Question On Gold & Silver Relative To The US Dollar
Jay Taylor
Question: Is the dollar rising or falling and does the rise or fall influence the price of gold and or silver?
ANSWER: When you ask whether the dollar is rising or falling, you have to ask "against what?" The chart below is a picture of the dollar's value relative to other major currencies in the world. Against other currencies, it has been in a steep decline since 1995 when it approached 160. It has currently rallied as U.S. interest rates have risen. But as you can see, it is currently at around 0.83, or about 50% below its high in 1985, which means if you travel to Europe or Japan, you have to pay a lot more dollars to buy the local currencies than you did then. In addition, all of the other countries have experienced considerable inflation so their currencies also buy less.
Clyde Harrison, a
commodity trader and
former partner of Jimmy
Rogers says it best when he
talks about how all the
currencies are falling, in
terms of their purchasing
power. It's just that some are
falling more than others.
Against the major
currencies, since 1985, the
dollar has been one of the
weakest currencies. The so-called
"Clinton strong
dollar" policy is seen during
the 90s as the dollar index
rose from around 0.80 at the
time Clinton took office to
120 about the time Bush
took office. But since Bush
Junior has been the biggest
spender in history, and since the Federal Reserve is creating money out of thin air at such a rapid pace that they have chosen to hide M-3, the dollar has been the weakest currency of all the major currencies.
Does this creation of
money out of thin air
affect the price of
silver and gold? Of
course it does, just as
it affects the price of
everything else. Ben
Bernanke used the
image of helicopters
spewing trillions of
dollars out on the
American population
to encourage
Americans to keep
spending. Our
currency, like the
currencies of all
countries around the
world, is not worth anything, except that people believe it is worth something. There is no gold or any other tangible asset behind it. Therefore an infinite amount of this phony money can be and is being created. Each of
these counterfeit pieces of money represents a claim against real goods and services provided by Americans and foreigners. And as the number of dollars increases, it means each one of them purchases less than it did before,
because dollars become worth less because phony demand from phony paper money is bidding up prices thus making each unit of our currency worth less than before. Thus, you need more and more dollars to purchase the same amount of goods and services. And since I do not see any end of this money creation, at least not until our IDW suggests that is changing, I think you have to continue to buy gold and silver and other tangibles rather than owning Treasury bills or holding cash in one form or another-because tangibles like gold and silver and copper and uranium and oil and gas and real estate and many other objects all have intrinsic value, while the
value of currency, which is increasing to infinite numbers, is always in decline. And with the actual rate of inflation around 10% and T-Bills giving you 5%, there is no real incentive to do anything with your spare cash
than to buy "stuff." If the American propaganda machine is keeping people stupid about this matter, don't blame us. We have been harping about it for years. And our subscribers have been benefiting from buying companies that produce stuff.
The inverse relationship between gold and the U.S. Dollar index can clearly be seen from the dollar and gold charts on the prior page. Since the decline in the peak of the Clinton Strong Dollar during the 2000 to 2001 timeframe, gold has more than doubled, while the dollar against other major currencies lost approximately one-third of its value. But it is also true that gold has been rising against major currencies in general.
As you can see by the chart below, gold has been rising against the yen and until the past several years,
gold has been rising, vis-à-vis the euro.
Recently, as the euro has risen so
dramatically versus the U.S. dollar, we
see a leveling off of the euro to gold. But
keep in mind that the quantities of all
paper currencies, the euro included, are
all rising much more rapidly than is the
supply of new gold being mined. In fact,
the amount of gold supplies coming from
the mines has, I believe, been in decline
with South Africa being in sharp decline.
How does silver fare versus currencies?
I don't have any charts to share with you
that show the relative strength of silver
compared to gold. However, what is true
for gold is even more applicable to silver,
because silver's rise in percentage terms has been more profound than gold. If we go back to January 2002, the year the bull market in precious metals began, silver sold at $4.59 per ounce. As we were going to press with this Hotline, silver was selling at $12.86, or 180% higher than on January 1, 2002. Gold, on the other hand, was selling at $278.35 on January 1, 2002. At its current price of $647.65, it is 133% higher. Therefore, silver has been an even better hedge against the devaluation of paper money than gold has been. Both metals have worked well, but in this environment, silver has outperformed.
Gold Works Best During Deflation.
Silver Works Better During Inflation.
Thanks to the work of Bob Hoye, I have become convinced that during inflation, silver is the better metal to own, and during deflation, gold is better. I believe the reason this is true is because while the global economy is growing and the global economy is still functioning, demand for industrial metals outstrips demand for gold, which derives almost all its value as money, not as decorative jewelry or for industrial purposes. Gold does derive value as monetary jewelry in places like India, Pakistan, Bangladesh, and elsewhere. In those cases, nearly pure gold is put into jewelry, and stored away to retain wealth as local currencies self-destruct. Silver also serves as money, but it is inferior to gold, because it takes much, much more of it to transport the same amount of wealth. At its current ratio, you need to carry nearly 50 ounces of silver around to equal one ounce of gold. Therefore, in time of stress when barter is required for survival (was true in Argentina a couple of years ago) gold works much better than gold as money. Our good friend Larry Parks has provided some background data on this that convinces me that gold is more of a monetary metal than silver. Larry notes that there
is something like 55 years of aboveground gold in the world and six or seven years of aboveground silver. Copper and other base metals that are used purely for industrial use have only days, and at most a few weeks of above-ground supply.
June 16, 2007
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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