Money Talks, Gold Shouts

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"If we were to return to a gold standard today, each ounce of gold held at the Fed would have to back a breathtaking $39,000. . ."

In 2Q08, when it became clear that bankrupted financial institutions would be bailed out by the federal government, gold did a funny thing. In the wake of a financial crisis of that magnitude, one normally would have expected asset prices, including gold, to plummet. Most observers expected the metal to dip from the $800 level down to $600, or below. Instead, gold held up well during the crisis, and has recently increased to just over $1,000.

The biggest change in the gold market has been the unwillingness of certain governments to sell their gold. Some powerful states, such as China, are beginning to hoard gold and to become net sellers of U.S. Treasury securities. In addition, private investors are buying so many gold coins that fabrication plants are months behind on physical deliveries.

In 1971, President Nixon broke the U.S. dollar's last link to gold, prompting the second great inflationary wave. Inflation became so bad that gold rose from $35 to $850 an ounce by 1981.

In more recent history, President Bush II and former Fed Chairman Alan Greenspan elevated monetary debasement into an art form, sowing the seeds of collapse in the financial system. They left the U.S. dollar so debased that the 1980 gold price of $850 is equivalent to $2,200 in today's shattered currency!

In a recession, when cash is scarce and price levels are falling, it is amazing that gold stands as high as it does. One can only guess where the price will go when the trillions of dollars of electronic government bailout dollars start vigorously circulating.

If we were to return to a gold standard today, each ounce of gold held at the Fed would have to back a breathtaking $39,000. It is a far (1,950 times) cry from the $20 for each ounce of gold of just seventy-six years ago! Is it any wonder that the euro, the currency of the nascent European Union, stands just a shade below its all time high of $1.45?

These signs of chronic monetary decay have not been lost on individual investors or governments holding U.S. dollar surpluses. The key player in this respect is China, the largest holder of U.S. Treasuries—and now the world's largest gold producer.

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