Gold / Euro Connection: Another Nail in the USD Coffin? 10 comments
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Financial advisors who don’t diversify their clients into gold typically give gold's long term record compared to stocks and bonds as one of their reasons not to invest. In one sense, they are right. In many other ways, they are dead wrong and their clients will suffer from their lack of understanding about how gold fits into a well diversified portfolio.
Why Financial Advisors Are Right
....about gold not being a good long term investment.
They’re right in the sense that gold hadn’t kept pace with the interest paid on dollar denominated bank accounts, stocks and their dividends paid, or bonds. The U.S. government was doing a good job of keeping gold out of the public eye since confiscating gold in 1934.
But why was gold not a good investment for all these years? You’ll have to look at a different perspective of the history of gold and see what was really happening.
Some Historic Analysis of the Price of Gold
Just the facts because if you understand the history of gold, it can give an indication as to the present and future.
What helps the financial advisors' case against gold is the fact that gold was not allowed to trade freely or be invested in by the general public for a period of just over forty years (1934-1975).
The price of gold was fixed by the U.S. government during this time and was only adjusted higher from the $35 amount in 1934 to an average of $42.72 by August of 1971. The general public was limited to just $100 of gold in their possession since 1934.
The dollar was still tied to gold (backed by) up until August of 1971. Within three years of the decoupling of gold from the dollar, the inflation rate hit double digits. 1973 and 1974 were also bad years for the stock market seeing the DOW fall by 46.3%. Gold, meanwhile, had more than quadrupled in price going from the $40 range to the low $180s by December of 1974.
In 1975, U.S. citizens were finally allowed to own more than $100 worth of gold through the passing of a bill signed by President Gerald Ford legalizing private ownership of gold coins, bars and certificates.
Gold was trading at $175 an ounce at the beginning of 1975. But the nation was coming off an inflationary period where the inflation rate hit a high of 12.34% to a low of 6.34% by February of 1978.
The price of gold fell and languished during this time frame until breaking to a new high in 1978 at the $180 range again; the calm before the storm.
By March of 1979, the inflation rate hit double digits again and broke out to almost 14% by January of 1980. Gold during this time went to its then all-time January 21st at $850 an ounce.
During this run up in the price of gold, the U.S. government needed to pull a feather out of their Federal Reserve hat to stop the fear that people had about the economy and especially the plummeting value of the U.S. dollar compared to gold.
That “feather” was provided with the installing of Paul Volcker as Fed Chairman in August of 1979. Within a short time of leading the Fed, Volcker instituted an interest rate policy that increased the Federal Funds Rate to much higher levels.
As the interest rates paid on bank savings and CDs started to rise, Americans clamored to take advantage thus dumping gold. The inflation rate came down to the mid 2% range by 1983. You see, there was no competition to the U.S. dollar at that time except for gold. Paying higher interest rates restored confidence in the almighty dollar.
Gold languished for 17 years hitting a bottom of $252.80 in July of 1999.
Gold started to bounce off its low in mid 1999 and some of this reasoning could be contributed to the “end of the world” panic with the end of one century and the dawn of the next. While the bounce wasn’t too big, gold did maintain a mid to upper $200 price range for the next couple of years, never falling below it’s 1999 low.
Now this is where financial advisors will tell you that when you include all of this data about the historic price of gold, it doesn’t paint a pretty picture. For the most part, they are right. But there is something that changed in 1999 that wasn’t a factor before. This “something” was the introduction of the euro in 1999.
The first year or so of some new financial instrument is sometimes a probationary period to see how it will do compared to the competition. The euro, during 1999, fell to where it was at par with the dollar by the dawn of the 21st century. By October of 2000 though, the euro had bottomed against the dollar.
Gold prices during this time-frame of the introduction of the euro languished. This was due in part because of the September 1999 Central Bank Gold agreement by G10 countries to dump 2000 tonnes of gold on the open market over the next five years (through 2004).
Even with the dumping of gold on the open market, gold managed to break $300 an ounce in 2003 and $400 an ounce by 2004 in anticipation of the end to the Central Bank selling of gold.
Another story was developing at this time; the euro had bounced off its lows and become a much stronger currency. As the dollar was sinking, from its high in 2002, and the uncertainty of what affect Central Bank sales would have on the price of gold, the euro became the only other “safe haven” in the mind of those who were looking to get out of the dollar.
The Euro Joins Gold as Competition to the Dollar
Had the euro not been around, we might have seen the price of gold be much higher than it was. But the Central Banks were also making sure that the price of gold wouldn’t take off too. As the first Central Bank sales agreement ended, a second agreement took its place in March of 2004, to last five years. This time the agreement was to sell 2,500 tonnes of gold.
I wonder how much the Swiss citizens are enjoying the fact that their Central Bank has been selling their gold at depressed prices since 2002 and is still selling today? What would U.S. citizens do if the U.S. started to dump its gold on the market? I do realize there is a mystery as to how much gold the U.S. really has since the government never allows it to be audited. It’s supposed to be around 8,033 tonnes.
But keep one thing in mind: the second Central Bank agreement to sell gold ends in September. How much more can these countries take of selling an appreciating asset?
The Competition to the Dollar Has Grown
During the time-frame of 1971-1999 there really wasn’t any competition to the U.S. dollar. The U.S. dollar was king of the world. Gold was not on the tips of everyone’s tongues because the U.S. education system hardly ever mentioned gold except something about a California gold rush in the 1850s and an Alaskan one (Klondike) in the 1890s.
But that changed when the euro became available as an alternative in 1999. But the euro is also a fiat currency and subject to inflation just like any other currency. (Inflation is defined as the increase in money supply by printing and additions to fractional reserves).
In fact, over the last ten years, gold has increased over 161% versus the euro as can bee seen in the chart below.
It’s also true that its easier to invest in gold now than in the 1971-1999 era because of the introduction of ETFs like GLD and IAU (although, I personally would only recommend trading with these instruments and not include them in one’s long term holdings….but that’s another story).
Does anyone find it interesting that ever since the introduction of the euro the price of gold has gone up every year in U.S. dollar terms (outside of its first year)? This despite Central Bank sales agreements to suppress the price of gold.
Does anyone think that U.S. government policies are dollar bullish?
Being that financial advisors hardly ever recommend gold to their clients, who is going to tell them they need to protect themselves from what really backs the U.S. dollar?
Financial advisors need to change with the times and stop bashing gold as an investment and include it as insurance in their clients' portfolios.
The euro, while having its own vulnerabilities as it is fiat money, is just another nail in the U.S. dollar coffin. All the other nails are golden.
Disclosure: Long physical gold
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I think critics of gold as a long-time investment, at least for US citizens (where there's no danger of invasion or revolution), are correct. But that doesn’t mean that it's not a good short-term "insurance" item when the economy is in uncharted waters, as it is now, and when there are serious long-term risks to the stability of the dollar (and the Euro). In addition, gold was a superior diversifier in 2008, compared to other asset classes. Bullion is a beta-blocker.
What got me thinking was the fact that during these last dual wars in Iraq and Afghanistan, our troops were pulling double duty.
Meanwhile, N. Korea was acting up again recently and Obama seems to have an infatuation with what is happening in Pakistan, even before he became President.
Recall his statement during the campaign:
“The first step must be getting off the wrong battlefield in Iraq, and taking the fight to the terrorists in Afghanistan and Pakistan…. If we have actionable intelligence about high-value terrorist targets and President Musharraf won’t act, we will."
And his most recent Pakistan comments after being elected:
Obama: U.S. prepared to pursue targets in Pakistan
www.cnn.com/2009/POLIT.../
Thinking like Sun Tzu, China, if they were keen on conquering the U.S., could take their 200 million man army and walk right across our border with Mexico.
"The opportunity to secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself." Sun Tzu
"There is no instance of a nation benefiting from prolonged warfare." Sun Tzu
The U.S. economy is suffering from this "prolonged warfare" and I just can't see how the U.S. Military can expand into any other country, although we allegedly are counting down the days of coming home from Iraq.
I'm not saying it can happen, but it would make for a good novel (and there's one little spec in my eye that keeps me looking out for how thin the U.S. will spread itself and what China's up to).
On Jul 15 05:42 AM Roger Knights wrote:
>
> I think critics of gold as a long-time investment, at least for US
> citizens (where there's no danger of invasion or revolution), are
> correct.
One can view physical gold as a continuous and fluctuating asset class in a portfolio. Why not replace the physical gold with GLD ?
Is the risk of loss that substatial?
GLD and IAU offer investors a ways to play the gold market, but do not allow the investor to take delivery of the gold. The gold is set aside in a bank depository. You buy shares in the ETF and sell the shares back when you liquidate your position receiving Federal Reserve Notes in return (into your brokerage account).
These ETF’s are a lower cost way to invest in gold, but offer only paper promises if the dollar were to collapse as you do not have actual ownership of gold. What you do have ownership of is multi-level custodian’s including the Bank of New York, and HSBC that are in control of the gold.
Another way of looking at it, is if push comes to shove with the dollar, do you want a bank in control of your gold or do you want the peace of mind knowing you are in control?
That's a big decision to make, but I understand, not one a trader of GLD or IAU cares about.
If you read my article on "What Really Backs the Dollar?" you might get a better perspective on the reasons to own physical gold. You can find it here: fedupbook.com/blog/eco.../
On Jul 15 01:09 PM User 427556 wrote:
> "It’s also true that its easier to invest in gold now than in the
> 1971-1999 era because of the introduction of ETFs like GLD and IAU
> (although, I personally would only recommend trading with these instruments
> and not include them in one’s long term holdings….but that’s another
> story)."
> One can view physical gold as a continuous and fluctuating asset
> class in a portfolio. Why not replace the physical gold with GLD
> ?
> Is the risk of loss that substatial?
then "(although, I personally would only recommend trading with these instruments and not include them in one’s long term holdings….but that’s another story)."
So when would you prefer to hold physical gold and not GLD, and is there a time when you would prefer GLD over physical gold???
Curious!
Gold is the perfect holding for mild financial calamity and an orderly fall in the value of the US$; but in a complete collapse of global markets, its value would depend on a belief that those markets could eventually be resurrected.
Until that time, "trading" GLD is ok, but I'd also want to know what else is going on in the economy: Wars: Pakistan, N. Korea, and Iran; more stimulus, bankruptcies and bailouts; FDIC needing more cash; How many more banks will be added to the 50 or so failures at present; China and Japan's rate of unloading U.S. Treasuries; and what the Fed is saying and doing along with the general sentiment of consumers and investors.....to name a few.
As the dollar index heads to 72 however, the premium over spot for physical gold will rise and that's why its good to accumulate now if you believe as I do that 72 and lower is on the horizon.
Everyone's personal situation is going to be different. My objective is to help people understand a little bit more about the situation.
On Jul 15 02:35 PM srfpala wrote:
> "..they are dead wrong and their clients will suffer from their lack
> of understanding about how gold fits into a well diversified portfolio."
>
> then "(although, I personally would only recommend trading with these
> instruments and not include them in one’s long term holdings….but
> that’s another story)."
> So when would you prefer to hold physical gold and not GLD, and is
> there a time when you would prefer GLD over physical gold???
> Curious!
>
There are many factors that could affect gold and silver prices moving forward:
1. Technology and industry creating specific usage additional demand for all metals, especially as we seek less oil dependence.
2. Mining output of silver, although increasing, barely able to meet current demand. While China produces more gold, it has also encouraged their own populace to buy it, and China’s government is buying 80 billion in gold for national reserves. They know they are caught up in the dollar currency game and seek to come out on top.
3. International Trade debt, Government debt. Corporate debt, and last but not least Consumer DEBT!!!! > Collapse? Where does the relief come from? Who taxes who and gets what from the other at what cost?
I saw a guy at the WSOP making huge houses of cards. How often do they fall under any kind of stress? First one part crashes and then the rest crash too.
4. International consumer purchasing increases for both gold and silver jewelry, and due to wealth protection of monetary risk aversion. If any serious confidence hic-ups occur anywhere, there will be a world-wide collective mad dash to acquire precious metals, a serious a bum rush to gold and silver.
The reason Obama got the job is because of our people's faith in his confidence, but deep down we all know what a bugger bear we have created for poor him to solve. I hope he can maintain the clarity of mind and the leadership presence to pull it off. He is a busy man, but I would like to talk with him, smoke a bowl.
5. There is never peace in the valley. It doesn't have to be "win or die" even though the world is getting smaller and it feels like we are all in each other's back yard.
a. The Korean peninsula. Will North Korea continue to sell arms to our potential adversaries, and saber rattle us into a conflict?
We have sold more weapons then they have though... so who is the culprit? Were our actions more sound, or predictable?
b. Iraq, will we leave when the time comes? They are more than tired of us, but Sunni (smarter minority) vs. Shia (herdish majority) tribalism conflict runs deep and chaos could erupt as we leave. Saudi Arabia supports the Sunni's and that is the only reason we are still there. Honestly, a democracy was the last thing they needed there. It was social Darwinism that had put the Sunnis on top.
Tito held Yugoslavia together until his death, the same strength in leadership is required in Iraq. The Mid-Eastern culture respects a charismatic person, not a faceless rule of democratic vote. For a hundred generations they have been conditioned to listen to their clerics and follow their guidance in all things.
c. Afghanistan religious tribalism; backward, zealous and unconquered as far back as anyone can say. We are going to exhaust our country's military and financial reserves trying to change that rock? For what? A foothold in the region? Who cares? The culture clash, both ours and theirs, in the Mid-East is beyond our comprehension and insurmountable. Need I give examples?
d. Who's next? Where is the next zealous nut ball who wants to poke the bear's nose, or catch the eagle's eye? That Dragon is starting to stand up too. “Who is that trying to start an oil bourse, or talking about the dollar no longer being the world reserve currency? That would upset the whole applecart. We can have none of that. Do we fight you, or maybe we can bribe you to keep our game intact?”
Restraint is a good course of action if you can get away with it. Our foreign relations should resemble a pot luck dinner. In that everyone brings some good food, all eat, share some pleasant conversation, let the kids play, play some music, and then sincerely wish everyone well and leave until next time. They don't reveal, or ask us to solve their problems. We don't pry into their affairs, and we certainly don't offer to beat up their neighbors. Respect all around is maintained.
"Trade with all, entangling alliances with none" Thomas Jefferson and more recently Ron Paul.
e. Iran; Election fraud (?) and civil discontent; nuclear development, peaceful or diabolical?; oil and the Strait of Hormuz; arch enemy of Arab Sunni tribe’s and Isreal. contemplate for yourself on all the ways that could go wrong... ...and with Isreali guided missile boats on the way?
How is it that Pakistan, North Korea, India, and that little fire plug country of Israel have nuclear weapons? That was some how more allowable, or is it that we are running nothing but our mouths these days?
Yes, we have bought too many F-22s that have critical flight failures every 2 hours. The military industrial complex tail can stop wagging the dog anytime.
Let us take all the profit out of the criminal justice system, and the military mission and requirements.
If we have to have a draft then that should tell us that the empire BS has gone too far.
Any military action not in our own direct defense is a waste of finite resources, and plays on our people's patriotism.
6. Wherever the economic situation becomes dire, there will be domestic unrest, crime and suffering that might lead to detention centers to control large groups of dissidents. Civil rights are lost as governments preserve themselves at any cost, maintain order, and control the populace. Isn't that what makes them so dangerous?
"Gated community" takes on a whole new level and meaning in an extremely security conscious world.
In preventing terrorism it becomes easy to justify the personal RFID chip and total immersion onto the grid giving one access to health, financial, travel passport, employment, and all government services. Never forget that the access to the grid can be switched off at the government's desire and that the RFID comes with the GPS locator beacon for them to come find you.
I now can hear you say "Not me! I won't allow them to RFID me!!!" Well, if that is so then that takes you off the grid and you are going to need plenty of gold and silver where you are going.
(Homeland Security chief promotes cheaper, secure driver's licenses
The country needs more secure driver's licenses to thwart terrorists, and a new Obama administration program supported by governors ...
www.usatoday.com/news/... )
opinion & speculation: The current powers that be will do everything in their power to keep gold/silver from being seen as traditional money, which it is. They will manipulate scarce commodity real gold/silver prices downward by shorting the commodity using unlimited printable paper money in paper markets. That is the only game they can play to try to prop up the dollar and maintain their advantage - smoke and mirrors.
Why do you suppose that most of the bailout money is unaccountable in a giant furball of finance? Is one reason that the banking minions (goldman sachs, etc.) acted on the government's behalf shorting gold and silver to prop up the dollar, and lost money as a result and want to be made whole? Would the secrecy of this allow the Federal Reserve to blackmail the government to secure more power? Are these billions upon billions of dollars sitting there waiting for a collapse, so that elite banking interests can buy up assets into whatever game comes next, thereby securing their own perpetual power for generations?
There are many eventualities that could cause gold and silver to rise moving forward. How much of this falls into the Bilderberg globalist plan of a New World Order?
Change is a certainty. Where that change will take you is the question.