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Cool Thoughts on the Present Situation
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(May 7, 2006) Another week, another 25-year high for gold versus the dollar. Gold has now gained $425 in 5 years, $150 of that in the past eight weeks. $850 seems in sight, a level last reached in 1980, a time of surging oil prices and, yes, some sort of trouble between the US and Iran.
(We borrowed our own headline today from a pamphlet that Ben Franklin wrote and published in 1764. He was writing cool-headedly about the then-current ‘hot’ topic in Pennsylvania, the controversy over governance of that commonwealth by the Proprietors of Pennsylvania. Amidst his ‘cool thoughts,’ he blasted the Penn family, and argued for the overturn of their proprietorship in favor of Crown rule via royal charter.)

Gold prices rise, surge, soar, go ballistic, set new records. Time Magazine runs a 2-page article about gold. The New York Times Sunday May 7th Business section puts Jim Sinclair and his gold on the cover. CNBC and the rest of the financial press have discovered gold and commodities. Gold is seemingly everywhere.

Gold, you might gather from all the news, is quite active. But, as we have long asserted, gold is inert, brilliant, incorruptible, and ultimately, passive. Gold doesn’t “go” anywhere. The currencies that gold is measured against are what’s moving – and the trend is downward.

Randall Forsyth in his “Up and Down Wall Street” column in the May 8th edition of Barron’s spoke of our falling dollar, and the bind that our weak currency will put on other nations’ efforts in the export game. In short, no country wants their own currency to be too strong relative to others:

“But other countries will resist the virtue of a strong currency being forced on them because they don’t want to be the wallflower at the global party. That leaves only one currency that can’t be compromised: gold, which Friday hit $686.50 an ounce for the nearby futures contract, up from $519 at the turn on the year.”

The global ‘race to the bottom’ among currencies shows that the weakening value of fiat money is not simply a matter of undisciplined spending or legislative indifference. There are legitimate issues of national interest in the trade wars which mean that the various fiat currencies of the world will always trend downward.

History shows that sometimes it happens slowly, and sometimes quickly, but fiat currencies (money created by order of the state) inevitably turn to dust.

The act of maintaining a fiat currency is a matter of confidence, or to put it more crudely, a confidence game. The holders of the currency must have some sense of assurance that an unbridled quantity of the stuff won’t be unleashed precipitously by the powers that be. Increases in the money supply serve to dilute the value of the currency by violating the only precept which enables that currency to maintain its value, that of scarcity. Absent scarcity, exit value.

We should not forget what a mighty feat of legerdemain it is to maintain a money that is not defined by precious metal, that is not in fact manifested in a true ‘coin of the realm’ stamped in measured quantities and purities of gold and silver. When the US began its Grand Experiment in modern money-which-is-not-coined-money during the Great Depression, the concept of the dollar as a measure of gold stayed intact, although altered for domestic consumption. Its total abandonment came in 1971, when the Treasury finally ceased pouring out gold to redeem dollars coming in from abroad.

Since that time, we have been living with a virtual dollar, and have created them by the trillions. The dollar is now an entity defined entirely by governmental contrivance, and nothing more.

So when Ben Bernanke, the head of the Federal Reserve, addresses the health of the dollar, we should all pay attention. Mr Bernanke is in no position to speak or write casually, ‘off the cuff,’ or in a speculative manner. His word defines our virtual dollar today.

And in a letter to lawmakers dated April 18, 2006, he wrote:

“If the dollar declined sharply, it would not necessarily disrupt markets.”

This is a remarkable statement, succinct and transparent. It bears reading again. Such a statement would be shocking in any age except the present. Today the head of the Federal Reserve doesn't even bother to pay lip service to the health of the dollar.

Unless, of course, its decline could be perceived as threatening to “disrupt markets.” In which case, of course, assurances must be given. About the ‘markets’ that is, not the currency itself – a weaker dollar is simply no big deal, but heaven forbid that anything should disrupt the 'markets,' which is presumably a shorthand for the stock and bond markets, as opposed to, say, the markets for poppies in Afghanistan, or straw hats in July.

Mr. Bernanke’s statement is equivalent to Bud Selig, the commissioner of Major League Baseball, coming out and saying:

“If baseball games were only six innings long, it would not necessarily affect attendance.”

First of all, the commissioner is the Lord of Baseball, and if Bud were to say such a thing, then you can bet money that before long you’d forget that there ever was such a thing as a seventh-inning stretch. Bud’s the boss, and what he says, goes. If you value baseball, then tough luck, because the game just got shorter.

And what Mr Bernanke is saying is, if you’re a season ticket holder of the dollar, then tough luck, it’s going to be worth less.

When the Lord of the Dollar makes such a statement, It's a sure wager that the dollar's in imminent trouble. In fact, since he made that statement some three weeks ago, the dollar has declined some 10% against gold.

Coincidence? Probably so, since there seem to be a plethora of factors lifting gold prices at this time. But all dollar holders are in essence holding a continuous bet against Ben Bernanke, and so far they are coming up losers.

Yet most Americans would be more outraged if their favorite airline tried to slash the value of their Frequent Flyer Miles, than they would at the devaluation of their currency.

But if you are one of the minority of Americans (i.e., a creditor rather than a debtor) who do worry about the health of that down-trodden currency known as the US dollar, then you will probably agree with this modest proposal:

That any time an official of the US Treasury or Federal Reserve Board speaks about the US dollar in any way, shape, or fashion, then the following oath should be required by federal law to be pronounced simultaneously:

We are, of course, unalterably opposed any action that erodes the value of our currency, since the dollar is the unit of value that US citizens are required to transact business in, and put their faith and savings in, and is the unit of trade that their pensions, Social Security, and various investments are and will be measured in, so it behooves us as issuers and protectors of those dollars to always to take into consideration the financial health and welfare of Americans who have, or will in the future have, dollars, and to take care not to engage in acts which, taken in the aggregate, would tend to drain those dollars of their value. So help me God.”

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As for gold prices, predictions are all over the map. If you search various media and the Internet, you can finds confident calls for $800, $1,000, $2100, $3,500, etc.

The truth is, no one knows for sure. If everyone was sure that it would reach $1,000 this year, then the market would go to $995 immediately.

But, as Mr. Forsyth says, gold is the only currency that cannot be compromised. Without that quality, gold would go back to being worth a couple of hundred bucks because it makes nice shiny jewelry.

 

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