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But Gold Already IS the Standard
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(August 30, 2012) With gold up $100 since its July low, the idea of ‘hard money’ makes the news as the Republican Party platform recommends a commission to study the possibility of pegging the US dollar to some constant “metallic” value. Meanwhile, the dollar that we have today swings wildly as measured against our favorite metallic, gold, in anticipation of possible Fed action at a place called Jackson Hole.
Party platforms are not legal documents, or even realistic plans of action – basically they are wish lists put together by the various factions within a party who enjoy seeing their favorite ideas in print. No doubt the Ron Paul Revolution wing of the Party had something to do with this plank:

“Determined to crush the double-digit inflation that was part of the Carter Administration’s economic legacy, President Reagan, shortly after his inauguration, established a commission to consider the feasibility of a metallic basis for U.S. currency. The commission advised against such a move. Now, three decades later, as we face the task of cleaning up the wreckage of the current Administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar.”

When the Reagan commission on gold met, it was only ten years after President Nixon shocked the world by severing the link between gold and the US dollar. The 1970s were an era of inflation so extreme that the very future of the US dollar seemed at risk, so as 1981 rolled around, there was a real attraction, tinged with nostalgia, to the idea of sound money.

In the end, the commission concluded that “…restoring the gold standard does not appear to be a fruitful method for dealing with the continuing problem of inflation." Then-chairman of the Federal Reserve Paul Volcker in fact was in the midst of attacking inflation his own way: He let interest rates rise into the double digits, choked off speculative demand, and wrestled inflation to the ground. For the next 20 years, gold fell in price, and off the popular radar screen.

The 21st century changed all that. Today, we are approaching the one-year anniversary of gold’s latest record price in dollars, the $1,900 level reached on September 5th of 2011. As has always been the case during the natural corrections in this eleven-year bull market in gold, the longer that correction drags on, the more the popular financial press puts their laziest writers onto the task of producing articles and commentaries that in essence spread the word about how dangerous and unpredictable gold is as an investment, how it seems to go down in price as well as up, how unsafe it is to hold, expensive to store, yields no dividends - and furthermore, these articles always assert that the last time this ‘barbarous relic’ reached a record price was during an unusual period of crisis, which is now gone, or at least forgotten (take your pick), and will never occur again, therefore, it is stated in sloppy conclusion, gold is not likely to trade that high again soon, if ever.

Meanwhile, the latest figures from the World Gold Council tell us that individual investor demand for gold was down during the past quarter, but increased gold purchases by central banks more than took up the slack.

So, it has come to this: the most substantial buyers of gold lately have been those institutions that are most knowledgeable, and have the most inside information, about the health and soundness of the world’s currencies. Central bankers are not buying what their colleagues in other countries are printing, but instead are increasingly acquiring gold dug out of the ground. What’s an ordinary citizen who is blessed with some ‘wealth’ in the form of ‘currency’ supposed to make of that?

The present slump in gold prices reminds us of an earlier phase in this eleven-year (so far) gold bull market. In early 2008, gold first traded over the $1,000 mark, peaking out at $1,011.25 on March 17th. From that point on, not much positive happened in gold prices for over a year and a half. It wasn’t until October 5th, 2009 – nearly nineteen months later – that gold again traded over the thousand dollar mark. Two years later, it was over $1,800.

Of course, there is no predicting the future for gold, or any other market. Gold prices over the past year have slump into the 1530s area twice, and that level shows some sign of being a new floor. Gold price action in the past few weeks has been positive, with prices up some $100 from the July low of $1,558.

This may have something to do with the prospects of Federal Reserve action, where Chairman Bernanke’s leadership could not be more different than Chairman Volcker’s. Inflation is the furthest thing from the Fed mind. No doubt our central bank brain trust is trying to think of something stimulative to do, since the economy is failing to show much improvement, and instead continues to drift like a ship in the doldrums.

Today, hints of possible action by the Fed are whispered about (Look over the horizon! Is that the QEIII?) as we sail closer to the unknown edges of the Jackson Hole.

 

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