Saturday, July 17, 2010

Gold & Fiat Money

"I do not under any circumstance favor raising the price of gold. It would perpetuate that "barbarous metal" in international monetary use. We have quite rightly broken the link between gold and our domestic money.

We should also break the link between gold and international money. The supply of money, neither domestic nor international, should not be dependent over the long run on the accidents of supply and demand in the marketplace for just one commodity."

July 12, 1968 - Darryl R. Francis, President of the Reserve Bank of St. Louis.

And so it came to pass not long after the speech by Mr. Francis that in August 1971 US President Richard Nixon unilaterally broke the US$/gold peg and declared the US$ no longer convertible to gold.

The convertibility of US$'s to gold was the last tenuous link between fiat currencies pegged to the US$ and gold.

I pick up the tale of Gold and Fiat Money in January 1971 and will tell this tale with graphs. Graphs of fiat money; of consumer inflations and asset inflations; interest rates; central bank activities; gold prices; and official gold movements.

Placing the fiat money year of 1971 in the context of gold requires a pit stop at inflation. Often we are lulled into a sense of security by looking at the inflation rate. This time perhaps we should first look at the traditional inflation index, the CPI.

Read more:

Why Gold?

Centuries ago Aristotle said gold and silver were money because they fit the five properties of money.

Kings and governments used gold for international transactions.

JP Morgan, 100 years ago, said gold was money and nothing else.

If Gold has no use or utility, then why do central banks own it? Why does the US own gold and no paper reserves?

It is because gold is money and the ultimate backstop to our monetary system.

Throughout history no currency other than gold and silver has kept its value.

You can't get a stock bull or gold bear to admit to this, because it defeats their central argument against gold.

Read more:

Friday, February 26, 2010

Gold jumps as dollar declines

Gold prices jumped to the highest price in a week on Friday, rising for a second day, as the U.S. dollar fell versus the euro and traders noted a sense of returning willingness among investors to buy riskier assets, including commodities.

Gold futures for April delivery added $10.40, or 0.8%, to $1,118.90 an ounce, the highest since a week ago. It briefly rose as high as $1,119.50, back near the highest in a month.

Prices are still headed for a 0.2% weekly decline.

"Gold has a split personality in a schizophrenic market," said Jay Feuerstein, a commodities trader and founder of 2100 Xenon. "Sometimes gold trades like a de facto currency and sometimes it participates in a flight to quality, and now it's battling between the two."

Some investors may be buying gold as the weak data increases its investment appeal as a hard asset.

But also, as stocks gain and the dollar falls, commodities may join other so-called risky assets as investors move away from safer positions, like in the dollar. Read more on gold's decoupling from the dollar.

The U.S. dollar index, which tracks the greenback versus a basket of rivals, headed down after weak data on existing-home sales and consumer confidence. See story on existing-home sales.

The euro rose to buy $1.3618, from $1.3554 in late New York trading on Thursday, aided by a media report that a German bank may help Greece address its financial needs. See more on currencies.

"The metal is likely to continue to track the euro and broad risk sentiment in the coming sessions; however, dips are expected to draw further strong support from both jewelry and investment players and should provide a floor," said analysts at TheBullionDesk.com.

Read more

Monday, February 22, 2010

Gold as the ultimate extinguisher of debt

If we accept the thesis that exorbitant debt and the destruction of capital is at the root of the present crisis, then we'll be directed to the solution of the problem. The solution is gold. The reason why there can be no resolution of the crisis without gold is two-fold.

* Gold is the only form of capital that is immune to destruction under any circumstances.
* Gold is the only ultimate extinguisher of debt.

I shall deal with the first reason in a moment. Here I just point out that when a debtor repays his debt by handing over Federal Reserve notes to his creditor, the debt is not extinguished. It is merely transferred to the Federal Reserve bank that issued the note. Transferring debt is not the same as extinguishing it.

One reason for the present plight of the world is that for the past forty years gold, the only ultimate extinguisher of debt, has been forcibly prevented by the U.S. government to discharge its debt-extinguishing function. As a consequence the debt-tower has kept growing, rain or shine. Conversely, until policy-makers at the Fed and the Treasury will understand that there is no substitute for gold in taming the debt-monster, their tinkering at the edges will keep making the global debt crisis worse.

Read complete story