Gold Is Not Falling

Recent purchasers of Gold are upset lately with the 8.5% drop in the U.S. Dollar price of gold this week.  But what most of these buyers don’t understand is that gold stayed the same.  It was what gold is priced in that changed.

That’s right.  Gold is just a shiny rock as all the Gold naysayers like to say.  It didn’t change in the last week.  It’s still a shiny rock.  But the U.S. Dollar appreciated of late thus causing the U.S. Dollar price of Gold to fall.  To understand this further take a look at how Gold has evolved over time.

Gold: A Transition From Medium of Exchange To a “Barbarous Relic”

That “shiny rock” used to act as a medium of exchange to acquire goods and services from ancient times to as late as the early 20th Century.  It was in 1933 when that rock, molded into the form of coins, ceased to be utilized as a medium of exchange in the U.S.  Why?  Because 20 years earlier the Federal Reserve Act was voted into existence by Congress that gave us what we know today as “Federal Reserve Notes.”

Federal Reserve Notes used to be “redeemable in coin” but after the confiscation of gold in 1933 by the Roosevelt administration, this option of redemption ended.  But Gold still did back the Federal Reserve Notes up until 1971 when President Nixon ended that relationship and thus ending the use of gold as a medium of exchange and “the Gold Standard.”

It was somewhere during this era economist, John Maynard Keynes claimed “In truth the Gold Standard is already a barbarous relic.”  Many people misquote this statement as Keynes saying that gold was a barbarous relic, but in reality he was referring to the Gold Standard, not gold.

Keynes Got His Way

Federal Reserve Notes would act as the only money for U.S. Citizens along with some coins (that used to be silver, but the Coinage Act of 1965 put an end to that).  Other countries had stopped using gold or silver as money and created their own currencies as well.

But with the 1971 ending of the Federal Reserve Note’s being tied to gold, something happened.  The price of gold was no longer artificially set by the government and allowed to trade freely among countries.  The price of gold in the U.S. started to appreciate immediately going up 400% by 1975.

Citizens in the U.S. were finally allowed to buy more than $100 worth of gold beginning in 1975 and the U.S. Dollar price of gold shot up even higher.  This, along with the economic and energy issues of the time, culminated in a panic top of $850 an ounce in January of 1980 where the price of gold doubled from one month earlier.

In 1986, after the U.S. Dollar was deemed a safe currency again as a result of Volcker’s high interest payments on U.S. Citizens bank and money market accounts,  a newly formed Gold Commission gave us the first gold coins since the Great Depression, the American Eagles.  But the problem was that these coins were not considered a medium of exchange and generally still are not today.  In the U.S., you can’t go down to your local bank and buy or sell gold coins.  Nonetheless, it was still a step in the right direction.

2000 and a Nail In the U.S. Dollar Coffin

The U.S. Dollar price of gold languished until the year 2000 as their wasn’t any real competition to the U.S. Dollar during this time-frame.  The U.S. during this time was the engine to the world.  But in 2000, the wheels started to come off the U.S. Dollar supremacy.  Almost all of Europe banded together to form their own currency called the EURO.  This was the first nail in the U.S. Dollar coffin.

It was around the year 2000 that the U.S. Dollar price of gold stated to take off.  The EURO was a place that investors turned to at first because there were no real alternatives deemed safe for liquid funds at the time.  To add to the U.S. Dollar’s woes, in 2004, individuals and institutions could now purchase gold through the nations first Gold ETF, the StreetTracks Gold Trust.  This Gold ETF turned out to be the biggest fund launch of 2004.

Why Does All This History Matter?

In understanding why gold is not falling, one must first understand the history whereby gold used to be the money and today gold is priced in what we view as money. So in that sense, gold never changes, but the currency it is priced in changes.  Thus, gold is not falling in the U.S. at present, but the currency it is priced in, U.S. Dollars, are rising.  Since Gold has had an almost perfect inverse relationship to the U.S. Dollar since 2000, the U.S. Dollar price of Gold is falling.

U.S. Dollar priced Gold has had a nice run of late.  In fact, this will be the 10th year in a row that Gold has gone up in price for U.S. Dollar holders of it.  Nothing goes straight up except the debt of the U.S., now sitting at over $13 Trillion.  Gold priced in U.S. Dollars is just taking a breather.  The bull will return.

The EURO Has It’s Issues Too

As much as the EURO gave the world an alternative to the U.S. Dollar in 2000, it too is not without its problems.  The economic woes in the Eurozone are at par with those in the U.S. yet the EURO had come close to its all-time high again versus the dollar in the last few months.  This prompted me to write this article and subsequently this one pointing to how the EURO has started its decent making a purchase of Gold priced in EURO’s a good play.  The charts in those articles tell the story.

So in this sense, Gold is not rising, it’s just a shiny rock right naysayers?  But Gold priced in EURO’s is rising.  It will always be rising or falling based on the currency it is priced in.

What Gold Truly Represents

What matters is not the rock, but the purchasing power of the rock which has withstood the test of time.  The U.S. Dollar, while currently enjoying a nice bounce, one that could continue into next year as some Elliott Wave Theorists are saying, barring any external influences, has almost 39 years of existence without Gold backing.  Most people can’t wrap their head around the significance that Gold has had in our U.S. history, let alone the history of mankind.  Most people don’t realize that every attempt at paper (fiat) money in the history of mankind has failed.  Why?  Because governments do what they do best, depreciate the value of the currency over time.

But what government is good at we return to the words of that barbarous relic guy, Keynes,  who knew the secret to fooling the People….one in which he got from the successful leader of a socialist revolution, Vladimir Lenin;

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

The Economic Consequences of Peace Chapter VI, pg. 236-236

As long as the U.S. Government continues via Congress and the Federal Reserve to abuse the monetary system and live beyond their means, you can bet the purchasing power of the U.S. Dollar will be lower in the years ahead and the U.S. Dollar price of that shiny rock will be higher.  Add to this the fact that the U.S. is no longer the real engine to the world and the only thing keeping GDP positive at present is Government spending and you can see the writing on the wall.

Personally, I would love to see Gold fall in price to $800 as Marc Faber has predicted.  This will allow me more time to get people to buy gold at lower prices, whether with U.S. Dollars, EURO’s or any other currency that has appreciated while its government wallows in debt.

Japan and the Yen Are Not Immune

Gold priced in YEN has been flat the last couple of years (point to point).  Japan is doing all they can to to lower the value of the YEN to make their goods more competitive by announcing stimulus plans such as the one this week. This while “it’s economy shrank at an annualized rate of 12.1 percent in the fourth quarter, unemployment is at a three-year high and personal consumption is falling while Japan’s government debt already stands at 170 percent of the country’s gross domestic product, one of the highest debt-to-G.D.P. ratios in the world.” 1

The interesting point here is that “Officials have said Japan could issue new bonds to pay for the new fiscal spending.”1  Adding debt to debt doesn’t solve anything.  It just prolongs the inevitable.  And true to form, “Japanese Bonds Fall on Concern Supply Increases to Sap Demand.”

The logical conclusion and another area to keep an eye on is trading gold in YEN.  You can see from the following chart that the YEN and the U.S. Dollar have moved symmetrically till about two years ago when the U.S. Dollar broke the pattern.  While the U.S. Dollar bounces at present, Gold priced in YEN could be another good trade.

That shiny rock can make you profit if you buy it with the right currency.

1 http://www.nytimes.com/2009/04/09/business/global/09yen.html