The scenario and the history of gold in relation to the dollar

When we were taken off the gold standard (essentially) by Nixon on August 15, 1971 - the value of one ounce of gold was “allowed” to appreciate past the U.S. Government’s official price that had been in place since FDR’s “confiscation” of Gold and subsquent ‘re-pricing’ of an ounce of gold at $35.00 throught the gold reserve act passed in 1934. In order to pay for the depression and lavish government spending projects (FDR was possibly the most liberal president in our nation’s history) gold had been “confiscated” from the American public under presidential executive order 6102 and deemed illegal to hold (other than in jewlery) or pay debts with.

The mints paid Americans $20.67 per ounce in 1933 - but the Gold reserve act passed the following year, 1934, re-valued the price of one ounce of gold at $35.00. In a single moment, the holdings of the Treasury (who now held the gold) increased dramatically, Gold appreciated dramatically in price (from 20.67 to 35.00), and the dollar was de-valued by 70%… now, before you ask “why didn’t everyone cry bloody murder?” - well, the beauty of it was that since gold was basically out of the hands of the population - that 70% depreciation of the dollar vs. gold was largely meaningless.

(The few folks who did not turn in their gold kept very quiet about their sudden windfall - because if they had let too many people know about their sudden 70% increase in wealth, they would have had the secret service/NSA knocking the door of their house down and arresting them for hoarding gold and being unpatriotic)

That marked a seminal moment in society when the Government ‘experimented’ to see if American’s would keep faith in a currency that was not backed by gold. It worked - and towards the conclusion of the second world war at Bretton Woods - the world decided that the “official” price for an ounce of gold would be set at $35.00

This price however, was untenable, as U.S. gold reserves were being very very quickly depleted by the rest of the world due to soaring U.S. trade deficits (and that was 45 years ago!)

35.00 remained the official price until Nixon repealed Bretton woods (due to the depletion of U.S. Gold reserves) on August 15th 1971 - closing the Gold window and eliminating the last ties between the dollar and gold. This move, also, in effect was the equivalent of the U.S. declaring bankruptcy from a gold standpoint. We could not afford to keep the gold we had, so we eliminated the dollar’s tie to it.

By the end of 1974 the price of gold in dollars around the world rose to over $195.00

On January 1st 1975 it become “legal” for American’s to own gold again - the treasuries sold and the price of gold dropped precipitously as reserves were sold to the public brining in paper dollars as gold dropped to $103 by August of 1976.

Problems with the dollar, however, went unsolved and the price of gold began a 4 year ascent as the dollar was pummeled in value and the price of gold soared. The new Fed Reserve chairman - Paul Volcker - recognized the threat to the dollar and essentially raised interest rates to the 20% range out of what he later claimed was a fear of meltdown of the entire global financial system by a rapidly declining dollar.

The dollar began recovering by mid 1980 and gold had already begun to plummet from its January 1980 high. A currency crisis had been averted, but the country was thrown into a pretty nasty recession. The run for dollars destroyed the gold price and by February 1983, gold was trading around 103.00 an ounce.

Gold has been largely ignored since that time while “floating” fiat currencies (like ours) have led to bubble after bubble from the Japanese stock market (then real estate) boom of the late 1980’s to the ’90’s NASDAQ bubble, to the 01-05 real estate and foreign markets bubbles.

In each occasion, the “bubbles” revert back to their initial price levels before showing eventual correction.

All the while, American debt has soared to astronomical levels. The ‘real’ inflation level has been manipulated through the constant flux in CPI computations while our inflation has been ‘exported’ overseas to foreign countries producing the goods we purchase here. We have been able to get away with this by constantly targeting new 3rd world countries to provide labor for us at lower costs.

The problem now is that we “leveraged” our inflation by outsourcing it in the manner in which we did and hiding the evidence in manipulated CPI numbers. Now that inflation is coming back to hit us in a big way. The basic problem is that we’ve run out of places to hide it. Our debt to others around the world has raised the quality of living of people from Vietnam to China, and as their wealth increases, so does their spending and consumption. That drives prices up and leads to inflation.

What I mean by ‘leveraged’ inflation is that by depending on these countries to provide us with the low cost goods American’s have become addicted to (found at Walmart) - we are at the mercy of their inflation rates as well. Now, as inflation is going up all over the world (because the dollar is being printed up to continue funding the debt our country needs to continue operating) food prices, fuel prices, commodity prices (including gold), are all beginning to soar around the world.

Unfortunately, this is a problem that can only be solved by treating the “cancer” that is the average American living far beyond their means (huge levels of debt) and the subsequent destruction of this debt. American’s will also need to return to work to create real goods and real wealth.

Volcker decided to raise interest rates to 20% - a move like that now would undoubtedly collapse what remains of the financial system of this country. So we are left to wonder…what will happen in the next decade…?

Meanwhile, since the mid 90’s, gold has begun rising again to reflect real levels of inflation as dollars are continuously printed up to avoid disaster from onerous debt burdens.

After the repeated efforts to ingite the last vestages of the American economic machine (homebuilding) after the collapse of the NASDAQ in 2001, gold has begun rising even more dramatically, and the rampant speculation in housing began.

The housing boom came to a crashing halt by end 2006, and by August, the writing was written on the wall - to continue operating as a country the way we’ve been used to, massive amounts of dollars would need to be printed up. We would also need people to buy them from us. Japan and China (our two largest debt-holders) stopped, and so the Middle East began buying - problem was, they didn’t have enough cash flow to fund the debt they are purchasing… So the logical solution was begin charging more and more for oil to purchase the debt put out by the U.S. Government (which is why oil and gas were skyrocketing) - one big problem now however - the U.S. consumer is tapped out so the cash stopped flowing.

Look at how gold responded to this phenomenon along with oil, since this dramatic shift occurred a year ago August. Their prices do not lie.

The only thing America can hope for now is another “Black Swan” event that puts us back in the driver’s seat of the world economy (cold fusion perhaps? - a good reason to own palladium) and creates jobs that bring wealth back from overseas and reverses America’s dependence on debt and helps the dollar regain strength.

Given this scenario and the history of gold in relation to the dollar, it makes more sense now than ever, despite what economists may cite as “deflationary fears” from an economic recession, to own gold. The deflationary fears cited are often in references to certain sectors of the economy (like real estate) (or equities) that are experiencing and unwinding and subsequent liquidation of holdings. The price of gold is funadementally supported by the amount of U.S. dollars floating around the world, not by speculative booms people have seen in nearly every other sector of the economy over the past decade.

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