Gold and The Disintegration of U.S. Economic Influence

During the 1970's the world watched closely as the Watergate scandal unfolded. As well as the element of human fascination with such high level intrigue, any event which could de-stabilise the US presidency would necessarily have a major impact on world financial markets. The worldwide concern relating to the US political troubles at the time was accompanied by an upward spike in the gold price. Although the price of gold is affected by a large number of variables, it is probable that the price movements which occurred at the height of the Watergate scandal were not coincidental.

In recent years we have observed the U.S. political administration become increasingly tainted with allegations and evidence of corruption and deception, the most recent of which involve foreign contributions to Democratic campaign funds. In addition to a presidency soaked in scandal, the U.S. is currently experiencing rates of money supply growth which are the highest in 10 years and a Federal debt which has burgeoned to $5.3 trillion.

Had the current US political and economic situation prevailed 20 years ago, then the resulting worldwide apprehension would almost certainly have caused the price of gold to soar. Such an escalation in the relative value of gold would likely have occurred irrespective of events elsewhere in the world, due to the dominant position of the U.S. within the global economy. However, what we have actually witnessed in recent years is a bear market in gold which has seen the gold price drop to its lowest level in over 20 years when measured in inflation adjusted terms. This, I believe, is symptomatic of America's reduced economic status in the world.

It is my opinion that there are 2 primary reasons for the reduced ability of events in the U.S. to influence financial decisions made throughout the world. Firstly, enormous growth has occurred across Asia, catapulting this region into a position of economic leadership. The world now watches Asia with the same intense interest it once reserved for the U.S. In fact, the two largest Asian economies, Japan and China, are also the largest foreign holders of claims on the U.S. Treasury and Federal Reserve (by claims I mean dollars, which are a liability of the financial institutions which create them, and U.S. Government debt). This gives these Asian nations substantial leverage in any dealings with the U.S. The shift in economic power towards Asia will likely continue at an accelerating pace and will also be a major positive for gold due to the healthy distrust of government promises which many Asians demonstrate when it comes to personal wealth protection.

The emergence of the Asian region as the dominant force in the global economy is not a reflection of any U.S. short-comings, but a naturally occurring phenomenon based on population dynamics and trade. However, the other primary reason for the reduction in U.S. influence results from America's own actions. From 1933 until 1971, the U.S. dollar was linked to gold at the official rate of $35 per ounce, which means that during this period the U.S. government was prepared to provide one ounce of gold in exchange for 35 U.S. dollars, and vice versa (to everyone except its own citizens, that is). This official link to gold, however, created a problem for the government. It meant that the supply of U.S. dollars could not be arbitrarily increased to suit higher levels of debt and a short term political agenda. The consequences of fiscal irresponsibility would be the complete depletion of America's gold reserves as the rest of the world rushed to convert their de-based dollars into gold.

In 1971, President Nixon removed the official link between the U.S. dollar and gold. The U.S. government, no longer restrained by the need to exchange gold for dollars at a certain rate, embarked on a spending spree which has seen the dollar lose around 90% of its purchasing power in 25 years. It has also reduced to a small fraction of its former self when measured against most other major currencies.

Continuation of the current U.S. fiscal policies will firstly lead to the loss the dollar's reserve status, and eventually to the complete demise of the dollar as a useful medium of exchange. (Note that the removal of the official link to gold did not, in itself, cause the collapse of the dollar. The real causes are numerous and include expansionist-minded banks, a Federal Reserve unwilling to assert its independence from its political masters, and politicians who were/are prepared to mortgage the future living standards of U.S. citizens to achieve short term political objectives. Nixon's action simply removed the last major obstacle to the furtherment of financially irresponsible practices on a large scale).

U.S. economic influence has dwindled hand in hand with the debasement of its currency.

In conclusion, evidence of political wrong-doings within the U.S. Government continue to surface. However, for the reasons discussed above, anything short of a presidential impeachment or resignation is unlikely to significantly affect investment decisions made outside the U.S., including the decision to buy or sell gold.