Two Important Messages from the Fear Index


"A 2010-dollar is not the same as a 1976-dollar."

The Fear Index remains within its decade-long bullish uptrend, so we therefore know as a consequence that gold also remains within an uptrend. But the Fear Index is also giving us another important message. It is that gold remains undervalued.

Gold's valuation is indispensable information given its exceptional appreciation this decade. In other words, even though gold has risen nine years in a row against the U.S. dollar, it remains relatively cheap. This conclusion is illustrated with the following chart.

The dashed horizontal line on this chart marks 2.63%, which is the average value of the Fear Index since August 1971. That is the date when President Nixon—with total disregard to the U.S. dollar's 180-year history—turned the dollar into irredeemable fiat currency, in effect declaring by presidential edict that the monetary requirements of the Constitution were null and void.

The Fear Index is presently 2.05%. Note that it is lower today than August 1976 when the Fear Index was 2.28% and gold was $104. Therefore, gold at $1106—its December 31, 2009 price—is even more undervalued than it was at $100 back in 1976. How is that possible? How can gold be more than 10-times more 'expensive' today and still be better value?

Simple. A 2010-dollar is not the same as a 1976-dollar. It has lost much of its moneyness—its innate value as money—in two insidious ways.

It has lost purchasing power because of inflation. Secondly, it also has 0.23% less gold-backing today than it did at the low point of the Fear Index in 1976. Even though dollars can no longer be redeemed for gold, dollars are still partially backed by gold

The Fear Index measures to what extent gold backs the dollar, assuming of course that the 261.5 million ounces in the US Gold Reserve really exist and have not been loaned out, encumbered or put in play as part of the gold price suppression scheme led by the U.S. government.

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