Competitive Devaluations to Spur Gold- Richard Russell

I often quote Richard Russell, the 85-year-old writer of the Dow Theory Letters, in my blog posts. Although I may not necessarily always agree with his views, they are always stimulating and important to consider when piecing together the financial puzzle. His article on competitive devaluations and the implications for fiat currencies and gold bullion makes for particularly interesting reading and the paragraphs below have been excerpted from it.

Every nation wants to export. The obsession to export has resulted in filling the world with products, things, and merchandise of every kind. There’s a world overflow of products, and the result is deflation. Just too much stuff being manufactured. Buyers from importing nations can’t handle it all. The result is asset deflation.

One reason why every nation wants to export is to lift employment. Nothing scares politicians like unemployment. Why? Because unemployed workers VOTE just the way employed workers do. The lesson - if you want high employment, learn to export. Exporting creates jobs. China and Asia learned that lesson, and they captured world export markets with the help of one valuable item - low wages - that along with no Social Security, no medical, no pensions, no anything, just plain low wages with none of the extras.

Ooops, I left something out. What I left out was the big second advantage - cheap currency. Every nation, particularly the exporters, wants a cheap, competitive currency. The US is no exception. Obama tells the world that the dollar is a strong, hard currency, but the dollar has been weak. The administration’s policy is to talk a “hard dollar” but hope for a soft dollar.

The result of all this is competitive devaluations. Nations no longer devalue their currencies against gold, they simply print oceans of their own currencies, and with that paper they buy dollars, hoping to raise the price of dollars against their own currencies. The result is a growing sea of fiat junk paper.

The greater the world ocean of fiat paper, the higher gold goes. You see, gold is the secret, unstated world standard of money. Gold can’t be devalued or multiplied out of thin air. So as the various currencies of the world decline in relation to each other, gold stands alone. It can’t be cheapened or devalued or bankrupted. While the currencies of the world decline in purchasing power in relation to each other, they all decline in purchasing power against gold. In other words, as time passes, it requires more of each currency to purchase one ounce of gold.

In the meantime, the U.S. continues to spend outrageously, not only running up debts for the present but also for the children of the future. The US deficits and national debt will run into the multi-trillions in coming years.

How will these monster debts ever be paid off? They’ll be paid off by devalued dollars, they’ll be paid off by additional borrowing, they’ll be paid off by inflation, they’ll be paid off with higher taxes and probably a VAT tax, they’ll be handled by projecting them into the future for other administrations to struggle with.

As they say in New York, ‘all right already, so what do we do about it?’.
“Short and medium term, you want dollars, as many of them as you can save. Long-term you want gold. Somewhere ahead gold will come into its own. I can’t time gold, but I can identify the time when gold is ready to ‘take off’. When gold climbs above 1,004 it will be the signal for the beginning of the third phase gold rush. What I’m saying is forget quick profits in gold, forget timing gold, just own some.

The way the world is going, ‘gold will be the last man standing’. Gold will be wanted because unlike everything else, gold can not go bankrupt. Gold has no debt against it, gold is not the product of some nation’s central bank. Gold is pure intrinsic wealth. It needs no nation to guarantee it. Gold is outside the paper system.”

Source: Richard Russell, Dow Theory Letters, June 25, 2008.

Comments

[ur2smrt4me:]

I would argue that inflation, especially in the price of fuel and food, scares politicians as much as unemployment. There is an inverse relation between the price of gasoline in the US and the president's approval rating.

Jun 28 08:06 AM

[DONE_SONZ:]

You may have just created a "Gold bug" national anthem.Save to favorites.Great post!

Jun 28 08:18 AM

[Tom E.:]

The Chinese dollar bashing and world currency proposals are just a smoke screen for a stealth devaluation by China against non-dollar pegged countries. The Chinese are willing to take a hit in the short run on the value of their dollar fixed income assets in order to spur exports and create jobs. Nothing concentrates the mind of party members like millions of angry unemployed people roaming the streets and countryside. They know in the long run that the dollar will bounce back.

I believe that this plot was hatched in conjunction with the US Chamber of Commerce when they flew to China after Obama was elected to convince the Chinese not to devalue the RMB against the dollar. It appears that a consensus was made for China to bash the dollar which would give them an indirect devaluation against non-dollar pegged countries AND give the US a stealth devaluation AND make the Obama administration look BAD for having a collapsing currency and runaway gasoline prices (when the dollar goes down, oil goes up, Obama’s popularity goes down). Sort of a win, win, win for the china, chamber of commerce/multinational, GOP Junto.

The Bric countries are going along with this because a weak dollar pushes up commodity prices. The Japanese know what is going on and have tried to talk the dollar up. The Europeans are oblivious to what is happening, perhaps blinded with glee by the US bashing.

Jun 28 09:16 AM

[Dr. Realist:]

There are a couple or more things to say about gold!
1) Most anti gold bugs say "Avoid Gold 'cause you can sit on gold but gold don't hatch!" i.e. pay interest.
2) But I have seen nowhere in any of this talk about gold --- That (give or take a few hours more or less depending on the richness of the 'lode' and the technical advancement of extracting it). from the old panning and golden fleece days right up to present time with its hundreds of inovations and billions in capital investment it take on average about 20 man hours or (woman hours if you prefer) to extract an ounce of gold on average. (YAMV)
3) Fiat currency ebolas (Electronic currency) can be produced in any denomination in a millionth of a second out there in ether land.
If you believe any of this stuff -- at least some quantum in the pondering mode has got to tell your guts something if not your brain.
But how is all that going to save your ass. I've seen situations where coffee and cigarettes were more in want than gold (During WWII)

Jun 28 12:19 PM

[ducat:]

Dr. Realist. One could read into your comment: "...hundreds of inovations and billions in capital investment it take on average about 20 man hours or (woman hours if you prefer) to extract an ounce of gold on average.", that you are suggesting it is a waste of resources to chase after gold. Not concluding that was your point, I want to make sure everyone understands that most gold mined comes either as a prime product with a base metal component or from a base metal mine with a gold bi-product. Without a high price for gold, there would a loss of base metal production at many marginal mines (especially copper mines), which in turn would result in more mining and higher prices for those commodities.

Jun 28 04:14 PM

[Henry Buttal:]

Tom E,

Its great that the U.S. Chamber of Commerce has all that persuasive power in China!

To bad it doesn't have any traction with Congress or the White House.....

Jun 29 03:12 PM