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Holy Moly, Is It July Already?
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(July 5, 2005) What exactly was there to report in June: Inflation? The real estate "bubble" was on every magazine cover on the planet. The dollar? China would like to recycle some by buying Unocal, but Uncle Sam says that won’t fly. Gold? For the first time ever, it takes over 350 euro notes to buy an ounce of gold. Now that's news!
Gold, although still in the doldrums versus the US dollar, achieved a milestone in June, trading at over 350 euro for the first time since the introduction of that European national currency. Gold prices hit their peak so far in the euro’s short history, trading at 367 euro on June 24th, and even in the midst of gold’s most recent correction versus the US dollar, gold closed at 357 euro on July 5th.

Despite the dollar’s surge against the world’s other currencies for most of this year, gold has lately traded near the middle of its $411-458 range, a well-worn value rut which goes back about ten months.

Gold’s strength against all currencies is significant, since the conventional rap against gold’s move over the past four years has been that it has been primarily an illusion produced by dollar weakness. Of course, to the US investor who bought gold at the sub-$300 levels as recently as April of 2002, gold’s rise isn’t an illusion at all – he or she has an absolute investment gain in dollars since the time of purchase. That was the idea, wasn’t it, to trade dollars then for something that will be worth more dollars in the future? Buying gold with dollars is simply hedging against dollar weakness, and so far this century, it’s meant money (dollars) in the bank.

But the euro has now fallen over 10% this year, versus both the dollar and gold. With the recent disunity in Europe, including France and the Netherland’s “NO” vote on the European Constitution, and Italy threatening to mimic Argentina in the way of fiscal discipline, the euro, seen scant months ago as the dollar’s best competitor, now shows to be much weaker than its former promise.

It now can be said without fear of contradiction that the dollar and euro are both under severe mismanagement.

John Hathaway of Tocqueville Asset Management calls it “a horse race between the euro and the dollar as to which can first attain full investment dishonor”….”…Capital flows into gold under one scenario only: when the lack of investment returns elsewhere, the desire for safety, and the ascendance of a risk-averse psychology at large converge. In other words, investors come to gold through a process of elimination. It is an odyssey of discovery and realization that investment vehicles thought to be potentially rewarding are in fact filled with hazard and adversity.”

Money, be it ‘hot’ money, ‘fast’ money, or simply ‘your money,’ today finds itself at a juncture of no small peril. Considering the alternative ‘stores of value,’ the haven of gold looks pretty good - at least until things blow over.

When the Maestro Alan Greenspan speaks of “conundrums” and other economic and fiscal circumstances occurring today which are inexplicable to him and the Federal Reserve Board of Governors for which he speaks, it's time to start worrying. We can picture his retirement speech to Congress in which he confesses total befuddlement about how all this managing the nation’s money stuff could possibly work, throws his hands up in the air, and wishes us all good luck maintaining this magic act, this cipher, this electronic ghost that goes by the name ‘dollar.’

Admitting, upon his leaving, that our modern attempts to maintain currency without the benefit and discipline of gold backing, despite decades of toil by the best and the brightest, has been a fool’s errand, would perhaps be Mr. Greenspan’s most gracious possible gift to the American people, and the world at large. Picture him, standing before Congress, with the cameras rolling, speaking for all the world (or at least all the C-Span viewers) to hear:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal…”….”A fully free banking system and fully consistent gold standard have not as yet been achieved...”…the gold standard is incompatible with chronic deficit spending.”

Building up a good head of steam, he might conclude with these words:

“This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.”

As some of you probably guessed, the above quotes are all from Alan Greenspan’s essay of 1966 entitled, “Gold and Economic Freedom.” It would be a thrill to hear him quote that in his farewell appearance, wouldn’t it? The sound money crowd, which once counted him a member, would go wild. Just slipping in a few lines from that 40-year old essay would do so much to redeem his reputation, at least among those of the hard-money persuasion who also have a capacity for forgiveness.

Mr. Hathaway brings us back to the (more realistic) present, as he concludes in his June 30th, 2005 essay,

“Convenient though government sponsored currencies such as the dollar and the euro may be, they are first and foremost tools of government policy and serve the interests of the private economy as an afterthought. The dichotomy of monetary interest between the public and private sector will be exposed as the current secular credit contraction runs its course. It will culminate in a grass roots mandate for sound money, and will be expressed as a dollar gold price well into four digits.”

 

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