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THE
ROCKET SCHOOL OF ECONOMICS


A Mystery!
by Professor von Braun

October 24th, 2000

Finally October 2000 arrives, the stock market goes through a roller coaster routine, currencies continue to head south, excepting of course the mighty US $, the gold price falls and yet, hidden around the ever diminishing planet earth, are some substantial losses that have not yet appeared. So far there appears to be very little fear and no sign of panic. What gives?

Do losses no longer matter? Let us revisit 1997 again, the time when Asian currencies and stock markets both headed south, in tandem and although recoveries have taken place in stocks, albeit limited recoveries, the currencies, with a few notable exceptions never really recovered. I think the most memorable photo I saw during that period was that of a group of Korean housewives donating their gold jewelry to the government to help out. Jolly decent of them I thought at the time.

Now here we are three years later. The currency debacle continues on an ever increasing basis, including the pound, the Euro, the Aus dollar, the Kiwi dollar, the French franc, the German mark and so on. The difference this time, as compared with 1997, is that in most cases each of the countries that have a serious problem with declining currencies have stock markets that appear to be holding up quite nicely. Meanwhile in some local currency terms the gold price is doing very nicely, thank you very much. The mining stocks aren't, but that's another story. So, what gives?

If you bought shares in the top Australian stocks 1 year ago when the currency was at 65 cents US (now at .53, having fallen from a peak of .81) and the ASE was at 2800, (now at 3187) and you were using US $'s to do it, (keep in mind that at least 50% of the ASE is offshore owned) you have not done all that well. While the index has advanced some 14.5%, the currency has fallen 18.5%. Meanwhile gold in Aus $'s has risen from AU $476 to Au $513, a nearly 8% increase, fancy that. So, depending on what you own and when you bought, financial life in Aus $'s is fraught with danger. I guess a 4% loss for the year is not too bad when you consider the performance of the Nasdaq year-to-date, even the DOW for that matter. But that 4% loss has been incurred while a stock index has risen 14.5%!

If one had gotten smart and hedged the exchange risk, then somebody is holding an 18.5% loss on your hedge. If that entity has not hedged that position (as in found another sucker) I would be surprised. But how could you hedge against a falling Aussie dollar? What would be the plan? Would it include a complex stock/currency hedging strategy? LTCM where are you?

How do you disguise an ongoing loss? When do you actually report it to whomever you are responsible to? Who is in charge? Where are Abbott and Costello when you need them?

To a large degree the same thing is happening in Europe. The Euro is now at 85 cents US having started out at 115 cents, a 26% decline. As for the European stock markets, well the Dax as an example is currently at 6600. Last October it was at 5000, then it peaked at 8000 and has now declined 1400 points from that peak. That's a 17.5% decline. The German mark has declined from a peak of US 55.65 to 42.60, a 23.5% decline. If you own stocks in German companies, then you have been hit twice. Both stocks and the currency have declined. Gold in German marks is at 630 marks per ounce, a level not seen since 1994 and well off its lows. France has not fared much better, its stock index has fallen 11.5% from its peak and the French franc has fallen 23% from its peak. Gold has risen accordingly.

German, French, and Swiss (in spite of their Central Bank) holders of the yellow metal have done quite nicely this year. These examples are by no means the only ones. In most currencies that are not pegged to the US $, the gold price has risen in local terms, while currencies and stocks have declined. Given the current strength of the US $, countries that have currencies that are pegged to it must be concerned about there increasing lack of competitiveness in a very competitive market. Will Hong Kong devalue? What about the Chinese? Will they stop stealing missile secrets and "nuke" the currency markets instead?

The losses that have been incurred as a result of currency devaluations are not showing up as one would expect. Where are the stock market declines one would expect to see when currencies start depreciating at a relatively rapid pace? Who is holding these losses? Is the October phenomenon running late this year?

Gold does not declare a 10 for 1 reverse split as some Nasdaq listed dot.coms have done of recent times. Once you own physical metal, it does not have to be watched every day to see if its lost weight, gone out of business, lost its listing, failed to report on time, or subjected itself to the humility of name your own price.

In turbulent times it is still the best protection there is. When the US $ begins to decline, which it will, then US holders of the metal will, compared to their stock market loving counterparts, benefit the most.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

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The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


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