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The Day the U.S. Dollar Died and Gold was Reborn

Commodities / Gold & Silver 2009 Jul 27, 2009 - 12:43 AM GMT

By: Bill_Downey

Commodities

Best Financial Markets Analysis ArticleWho would have thought that the information age would be so confusing?  Given the same set of conditions, man has this tendency to find different interpretations of the same data.  For instance, there is a huge inflation/deflation debate going on.  The problem (for some of us) is that both sides can and do give good argument for their respective side.  When I read a good deflation article, I am convinced that it will be so.  That is, until I read a good inflation article.  Then I tend to start thinking inflation again. 


For those who are just beginning their foray into the investment world of gold, answering that question correctly is going to determine whether you’re the hero or the goat.  While I will not argue the merits of each side, is it possible for one to determine whether he wants to live in an inflationary or deflationary world?  Obviously perspective can mean a lot, but I think we can make the case that if one would rather live in a deflationary world where prices go down over the long term he can do so by simply choosing the correct vehicle to maintain his purchasing power. In fact with good timing he/she can even enhance that power.

For those of us on the fence in the inflation/deflation debate let’s take a peak back and re-visit the events leading to the day the dollar died. Then let’s see if we can tie it into what is going on today.

It was the late 60’s and Woodstock nation was approaching its zenith, and yes, John, Paul, George and Ringo were still Beatles then. Little did anyone realize that the dream would soon be over by the early 70’s.  But while that dream was still being lived in the 60’s, and we were spinning Sgt Peppers on our turntables in June of 1967, behind the scenes there already were international monetary crisis’going on even then. The pound Sterling, the French Franc, the German Mark were being devalued and this crisis made its way eventually to the United States dollar.  (Sound familiar?)

Faced with no other choice, central bankers came up with the “two tier” system for gold.  In other words, the “manipulated” price of $35 dollars per ounce for gold would be maintained for international balance transfers but gold would be allowed to find its own price in the marketplace.   But the Vietnam War and the great society welfare reform of the 60’s was quickly emptying our gold vaults.  The printing press had caught up with the masses and dollar runs and demand payments in gold overwhelmed the system.

It was August 15, 1971 and Richard Nixon was president at the time.  The nation was enthralled in war with Vietnam, and LBJ’s great society welfare program had been fully implemented.  Inflation was raging, the economy was a mess, and losing ground fast.   (Sound familiar?)  A televised presidential speech was set for that evening entitled “Outlining a new economic policy: The Challenge of Peace.”  (Sound familiar?)

To paraphrase that August night in 1971, Nixon explained that the “success” in Vietnam would soon add 2 million new job seekers to our nation and that we needed to “create a new prosperity without war.”   (Telling in itself).  Then he went on to say, “this requires action on three fronts.”  “We must create more jobs.”  “We must stop the rising cost of living.  And thirdly, “we must protect the American dollar from the attacks of the international money speculators.”
“In the past 7 years there has been an average of one monetary crisis per year. 

Now who gains from these events? Not the working man, not the investor, and not the real producers of wealth.  The gainers are the international money speculators.  Because they thrive on crisis - they help to create them.”  
“In recent weeks, the speculators have waged an all out war on the American dollar.  Accordingly I have ordered Secretary Connally to suspend the convertibility of the American dollar.”  “The effect of this action will be to stabilize the dollar.”  “Now this action will not win us any friends among the international money traders.  But our primary concern is with the American workers, and with fair competition around the world.”  ( Yeah….right.)

And with those words it was a done deal.  And it all happened in one evening.  The rest of course is history.  Gold embarked on a rally that took the price from $35 to $850 within the span of 8 years. In essence, August 15, 1971 was the day that the dollar died, but the “two tier” decision to let gold float freely in the marketplace also gave a REBIRTH to gold.  It would no longer be suppressed in price.

Now we flash back to today some 38 years later.  What can we infer from this event?

First, whatever the government or the feds tell you about monetary policy, and its effect on us is usually the opposite of what they say it will. 

Second, whenever something is manipulated, the consequences usually catch up.

Third, government and the feds are not the defenders of inflation. They are the inventors and the cause of it.

Fourth, wars and huge social programs during economic downdrafts and deficit spending have grave implications for the value of the “fiat” currencies countries employ.

Fifth, the only real money that has existed on earth is gold and silver.

Lastly, let us consider if Richard Nixon was correct……that the beneficiary would be the American worker………..and not SPECULATORS.

How Much things cost on Aug 15th,1971                              Today

Dow Jones Industrial Average 890 or 25 oz gold           9000 or 10 oz gold
Average Cost of new house $25,250 or 721 oz gold      250k or 277 oz gold
Average Income per year $10,600 or 302 oz gold        70K or 77 oz gold
Average Monthly Rent $150.00 or 4.3 oz of gold        $824 or 1 oz of gold
Datsun 1200 Sports Coupe $1,866 or 53 oz gold        $28,400 or 31 oz gold

Conclusion:   If your money is dollars, you live in an inflationary world.  If your money is denominated in gold, you live in a deflationary world.  In other words if your purchasing power is dollar denominated, costs have exploded upward.  But if you maintained your purchasing power in gold, costs have decreased by almost 2/3rds of their original price from 1971 !!!!!!!!!!!!  Check out the table below.  Using the price data from above lets construct a table measuring cost in percentage terms from 1971 to 2009.


ITEM

Dollar Inflation

Notes

Gold Deflation

Dow Jones

1000% increase

Appx

40% decrease

New House

1000% increase

Appx

26% decrease

Ave Income

660% increase

Needed to buy

75% decrease

Ave Rent

475% increase

Appx

78% decrease

Dow Jones

1000% increase

Appx

40% decrease

Total gold needed

1105 oz to buy all

1971 vs 2009 oz’s

396 oz to buy all

Now I know many of you will say that $35 dollars was a “suppressed” price by the government and it skews the outcome and I am taking the absolute low in gold and the absolute high to measure and make this comparison.  I’ll give you that much, but right now………………IT’S REALITY.  Also, I want to point out that our Gov’t still is using either $35 or $42.50 per oz (depending on your source) as the stated price of gold per oz.  And while gold is above 900 today, it was almost exactly that at the 1980 high of 29 years ago.  The point is that if you took an average price of gold from 1980 to today, and you did this exercise, you’d still be WAY ahead if you maintained your wealth in gold.

So while the world lives in an inflationary environment it does so because it is denominated in “fiat” currencies.  That is what people keep their purchasing power in. 

For those who hold gold, they actually need LESS gold today to purchase the same thing as in 1971.  So can we say they live in a deflationary environment? Ah…….perspective is everything isn’t it?  It is obvious that cars are better, houses are bigger, etc etc.  But there can be no denying the cost of living has grown exponentially.  And over the long run, gold has maintained it’s purchasing power better than anything else.  When timed correctly, it has even enhanced that purchasing power.  The last 8 years are living proof of that. Gold has almost quadrupled in this decade alone!  With the dow off 50% that means that gold has outperformed the Dow Jones eightfold this decade. Just off the top of my head a $250 investment in the Dow at the turn of the century is worth about $160 or so dollars today. (Dollars that only buy ½ of what they did !!).  A 250 dollar investment in gold at the turn of the century is now worth about 900 dollars.  So there you go. Starting with the same amount the Dow Jones person has $160 bucks left and the gold bug has about $900. 

So why don’t more people own gold then?

Obviously many people are not aware of gold’s history as a monetary instrument.  But what about the other people that should know better? Why do they consider it such a barbaric metal still?  Perhaps they have not had a good experience with gold?  Did you know that the last 8 to 10 weeks of the gold rally in 1980 saw gold go from 400 to 800 ?   Now I haven’t looked back in a while so the number may be off a bit, but the point is that LAST SPIKE was a very brief time.  Therefore, with the exception of about 10 weeks in 1980, the price of gold was below the 525 dollar area for its entire modern history up until about 2005.  In other words, up until 2001, gold has only really witnessed ONE BULL MARKET run in modern times.  And you know what?  A lot of people who did invest then got burned and bad.  So bad that they will probably be the last ones on board again this time when gold makes its peak.  But don’t worry, just like the stock market of the last 20 years, the real public won’t join the party till its almost over.

In the 70’s gold was artificially set in price.  The reason that we had to get off the gold standard was because our government could no longer suppress the price of gold.  There is growing evidence that gold and silver prices might well be under suppression again.  Many of us have written about it.  Jim Willie’s recent article on the internet combines and articulates what is mounting evidence that gold is being suppressed again by forces that do not want another spike like 1980.

The best evidence we have that something fishy might be going on is the price chart of gold for the last 3 years.   Pull it out and have a gander at the four times it has been halted at the 1000 area over the past 18 months.  And how it just continues to meander under that magic number.  The evidence is out there for those who seek it.

Just as in the 70’s the suppression of gold at some point in the cycle will be overwhelmed and something will have to give.  One of the clearer signals that the suppression is no longer working is when gold vaults above the 1075-1100 area.  That will be the confirmation that the suppression is losing control.

It will also be the signal that the word is getting out to the masses. In technical terms I think they call it “the jig’s up.”   Odds suggest that the move in gold could be just as dramatic as in the 70’s.  I’ve been told in the total gold universe there is only like one ounce for every person on earth.  In a perfect storm scenario a gold bull market could be the mother of all bulls.

So where does that leave the average and yes even the above average investor?   
Let me say this. I’ve never met an investor or trader who disagreed that having an investment plan is a bad idea.  Most would agree it is paramount.  Yet herein lies the paradox.  Most investors and traders do not have a plan.  There are a lot of reasons why, but I think what it comes down to is if they had a plan they would have to take responsibility for its outcome.  Those that do have a plan must do something even harder.  They must have the discipline to execute the plan.   The ability to execute a plan is a lot harder than writing it. 

Do you have a plan or strategy?  How well have you fared in the gold bull market thus far?  How well did you do during the stock market heydays of the 90’s.  In other words……………have you kept up and are you making any money so as to maintain your purchasing power?   If you’ve been a participant you know that to make money in these markets is no longer a dart throw.  We are in the age of statistical modeling and technical analysis.  Fundamentals will play out in the long term but if it were that easy economists would be stock traders.  The truth about trading is its not as difficult as it looks.  That is until you try it.  You see the success lies in DISCIPLINE.  Show a 4th grader a 10 year chart of gold and ask them which way the price is going.

The past few years has shown that the markets of today do not act like those of yesteryear.  What would have seemed impossible a few short years ago is bubbler talk nowadays.  If your interested in gold and plan to ride the upcoming waves,  be it UP OR DOWN, make sure your prepared and that you line yourself up with someone who can assist you with a strategy that will FOLLOW THE TREND OF THE MARKETS and not just someone who is trying to pick tops and bottoms.  Its not that tops and bottoms can’t be picked once in a while they can.  The question is can it make money in the long haul?

Of all the investment vehicles out there right now, Gold seems poised to have a lot of action in the coming months and years.  I believe little by little is it going to be recognized for what it really is.  Real money.  Gold is not an “I owe you” (I.O.U).  It is not debt.  It has been real money since the dawn of civilization.

Do you have any real money?  If yes, make sure you’ve got your plan or strategy mapped out.  If no, it’s time to take action. 

If you would like to receive Free Gold Analysis please visit my site: www.TechnicalCommodityTrader.com

May you all prosper.

William – “The Lone Trader”

http://www.technicalcommoditytrader.com

© Copyright Bill Downey 2009

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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