already we see this trend developing, which surely will accelerate in the not too distant future. Part of this reaction will be from those who seek a haven to protect their wealth – not invest – by treating gold and silver as universal and historic money. This means holding fewer dollars that are decreasing in value while holding gold as it increases in value.

A soaring gold price is a vote of “no confidence” in the central bank and the dollar. This certainly was the case in 1979 and 1980. Today, gold prices reflect a growing restlessness with the increasing money supply, our budgetary and trade deficits, our unfunded liabilities, and the inability of Congress and the administration to reign in runaway spending.

***
Foreign policy plays a significant role in the economy and the value of the dollar. A foreign policy of militarism and empire building cannot be supported through direct taxation. The American people would never tolerate the taxes required to pay immediately for overseas wars, under the discipline of a gold standard. Borrowing and creating new money is much more politically palatable. It hides and delays the real costs of war, and the people are lulled into complacency – especially since the wars we fight are couched in terms of patriotism, spreading the ideas of freedom, and stamping out terrorism. Unnecessary wars and fiat currencies go hand-in-hand, while a gold standard encourages a sensible foreign policy.

***
Since keeping interest rates below market levels is synonymous with new money creation by the Fed, the resulting business cycle, higher cost of living, and job losses all can be laid at the doorstep of the Fed. This burden hits the poor the most, making Fed taxation by inflation the worst of all regressive taxes. Statistics about revenues generated by the income tax are grossly misleading; in reality much harm is done by our welfare/warfare system supposedly designed to help the poor and tax the rich. Only sound money can rectify the blatant injustice of this destructive system.

The Founders understood this great danger, and voted overwhelmingly to reject “emitting bills of credit,” the term they used for paper or fiat money. It’s too bad the knowledge and advice of our founders, and their mandate in the Constitution, are ignored today at our great peril. The current surge in gold prices – which reflects our dollar’s devaluation – is warning us to pay closer attention to our fiscal, monetary, entitlement, and foreign policy.


You can read and/or watch the entirety of Ron Paul's speech, "What The Price Of Gold Is Telling Us", at http://www.lewrockwell.com/paul/paul319.html

If Ron Paul's warnings do not trouble you and the state of your bank account, the analysts predict that the price of gold will not only reach the record high of $850 per ounce, but may possibly hit $1,000 this year. https://registration.ft.com/registration/barrier?referer=&location=http%3A//news.ft.com/cms/s/b5dca1a8-ca13-11da-852f-0000779e2340.html

While I am neither a Democrat nor a Republican, it is worth pointing out the HUGE discrepancy between the value of gold in the chart above, i.e. the value of the dollar, during Clinton's presidency and after the Chimperor took the throne.

Whether you are pro-war or against it, whether you believe in gay marriage or not, whether abortion ruffles your feathers, the value of gold does not lie. It is a neutral arbiter of the competency of our government and the current values confirm what the majority of Americans are finally starting to realize - Bush and his cronies have destroyed this country with their irresponsible ways. If you care about the dollars in your bank account, it is time to wake up.


The 1st panacea of a mismanaged nation is inflation of the currency;
the 2nd is war. Both bring a temporary prosperity; a permanent ruin.
Ernest Hemmingway

21 Comments:

At 5:52 PM, April 27, 2006 , Blogger mrsleep said...

So in summary, the Presidents word is not as "good as gold"?

Excellent analysis BTW.

I have always viewed Gold as a hedge against economic catastrophe.

I however, have not purchased any "protection".

 
At 5:57 PM, April 27, 2006 , Blogger Intellectual Insurgent said...

Me neither. Not yet anyways. Still debating between gold and the Euro.

 
At 10:33 AM, April 28, 2006 , Blogger Stalin the Shark said...

Oh, just wait until the Iranians start selling their oil for Euros, maybe even at a discount just to piss us off. Bye-bye dollar, bye-bye American hegemony.

:-), StS

 
At 10:52 AM, April 28, 2006 , Blogger Intellectual Insurgent said...

That's what Saddam did and that's what got him bombed. I think I posted the link on your blog last week that Sweden cuts its reserves of dollars in half.

The financial papers today are making a big stink about increases in US consumer spending as a sign the economy is doing well. What they fails to mention is that the spending is creating debt, not producing wealth. That is probably why the dollar still didn't rebound with the news.

http://news.ft.com/cms/s/2a9dd5ac-d699-11da-b64c-0000779e2340.html

 
At 11:45 AM, April 28, 2006 , Blogger Capt. Fogg said...

Gold's up 18.50 today. Euro is up, Sterling is up. Life is good if you've already got the bux. As for everyone else, let them shop at Wal-Mart.

 
At 12:17 PM, April 28, 2006 , Blogger bombsoverbaghdad said...

II,

This is scaring the hell out of me. I told you Bush and the neocons are looting the State. (Guess which country in the middle east is gonna hold their little offshore accounts? I'll tell you about THAT when you're ready, just like the Saddam issue.) Serious!! They want America to be like the rest of the world. A middle class is too troubling--an overpaid bunch of crybabies.

Can I buy gold like I buy mutual funds?? From my stockbroker???

(I'm gonna look like Mr.T in a minute. :-))

 
At 12:24 PM, April 28, 2006 , Blogger Intellectual Insurgent said...

Since I have the day off, I have been doing research on "diversifying". Fidelity has a few options:

Currency Fund -

http://personal.fidelity.com/products/funds/mfl_frame.shtml?34984T402

Falling Dollar Fund

http://personal.fidelity.com/products/funds/mfl_frame.shtml?74318A190

Gold Fund

http://personal.fidelity.com/products/funds/mfl_frame.shtml?316390780

I'll post more as I find it.

 
At 4:15 PM, April 30, 2006 , Blogger Odysseus said...

If you want to protect your assets against the slide of the dollar, there are several ways:
1. There is a gold index traded like a stock, the ticker is GLD.
2. Invest in black gold, or energy. Think coal, natural gas, and especially canadian coal or natural gas since the looney has been kicking the stuffing out of the USD, if you're uncomfortable with petroleum. Check out the CWEI message forum on yahoo to learn more. Note - it's already crowded, so I just read and learn and don't enter the political debates.
3. I believe in Euros and real estate. I bought an apartment in Spain as a hedge.
4. Real estate in the US. If you don't do any of the above, hold on to US real estate, or sell now if you still can and buy again after the crash. Real estate has almost always held it's value in currency devaluations and inflationary times.

Some time in the future we're all going to be saying that we saw it coming.

And by the way, you'll find better bargains at your local flea market than at Wal Mart, and you'll be able to sleep better knowing that you're not supporting a small businessperson rather than financing slave labor.

 
At 6:44 PM, April 30, 2006 , Blogger Boris Yeltsin said...

Amen to that!!!!!!

 
At 6:45 PM, April 30, 2006 , Blogger Boris Yeltsin said...

BTW, great post. Is our economy taking a huge dump? The car dealerships seem to think so!

 
At 8:14 AM, May 01, 2006 , Blogger Capt. Fogg said...

Gold's at 660, the Pound is 1.83 - I'm a happy man but I will bet you , Dollars to Dinars that the royal families: Cheney, Bush and Rumsfeld are making out like the war profiteering bandits they are

 
At 8:42 AM, May 01, 2006 , Blogger Intellectual Insurgent said...

Captain,

There is no doubt those looters have their spoils in offshore accounts. Can you believe it's at $660.

Boris,

Here are the two headlines for the morning. You tell me how the economy is doing -

http://news.ft.com/cms/s/1dc7bace-d904-11da-8b06-0000779e2340.html

http://news.ft.com/cms/s/5ff393e2-d908-11da-8b06-0000779e2340.html

 
At 8:44 AM, May 03, 2006 , Blogger mrsleep said...

Just heard today that Gold hit a 25 year high.

 
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