Considering that our money is not backed by anything of value – it’s certainly a valid concern. The value of our money is based solely on people’s acceptance of it as money. No confidence in the dollar – and the dollar’s value will plummet.
I think it was Ron Paul who said it best. If you buried a $100 dollar bill and a $100 gold coin for a hundred years – which one is going to retain its value? Chances are – the $100 bill will be worthless and the gold coin will have increased in value.
This has held true throughout human history. Money that is based on gold/silver and is not debased has retained its value and purchasing power (see the Greek Empire). Money that is debased (reduction in gold/silver content) will always decline in value (see the fall of the Roman Empire). Greek coins continued to be used as currency throughout Asia long after the fall of the Greek Empire because they did not debase their currency (remained constant at 66 grams of gold per coin). When the Caesars of Rome began to debase their currency (reducing the amount of gold/silver in each coin) in order to coin more money to finance their increased spending – inflation sky-rocketed and the value of their currency plummeted.
If you were a Roman businessperson - would you want to receive a coin with 66 grams of gold or 30 grams of gold (regardless of a government decree)? People began to demand a higher number of coins (prices) to pay for the same products/services – so inflation increased significantly and the value of their currency plunged. Sound familiar?
We hear that gold is a good inflation hedge – but it’s really a hedge against the world’s fiat currency system. Gold has always been valuable (it’s rare) and is easily made into coins – so it’s a perfect form of money. On the other hand – current fiat currency is based on nothing of value – it’s either made out of paper, coined from abundant metals (zinc, copper, etc.) or in electronic form (your checking account). So – a fiat currency is only good – as long as people continue to have confidence in the system. No confidence = no fiat currency.
Here’s our problem – every nation throughout history with a monetary system based on a fiat currency that is not on a gold/silver standard - has always printed/coined its way to ruin. Every one. It may only take a few years (Zimbabwe) or it may take decades (us) – but the result has always been the same. Debase your currency and you will eventually destroy your economy over time.
In 1971, President Nixon removed the gold standard from our currency.
What happened? Should we be concerned? History tells us – yes.
From a government spending perspective – all restraints were removed. You’ll notice on the following chart showing the growth of our Federal debt – that we turned the corner soon after 1971.
No need to worry about having enough gold to back your currency (and hold your spending in check) – print all you want. Total money supply growth (M3) also turned the corner soon after 1971.
Same situation with the currency component of our money supply:
We would then expect inflation to ‘turn the corner’ around the same time – and that’s exactly what we see.
Most people believe that inflation is simply a rise in prices – but a rise in prices is a result of an increase in money supply and available credit. Inflation is strictly a monetary phenomenon. Increase the supply of fiat currency – and you are going to increase prices while devaluing your currency.
Definition of inflation from Webster’s Dictionary:
-a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services
When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
This is a very important point – inflation erodes the purchasing power of your money. In a monetary system that requires exponential debt and money supply growth (that’s our system) - prices are always increasing and the purchasing power of your money is always eroding – not a good thing if you want a stable and sustainable economy.
What are the real world effects of this? As more and more money is added to the system - the general population will find it harder to get enough money to pay for the things it needs/wants (bills, consumer goods, etc).
Let’s look at what has happened to the purchasing power of the U.S. dollar since 1971.
The standard of living of Americans has steadily declined in recent decades due to our monetary system. Don’t believe me? We only need to look at the U.S. median income to see the devastating effects of inflation.
When it comes to income – we typically see charts like this:
Based only on this chart – it would seem that everything is A-OK. Prices are going up – but our income is also going up – so what’s the problem?
It takes some additional digging to see what’s really happening to us.
Let’s look at our income adjusted for inflation:
What does this show you? It shows you that our real income (adjusting for inflation) has barely moved at all since 1973. Now you know why so many households have dual incomes today. We need to make more money to try and keep pace with prices. Another ugly side effect of this is that we’ve taken on enormous debt over the past couple of decades to help make up for the income shortfall. This is why we see household debt charts like this.
Total U.S. household credit market debt is now approximately $15 trillion dollars. When did we turn the corner on this exponential curve? Again – around the same time that we removed the gold standard.
If you really want to see the truth regarding what is happening to our income – take a look at our income compared to gold.
In 1970 – our median income would have purchased 240 ounces of gold. Remove the gold standard and introduce high inflation rates – and it’s easy to see the affect on our income during the 1970’s – leading to a significant drop in our income compared to gold (median income would have purchased 29 ounces of gold in 1980). You’ll also notice that today’s trend is not good – the value of the dollar is declining and the value of gold is increasing – so the amount of gold we can purchase today with our median income – is declining.
Also keep in mind that this system does not reward saving money. A constant inflation rate caused by the system – destroys the value of your money over time. Couple this with very low interest rates (dictated by the Federal Reserve) and you’ve got a system that in no way – rewards you for saving money.
We should expect the value of the U.S. dollar to continue declining due to our current fiscal condition (massive budget deficits, negative account balances, etc.) and we should expect to see the value of gold continue to rise over time as investors continue to hedge against a rapid decline of the world’s monetary system (fiat currencies).
The bottom line is that the people behind the world’s monetary system know how this ends and they are very aware that a high degree of confidence is required in their fiat currencies to keep the system running. Without confidence in the world’s fiat currencies – we all turn into Zimbabwe – looking for whatever we can find to use for money. This is why there are many people today telling you to buy physical gold that you can store in your home. This is also why we see so many mainstream media articles bashing gold investors (in order to pump up our fiat currency and slam gold).
Here’s the 1 year gold trend:
Silver is up even more (%) than gold since November:
…and the one year dollar index:
I will say that mainstream media does get it right sometimes. Here’s a quote from yesterday’s Wall St. Journal.
"That gold has broken through $1,000 shows people are still very concerned about paper currencies," said Howard Ward, chief investment officer for growth equities at Gamco Investors. "Those commodities denominated in dollars will go up as the dollar keeps going down."
I would say that people will be very concerned about paper currencies until the world’s economy collapses. Then it will be a brand new ball game.
I have attached a mainstream media article about gold investing (today’s paper) after Chris Martenson’s blog post.
jg – September 10, 2009
Gold Bashing 101: A Mainstream Press Primer
Friday, September 4, 2009, 11:07 pm, by cmartenson
It is pretty clear that gold has its detractors in the mainstream press, and this next article is so over the top as to be a hilarious object lesson in the art of gold bashing.
It all starts with the title itself and gets funnier quickly.
US gold ends down $1, fails to break above $1,000
First of all, gold ended UP on the day by $2.80, not down. Second of all, you'd never see a similarly worded headline for, say, a favored stock which had just finished the week up 35 bucks. Can you imagine if Google went from $400 to $414 for the week reading the headline "Google fails to break above $415?" I can't either.
Here's the rest:
Opening paragraph (all emphasis mine):
NEW YORK, Sept 4 (Reuters) - New York gold futures ended $1 lower on Friday as strong investment demand failed to push prices over the psychological mark of $1,000 an ounce, and traders said the metal could be vulnerable to near-term profit-taking following a sudden rally.
As I already mentioned, gold ended the day up, not down. There's a difference. And then we might note that gold is characterized as "vulnerable," and that it failed to push over a psychologically important level. That's not news; that's barely even opinion.
* Concerns about equities market, as well as inflation worries after massive government spending to jolt the economy out of recession fueled a highly speculative gold rally - Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.
Highly speculative? Compared to, say, the 220,000,000 shares of FNM, a company with deeply negative equity (i.e. bankrupt), that traded today? You mean that kind of "high speculation," or is the purchase of gold worse somehow?
* Gold prices will correct eventually after the fast-paced rally - Dunn.
I guess we should get out now, while the getting is still good!
* Gold futures initially extended losses after the U.S. nonfarm payrolls data in August showed the smallest decline in a year, but unemployment rate jumped to a 26-year high of 9.7 percent.
"Initially extended losses" is just a fantastic use of spin. Unbeatable! Right there in three simple words, we find out that gold had already been on a losing streak and that it extended those losses. And the use of the word "initially" smoothly hides the fact that it quickly recovered those loses. The casual reader is left with the impression that gold was under the gun and in retreat all day. Who would want to buy a ruinous asset like that?
* Demand from jittery investors to diversify assets into gold amid shaky equities markets propelled gold's sudden rally this week - analysts.
Note that what finally propelled gold today was "jittery investors." If you bought gold today, you are the jittery sort, prone to turning tail amid shaky markets and running for safety. Clearly, when you hate gold as much as Reuters, there can be no room for the possibility that strong investors might be in the game. Who wants to be in the jittery camp? Not me! This paragraph also featured one of my favorites - unnamed analysts.
All of this is to point out (again) that a good chunk of the mainstream press has an agenda when it comes to gold, but fortunately they are quite heavy-handed, and their clumsy efforts are easily spotted.
I merely raise this to point out that it is really best not to let one's impressions of markets be shaped by the mainstream media. If the journalists were any good at finance, they wouldn't be writing for a living.
I often wonder about such articles…do they spring from a legitimate disgust with gold that developed previously for the writers, or are they merely attempting to shape opinion for some other set of reasons (perhaps the publisher's parent company has a relationship with a trading company that just happens to be short a few tons of gold and supplies some nice quotes)? Who knows?
All I know is that I am very glad I've not heeded the advice of the mainstream media on gold and silver over the years.
SEPTEMBER 10, 2009
Golden Eggs: Danger in the Yellow-Metal Stocks
Wall St. Journal
By DONNA KARDOS YESALAVICH and GEOFFREY ROGOW
NEW YORK -- The recent surge in gold futures has been a boon for gold stocks, but all that is gold doesn't glitter, and a correction is likely near.
Tuesday, a number of gold stocks hit new 52-week highs as gold futures jumped above $1,000 an ounce. The excitement spread quickly, as the psychologically important $1,000 mark hadn't been hit since February. Gold fell slightly Wednesday, though it remained near that level.
However, now is not the time to jump on the gold bandwagon. A technical analysis of gold stocks, which are up some 12% this month alone, shows that although they are exhibiting positive momentum, they are likely due for a pullback.
"I probably wouldn't be a buyer at these levels," said Cleve Rueckert, a research analyst with Birinyi Associates. "It's gotten very overbought very quickly, and sometimes these things have a tendency to come back down just as fast."
Gold's ascent has two primary drivers. On one hand, those figuring the dollar is due for even more of a pullback are wise to place cash in gold. At the same time, gold benefits from global growth and consumption trends.
The climb this week has largely been because of concerns about the dollar, which helped gold stocks push the trend on their 50-day and 200-day averages higher. That is a sign of positive momentum, something that would make gold stocks attractive once again if they correct from their overbought levels.
Measuring gold miners, the Market Vectors Gold Miners ETF closed Wednesday at 44.12, and hit a 52-week high during Tuesday's session at 47.45. Mr. Rueckert expects the ETF to come back down to "at least 42," which he sees as a more reasonable place to enter.
The ETF wouldn't be considered oversold until it got down around 37, but Mr. Rueckert warned that pullbacks don't always go all the way to their oversold level. "If you wait for it to get oversold, you may miss an opportunity," he said.
One of the more prominent names in the gold sector is Newmont Mining. The stock closed Wednesday at $44.88, up 12% on the month.
"Newmont had been a laggard, but people look to it first when they want gold exposure in stocks. This is typical," said Howard Ward, chief investment officer for growth equities at Gamco Investors.
But Mr. Rueckert said Newmont doesn't exhibit the same kind of positive momentum that some other gold stocks and the Gold Miners ETF do, and has been volatile between $37.50 and $50.
Freeport-McMoRan Copper & Gold, on the other hand, looks better to Mr. Rueckert as a gold play, although it is traditionally thought of as a copper company. The stock's up trend has been more defined and fairly consistent since the beginning of the year. Mr. Rueckert recommends trying to get in around $65, a bit below its Wednesday close of $67.68, and believes it could run up to $82.80.