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Rising Gold Prices and Depreciating Paper Currencies!
by Professor von Braun
December 11th, 2005
On March 2nd, 1933, the original King Kong movie opened in theaters in New York City. This preceded by 2 days Roosevelt's inauguration as president on the 4th. On the 5th of March Hitler was given by his 'new' majority government, dictatorial powers over the German people. On March 6th the now President Roosevelt proclaimed a 3 day nationwide banking holiday, followed by the Emergency Banking Act on March 9.
On April 5, 1933 Roosevelt issued an executive order forbidding the hoarding of gold coin, gold bullion and gold certificates. Ownership of gold by an American citizen was now a Federal felony punishable by either a fine of $10,000 or 10 years in prison. Interesting times!
Having confiscated the citizens' (residents in the land of the free) gold holdings at $20.67 per ounce the price was slowly moved up (by perhaps the original cartel consisting of Jesse Jones, George Warren and Henry Morgenthau who met each morning at the president's bed to set the gold price. Morgenthau became Treasury Secretary on January 1, 1934, a position he held until 1945. He was also the Chairman at the1944 Bretton Woods conference, which pegged all international currencies to the dollar which in turn was pegged to gold) until January 31, 1934 when the 'official' price was fixed at $35.00 per ounce, thereby reducing the actual gold content of the dollar by 40%. Private ownership of gold was not allowed again until Dec 31, 1974, three years and four months after Nixon in August 1971 took the US off the gold standard altogether. So much for Bretton Woods!
By this time gold was trading at $197.25 per ounce, up $176.58 from the pre- March 1933 level of $20.67. At that level the gold content of the dollar had reduced to approximately 11%. From that level the price of gold fell to a low of $103.05 in the fall, (September 1) of 1976, rallied back to $138 in mid November, declined to $121 in January of 1977 then rallied for three years peaking on January 21, 1980 at $850.
Coincidentally the first remake of the original 1933 movie King Kong was released in New York on Dec 16th, 1976.
Since the late 1600's the price of gold has been determined by various central banks starting with the United Kingdom, ending with the US, with 59 countries being on a gold or gold exchange standard at various times; China being the notable exception. After 1971 all bets were off when it came to a known amount of a central banks currency per ounce of gold, something the gold market had perhaps intuited when gold bottomed Jan 20, 1970 at $60.65. This was the beginnings of the rally that lasted through to December 1974.
This brings me to the history of gold bull markets, which is limited to say the least. Having free traded (sort of) for only a short period of 35 years, certainly short when compared to other markets and their 'history', bull markets in gold are perhaps a bit of a misnomer. Rising gold prices tend to occur when currencies, whether intentionally or otherwise, begin to devalue -- with gold being the barometer that reflects the devaluation.
Commodities of course came first and are the natural element of trade, paper being the man-made ingredient that operates as an IOU. Just what IOU is another matter, but in the good old days gold was the preferred means of settlement. The gold coins of the Byzantine empire allowed trade to be conducted in relatively peaceful atmosphere for eight hundred years until some rather indebted emperor decided that, to reduce his debts, he could devalue the coins by reducing the gold content and pay with them instead. The Arab Dinar circulated for some 450 years during which the Arab culture flourished. What is a gold coin? It's a known amount of a recognized commodity is what it is, one that was freely bartered for other commodities, without the interference of paper printing central bankers and with no doubt as to its value.
What Roosevelt did in 1934 was reduce the gold content of the dollar, which equates to how much gold you can redeem for a dollar. He went further than that by making gold ownership illegal altogether, a situation that remained in place for nearly 41 years. Yes it really was a new deal!
Was the rise in the price of gold from $20.67 to $35.00 the first bull market in gold? Or was the first bull market the one that began in 1970? Is the bull market in gold that began in either 1999 or 2001 the second or the third in the last 75 years? Or are they all the same thing, a reflection of a depreciating currency and a messed up banking system?
Monetary history is of course not something that the average pundit on CNBC knows anything about, in fact the term NO CLUE comes to mind when one listens to the latest comments about the recent rise in the gold price. Now we hear about fundamentals, supply and demand, debt levels, and inflationary pressures. What we don't hear about is the ongoing fraud that fiat currencies are. Few it seems have figured out that having a balance sheet that's carrying digits in the plus column does not represent holding a tangible profit. Rather it means that one is holding debt instruments that are not redeemable by the issuer for anything tangible. In that sense the 'trade', regardless of what it is, never gets completed.
Yes there is a fundamental problem with the gold market, yes there is a supply and demand problem and yes there is a problem with debt-denominated instruments. At current price levels there is not enough gold to go round, supply has been decreasing and demand increasing and debt instruments have grown out of all proportion in relationship to their actuality of ever being repaid. The currency has depreciated itself over time by a very large degree as any currency must do if its not backed by something it can be redeemed for.
The rising gold price is a reflection of the awareness of that situation and talk about gold being seriously overbought at this point is ridiculous. With rising debt levels being about the only thing that keeps both internal and international trade afloat, with debt levels at a minimum10 times greater that they were in 1980, (which were 20 times greater than they were in 1934) when gold was last at $850 per ounce, with literally several thousands of tons of gold being traded as paper contracts that have no hope of ever being fulfilled by way of delivery, with central bank gold leased out that can never be returned in total, the CNBC pundits, the cheerleaders of the fiat monetary system really have no idea and its beginning to show in the comments they are making, the questions they are asking and the slight hint of nervousness that is starting to appear.
The real question should be: 'how far has the dramatic increase in debt levels affected the ongoing depreciation of the dollar and how far will the key depreciation indicator, gold, rise to reflect that situation?'
Currently, with gold at $527.00 per ounce, gold is at a 25.5 multiple of $20.67. Put another way $20.67 today will buy 1/25th of an ounce of gold at today's prices. However there are a lot more dollars and debt instruments in circulation in 2005 than there was in 1933. The supply of newly mined gold available for purchase has not increased at the same rate as the debt creation scheme and central bank gold holdings, the key ingredient to price manipulation, have also, in most cases, decreased.
The rising price of commodities should be giving the fiat cheerleaders a clue about what's in store for gold, as should the rather obvious fact that the price of gold in all currencies has been rising since 1999, which should not be surprising since they are all fiat currencies.
The second remake of the 1933 classic movie King Kong is scheduled for release in New York on December 14th, 2005.
It may well be that it's devaluation time again!
The Prof can be contacted by email at email@example.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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