The Fundamental Difference
Philip BartonThere is a factor that makes this gold/silver bull different from the '71 - '81 bull. The difference is very fundamental.
As the price of gold started to rise in the early '70's so gradually, very gradually just like now, people started to become aware of the rise and 'came aboard'. Gradually gold increased in value leading to ever more people investing in the market.
As more and more people started investing in the gold market they at the same time became more and more educated to the fact that the US$ was 'out of whack' and that this was why the price of gold was going up. Awareness increased of the fact that the fall in the US$ value and the rise in the gold price were not independent of each other. As more and more people became aware of the US$ weakness, so the cost of gold in US$ terms was driven ever upwards.
The price of gold has always been the financial equivalent of the canary in the coal-mine. It flags in no uncertain terms the health of any currency that it is measured in. At the moment the canary is singing badly out of tune with Ben Bernanke the new head of the Federal Reserve, who claims that the US economy is on sound footing and that it is full steam ahead.
In the late '70's those in charge of the US$ were pressured by the surging gold market to do something about the perilous state of the US$. Under then new Fed Reserve head Volcker they did. Using unprecedentedly high interest rates the US$ was eventually brought back under control, and the need for gold started to dwindle as the subsequent almost 20-year bear market in gold witnesses.
In 2006 we have the same problem. The gold bull is now almost six years old and more people are becoming aware that it is something wrong with the US$ that is causing the price of gold to surge. Once again we need the Federal Reserve to correct the situation. As more and more people become aware of the problem, consequently gold is again being driven higher and higher.
And that is where the difference comes in. In the '70's the problem was fixable, though the fix was extremely painful. In 2006 the problem is not fixable at any level on the pain gauge. In the '70's the US was a prosperous nation with a positive balance of payments and a high savings rate. In 2006 the US owes more money to foreign governments than any nation has ever owed in the history of the world, and also has a large trade deficit.
Individual savings and debt are respectively non-existent and humungous. Personal bankruptcy rates are at record highs. GM is on the verge of bankruptcy. Likewise the Ford Motor Company. Estimates of total private, corporate and government debt range from $51 trillion to over $80 trillion... yep, that's trillion, not measly billions. Twelve zeros not nine zeros. Each individual in the USA owes a figure that at a minimum is $160,000. That in an economy that claims an annual GDP of around $11 trillion, and many acknowledge that that is a grossly inflated figure presented for political purposes. Real US unemployment, judged by the same yardsticks as applied in the '70's, is at 12% and rising. Real wages have fallen since the '70's.
Even if in 2006 the Federal Reserve had someone with the backbone of Volcker, which it doesn't appear to have, there would still be no way to honourably fix the problem.
There are only two solutions for the US. Raising taxes isn't one of them as even a 50% tax rate would not be capable of solving the problem.
What the Fed does now with interest rates is of no real consequence except perhaps in affecting the chronology of the impending crisis. In any case, long term interest rates in the USA are currently controlled by the governments of other countries, notably China. Either the Fed keeps interest rates going higher or the foreign governments won't keep lending the US money. Cutting spending also isn't a solution as the money has already been spent and the debts already incurred.
The two solutions are:
- Inflate away the currency and pay off the debts in dollars that aren't worth the paper they are written on.
- Officially default on all debts... the Argentine solution.
Number one option is being applied right now which is why the US is not allowing foreigners (the same people who for years have lent the US the $2 to $3 billion a DAY that it has taken to keep the US solvent) to buy businesses in the US. Arguably that would give them something of value for their money. That cannot be allowed to happen as there are enough US$'s floating around o/s in cash or digital form to buy every major company in America. The Chinese government alone holds almost 1 trillion US$'s in its reserves. It is also why M3, the most useful measure of the supply of currency, is no longer being issued by the Federal Reserve as of March 2006.
The plan is to close the doors to America via protectionist measures and tariffs, especially on Chinese imports and investments, whilst simultaneously inflating away the value of the dollar. That is why gold will continue to rise and why there is nothing that anyone can do about it.
The only questions are how long will the game play out and how high will gold go before the imbalance is corrected; and will the US$ precipitously collapse or will it gradually fade away in slow motion? No one knows the answers but it is both reasonable and logical to assume that the price of gold will eventually exceed that of 1981. In current US$ value that will be well in excess of $2,400 per ounce.
It is estimated by US Treasury officials that two thirds of US$'s are circulating outside of the US. Once the holders of o/s US$'s start to realise what is happening to their US$ holdings, then the price of gold will go through the roof. It will not be the Chinese with their $1 trillion in US reserves who knowingly precipitate the drop in the value of the dollar, they need the US consumer at this point in their evolvement, but once that drop starts in earnest, then the Chinese will not allow themselves to be left holding worthless paper. When an unquantifiable portion of that o/s cash and reserves ($8 trillion) starts being converted into precious metals, namely gold and silver, then the prices will go to heights undreamed of by even the most ardent precious metal buffs. Eventually a new and stronger currency will emerge but it will be a long time before the price of gold goes into a slump again because it will be a generation or two before people will trust paper currencies again.
Philip Barton 11th April, 2006
Pension Fund Trustee, Australia
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