Precious Metals, A Store of Value

It is practically impossible to find a government economist, central banker, or private mainstream economist today who shows the slightest concern for the store-of-value function of Money. Governments as well have shown a complete disregard for one of "Money's" primary functions, its "store-of-value" function. The resulting reduction in purchasing power can best be seen by comparing the cost of a typical market basket of goods and services over the past century in terms of the 1900 US dollar.

1900 - $1,000

1913 - $1,159

1925 - $2,045

1950 - $2,858

1975 - $5,915

2000 - $19,950

2006 - $25,188

Cumulative inflation in the dollar over the past century has been staggering, especially the surge in the inflation rate from the 1970s to the present. The progression of inflation has clearly coincided with the staged elimination of gold's discipline from the monetary system, whose destruction began with the creation of the FED in 1913.

William Jennings Bryan, a three time Democratic presidential candidate, in his famous 1896 Democratic Convention speech, set the mood towards gold for the next 100 years. Bryan condemned the idea of a Gold Standard, warning that, "You shall not crucify mankind upon a cross of gold." It seems we have the same kind of FOOLS now as we had back then. However, gold's place remained in the system and four years later, the US moved from a Bi-metallic Standard to a pure Gold Standard.

• The bankers and politicians who formed the Federal Reserve System in 1913, represented the world's first major official negative influence on gold. In 1925, the Gold Standard was replaced with the Gold Exchange Standard whereby only dollars and pound sterling were redeemable into gold. All other currencies were redeemable into sterling.
• John Maynard Keynes' New Economics (not much more than an updated version of Marxism) which was introduced by FDR and his New Deal in the 1930s, had a profound negative influence on the Gold Standard, which Keynes also deemed a "barbarous relic."
• The attack on gold reached its crescendo when in 1933, Roosevelt banned US citizens from owning gold, but still allowed foreigners to redeem dollars for gold. The restriction on US citizens lasted 41 years. Oddly enough, until 1945, the Federal Reserve was required to hold gold reserves equal to 40% of its outstanding notes and 35% of its deposit liabilities. In 1968, all reserve requirements that were left were dropped completely and a two-tier gold system was put in place with both an official gold price and a free-market price. The official US government gold price, began in 1797 at $19.75 an ounce, was bumped up to $35.00 in 1934, then to $38.00 in 1972, and finally to $42.22 in 1973. Each increase represented a devaluation of the dollar.
• By 1971, ballooning trade and balance-of-payments deficits eroded faith in the dollar. Nixon, realizing the US couldn't cover its foreign liabilities and fearing a European run on the dollar especially by the French and international currency speculators, closed the gold window to foreigners, placed a 10% surcharge on imports and imposed wage and price controls; not exactly what you would expect from a Conservative Republican. Nixon then declared himself a complete Keynesian and from 1971 to this day, the dollar has been devoid of all ties to gold (and Nixon is still always referred to as a Conservative Republican, even though judging by all his economic policies that he put in place, if he was honest he would have run as a Democrat at best or at least as a RINO).
• In the mid 1970s, William Simon, Secretary of the Treasury (another RINO), in his infinite wisdom, devised a program of US Treasury gold auctions, which coincided with IMF gold sales. Inflation had begun to pick up, the free-market gold price was rising and the authorities wanted to squelch interest in gold. Official gold sales drove the free-market gold price from $200 an ounce in 1975 to $103.50 in August of 1976. Bankers and economists were so convinced gold was finished that Walter Wriston, head of Citibank, forecasted publicly that the free-market gold price would be driven back to $35 an ounce or lower. But in the face of oil shortages and long lines at the pumps, an 18% inflation rate and 20% Treasury Bond rates, gold like the Phoenix, rose from its ashes of the $103.50 low in less than 3 ½ years to over $850 an ounce by January, 1980. Gold then began a twenty-one year Bear Market as Reagan ordered Paul Volker, who was appointed by Carter, to break the back of inflation and the USA fell into a severe recession which lasted from 1981 to 1983 when the Regan Tax cuts came into being. Despite continuous central bank gold sales and forward-selling programs by the mining industry, gold nevertheless made its double bottom in Feb.2001 at $256. Once the bottom was in place and in spite of all the manipulation attempts at driving Gold lower, it worked its way higher in a near perfect Elliott Wave, Fibonachi Five Waves, Bull Market move until it hit $730 in May of 2006.
• The accelerated debasement of the dollar, especially over the past quarter century, which has resumed its fall lately has finally brought the long-term reserve currency status of the US dollar into question. Created literally out of thin air by the trillions, the dollar has defaulted as a store-of-value to all savers, who have worked and saved their hard earned dollars hoping to set aside something for their heirs or for a rainy day. Moreover, the US dollar has become the cornerstone of what amounts to a global fiat paper money DEBT system. History is strewn with worthless defunct paper monies. History buffs will recall the US experience with the Continental dollar, created by the Continental Congress to support the Revolution. The inflated currency rapidly became worthless and to this day the expression goes, "not worth a continental." France, during the French Revolution, saw its currency, the Assignat, become worthless and the Germans saw their Reich marks become worthless in 1923. All the other examples are too numerous to list here now.

Confidence in irredeemable paper money is very much a state of mind. Benjamin Disraeli described confidence in money as suspicion asleep. Once suspicion has been awakened, it won't go back to sleep for a long time. In periods of sound money, confidence in paper has been maintained by a gold backing; however, not only the US, but the entire world, has abandoned the natural stability of a gold-backed currency. A look back in monetary history would conclude that a breakdown in paper money, including the dollar, is unavoidable at some point. The only question remaining is WHEN? In the move to substitute paper for gold, the Federal Reserve became a prisoner of its own expansionist policies which have created domestic political demands for perpetual economic growth regardless of the additional debt created. Consequently, total credit-market debt has ballooned disproportionately relative to the size of the US economy. It now takes over $5.00 of new debt stimulus to produce only $1.00 of GDP growth. Like trees that can't grow to the sky, a debt pyramid can only grow so much before imploding. Inflationary forces have now caused the Federal Reserve to raise short-term rates from their 45-year 1% lows in 17 consecutive increases to 5 1/4% and pressure has continued to build on the overall debt structure as pressure for a interest rate cut re-emerges at the slightest sign of any GDP slowing.
The US is now saddled with record budget and trade deficits, is dependent on foreign sources of financing to the tune of over $2 Billion a day and is mired in debt with both the government, its companies and citizens living far beyond their means. The final solution is likely to be the re-association of paper money with gold, but only after a major monetary catastrophe.

In the interim, drawing from the history of how inflation-riddled paper monies have eventually fared, private citizens should be able to see the handwriting on the wall for the US Federal Reserve notes as well as the whole global paper money system. In the end, the impact on history's only enduring money, GOLD, should prove to be extraordinary. For gold investors, it will be déjâ-vu all over again. Will there ever again be a TRUE CONSERVATIVE occupying the White House?

GOLD WHERE TO NOW?

The move from last May 2006 lows to the April 2007 $695 high was and is just part of the correction (Wave II) that I have been talking and warning about for the last year. A few weeks ago, I warned that even 2 months is not enough of a correction for over five years of a 300% Bull Market. What you have been witnessing over the last year is exactly what I have been talking about in my last and other previous letters. Traders, even if they were right on the general trend, will be faked out of their positions, their resolve shattered, their nerve lost or destroyed and a once in a lifetime opportunity lost.

BORING!

I don't mean to be boring but there is nothing else for me to do but repeat to you what I have been reiterating to you for the last year. The overall market not only in the USA, but all over the world is in the process of forming the BIGGEST TOP in history and you CAN"T rush it. Only a fool gets in front of a runaway freight train. Picking thee top is a sucker's game (which I have played all to often) WAIT, even if you miss the top and get in 5% or 10% after the top has been made, there will be a whole lot more to go on the down side.

GOLD, like the markets, is also in the process of completing its Wave 2 correction but unlike the general markets, we are still in the early stages of GOLD'S BIGGEST BULL MARKET Look at the differences between the two markets: A company announces lower earnings but because they beat Wall Street's lowered expectations, the stock goes up to new all time highs. But when it comes to a gold stocks, even though they at times reports earnings increases of over 100% with projections of even more mines opening in the next 6 months or so, the stock goes down. Gold stocks that had P/E ratios of 50 to 100 or even no earnings at all during the 5 year Wave I bull market are now selling at P/E ratios of 7 to 20, are reporting higher than expected earnings and yet are going down and are near their year LOWS. What more can you ask for? Isn't what's happening now not exactly what I have been advising you to look for?

ARE YOU LOOKING A GIFT HORSE IN THE MOUTH?

With Gold Bullion still within 8% of its highs, but with stocks bouncing near multi-year lows as we approach the end of one year into gold's Wave 2 correction, what are you all bitching about?! In the last 2 or 3 weeks, you have got what you were all hoping for; a chance to buy in cheap. So what are you all waiting for. BUY THE DIPS NOW!

Aubie Baltin CFA, CTA, CFP, Phd. (retired)

Palm Beach Gardens, FL

[email protected]

561-840-9767

13 May 2007

The above information has been gleaned from information that I believe to be reliable but is not guaranteed by me. The information provided is strictly for educational purposes and is not meant to be used as investment recommendations.