By
Jeff Clark of Casey Research, editor, BIG GOLD
Saturday, October 17, 2009
In August, the U.S. dollar celebrated its 38th anniversary as a fiat currency.
When Roosevelt issued his infamous 1933 presidential diktat, forcing delivery (confiscation) of gold owned by private citizens to the government in exchange for compensation, gold was $20.67 per ounce. In January 1934, the price was raised to $35 per ounce. The U.S. government pocketed the difference – and essentially devalued the dollar by 69%.
Yet the dollar remained convertible, and foreign central banks could redeem their dollar reserves for gold. This presented no problem when the U.S. was running trade surpluses and foreigners didn't have many dollars to exchange for gold. But in 1965, France's President Charles de Gaulle started aggressively exchanging his country's dollars for gold and loudly encouraged other countries to do likewise. That year, U.S. gold holdings fell to a 26-year low.
Several schemes were tried to stop the drain on the U.S.'s hoard, including lifting the price to $42 per ounce early in 1971, but nothing worked. The run on the dollar did not abate.
With the U.S. unable to eliminate its trade deficit, Nixon was faced with the stark reality of another dollar devaluation. He opted instead to close the gold window on August 15, 1971, ending dollar-for-gold convertibility. The dollar was suddenly off the gold standard, and half of U.S. gold holdings had disappeared. The greenback began to "float," meaning it wasn't tied to any standard and could be printed at will.
So how's it done since then?
The following chart tracks what has happened to the purchasing power of the dollar and gold since the gold standard ended in 1971. After adjusting for inflation, you can plainly see the erosion of a dollar bill, now able to purchase only 18 cents of what it did in 1971, vs. an ounce of gold, which has not only stood up but increased in purchasing power.
There are two overriding conclusions from this chart:
The dollar has consistently lost value since coming off the gold standard.
While gold's price has fluctuated, its purchasing power has endured. This fact will not change and is the reason you should own physical gold. It's what I call the four Ps: your Personal Purchasing Power Protection.
At Casey Research, we believe the dollar must go lower over the coming years. Since the end of August 2008, the past year, the U.S. monetary base (coins, paper money, and central bank reserves) has swelled from about $800 billion to $1.7 trillion. This is the largest expansion in history and a staggering devaluation of the dollar.
And as you already know, we're also taking on unprecedented amounts of debt. Year-to-date government spending is $2.9 trillion, while tax revenue is only $1.6 trillion. But that's nothing compared to the massive unfunded liabilities (meaning, they are not covered by an asset of equal or greater value) of Medicare, Medicaid, Social Security, and prescription drugs. Liabilities from this trio total $105.7 trillion.
Taking on debt is like getting a tattoo: It doesn't go away, and it's pretty painful to get rid of. The only way the U.S. government can get rid of its tattoos is by paying them off with greatly diluted dollars.
There are a lot of uncertainties about how this situation will play out. But the future purchasing power of gold is not one of them.
Regards,
Jeff Clark
Casey Research
P.S. Gold can indeed give you solid returns, especially in times of crisis like these, when people start flocking to it as an uncertainty hedge. But select gold and silver stocks can gain even more with gold's run-up – so far, we've seen up to 6:1 leverage from large-cap gold producers.
One company in particular has provided steady gains even as the Dow and S&P tanked last year; that's why we call it "48 Karat Gold." Click here to learn more.
This week's chart is our recommendation to mainstream media to "get real."
On Wednesday, the Dow Industrials climbed over 10,000 for the first time in a year. The rise caused all the major media outlooks to wet their pants and splash it across their papers and websites.
DailyWealth readers know it's a ridiculous exercise. They know the smart investor doesn't pay much attention to the nominal price of stocks. The smart investor measures such things in "real money" terms: in terms of gold. As you can see from this week's chart, in terms of gold, the Dow hasn't done squat this year. The U.S. dollar's plunge has wiped out the real purchasing power of stock gains.
Sure, there are lots of dollars flowing into stocks right now... but the yahoos running the controls in Washington D.C. are making those dollars worth less and less every day.
Money-Compounding Machines in India By Rahul SaraogiFriday, October 16, 2009
Most of our time is spent avoiding and ignoring the noise and excitement around us. A lot of people know the right thing to do but many of them are carried away by the noise and emotion around them.
The Federal Reserve Is Openly Telling You to Buy Gold and Silver By Porter StansberryThursday, October 15, 2009
At some point in the next few years, our creditors are going to stop believing in our ability to pay our debts in honest money. I don't know what will break first, but we can't go on printing money to prop up our banks and spending money we don't have to prop up our culture of entitlement.
What I Learned Inside the Vault By Dr. Steve SjuggerudWednesday, October 14, 2009
There are hundreds more stocks like CLCT out there... hundreds of microcap companies that have no brokerage-firm coverage selling for little more than cash in the bank. Yet they have legitimate cash flows from their businesses.
Two Ways to Profit on a Huge New Currency Trend By Tom DysonTuesday, October 13, 2009
While other central banks are considering raising rates, the Fed has so far refused to join the party. The dollar is the worst-performing major currency in the world this year as a result.
What the Man Behind the Most Profitable Short Sale Ever Says Now By Tom DysonMonday, October 12, 2009
As Prechter warned, a wave of optimism is washing across in the investment community. Except for his remark about the President's popularity, which is waning, Prechter's description of the social mood in America could not have been more accurate.
