It is almost exactly three months now since Gold climbed to the dizzy heights of $US 1000 for the first time and stayed there - briefly. That was in mid March this year. At that point, Gold had risen almost exactly 20 percent since the beginning of 2008 and more than 57 percent since the beginning of 2007. At Gold's spot future close of $US 871.10 on June 13, those percentage gains had been pared substantially. Gold is now up 4.2 percent since the beginning of 2008 and "only" 37.6 percent since the beginning of 2007.
Given the explosion of prices expressed in US Dollars all around it - especially prices of other "commodities" of all descriptions - this is deemed as not being good enough. For one thing, oil expressed in US Dollars - as it still is globally for buying and selling purposes - had a spot future close of $US 134.86 on June 13. That's up 22.4 percent from where oil was when Gold traded for $1000 in March. It's up 40.5 percent since the start of 2008 and a whopping 120.9 percent since the start of 2007. Gold (and Silver too) is lagging - badly.
In terms of its uses as an economic good, oil is the most important raw resource in the modern economy. This is true primarily because of its vital role in modern transportation - both of people and, more important in this context, of goods - all types of goods from raw materials to finished consumer goods. It is this huge increase in the costs of transportation which has pushed up the prices of ALL economic goods all over the world.
The rising cost of oil has impacted on the rising prices of real goods directly in countries where fuel has not been overly subsidised by governments. It has pushed up these prices indirectly in countries where the price of oil is subsidised, by blowing out the budget deficits in these nations. This has now reached a point where many of these nations are cutting, sometimes drastically, these subsidies. They literally can no longer afford the strain on their budgets.
And, of course, with the ratcheting up of the prices of real economic goods of all descriptions, the cry of "Inflation" is now a global litany. The cost of living and of making a living is now increasing with a rapidity not seen for decades. But inflation, properly described as an increase in the total stock of money, has not accelerated. What has changed is the direction in which this increasing stock of money is flowing. It is no longer chasing paper "assets", it is now chasing real goods.
After a long slumber, after an almost three decade succession of consecutive financial asset bubbles, this is now bringing the REAL impact of inflation out into the open. What people everywhere are witnessing, though comparatively few of them yet realise it, is the end effect of the debasement of money. They are watching the purchasing power of the monetary unit decline with increasing rapidity everywhere.
In 1931, the great Austrian economist Ludwig von Mises wrote an essay which he titled: "The Causes Of The Economic Crisis". We stress, this was written in 1931. He concluded this essay with a question: "Is There A Way Out?".
Mises first addressed the problem, as follows:
"The periodically returning crises of cyclical changes in business conditions are the effect of attempts, undertaken repeatedly, to underbid the interest rates which develop on the unhampered market. These attempts to underbid unhampered market interest rates are made through the intervention of banking policy - by credit expansion through the additional creation of uncovered notes and checking deposits - in order to bring about a boom."
That is indeed the fundamental nature of the problem. It has not changed since von Mises wrote those words at the beginning of the 1930s. What has changed is the modern means used in the "creation of uncovered notes" - of all descriptions. It is now incomparably more "efficient" than it was then.
Mises then goes on to provide the "unwanted" (his term) solution:
"There is only one way out of the crisis. Forego every attempt to prevent the impact of market prices on production. Give up the pursuit of policies which seek to establish interest rates, wage rates and commodity prices different from those the market indicates."
Any student of "economics" or even casual observer of government "policies" since Mises wrote in 1931 would certainly concur that this solution is "unwanted". How "unwanted" it is is a queston that was answered conclusively nearly four decades ago when President Nixon made the final separation of Gold and the US Dollar - the world's reserve currency - back in August 1971. The fact remains, though - whether in 1931, 1971 or today - that this "unwanted" solution is the ONLY solution which can - ultimately - fix the problem.
The major difference between 1931 and today is not in the nature of government and banking intervention and interference with markets. It is the nature of what is the foundation of markets, the medium of exchange or money itself. In 1931, Gold still actually circulated as money in the US. Today, it cannot legally be used as a medium of exchange at all and the only thing which can, the US Dollar, has no legal or official connection whatsoever to Gold.
To anyone who is still skeptical about the suppression of Gold by the government or the manipulation of its "price" expressed in the only legal medium of exchange, the US Dollar, Mises has this to say: "The sound money principle has two aspects. It is affirmative in approving the market's choice of a commonly used medium of exchange. It is negative in obstructing the government's propensity to meddle with the currency system. The eminence in the Gold Standard consists in the fact that it makes the determination of the monetary unit's purchasing power independent of the measures of government. ...It makes it impossible for them to inflate."
The power to inflate is a pre-requisite for any program of government economic intervention. A program of economic intervention is a pre-requisite for the acquisition and enhancement of the government's power OVER its citizens. Any "solution" which requires the relinquishment of this ability to manipulate and regulate the markets will be much more than "unwanted", it will be fought to the last inch by all those who ARE (or strive to be) in power.
To quote an essay which appears in the Gold section of this website: "...because the money you use is totally controlled by your government, dear reader, so are you. That is the case for Gold as money.
The most important economic good in any economy is the one which is used as a medium of exchange or money. The most deadly form of intervention that any government can undertake is tampering with what is used as money. Unlike any other economic good, a "money" can (and tragically has) become whatever the government says it is. Unlike any other economic good, the quantity of money in existence can (and tragically has) become any amount the government deems "necessary". Unlike any other form of economic good, an increased supply of money, especially brought about by goverment meddling, is HARMFUL to the well being of every person who uses that money.
The solution to the present financial crisis remains as "unwanted" as it always has. It also remains the only solution - as it always has. This week, Fed Chief Ben Bernanke said that the risks to the US economy from the current credit crunch had "faded". He also vowed to be diligent in making sure that the present outcry about rising prices would NOT become entrenched in future rising "inflationary expectations". Mr Bernanke is right to be concerned. It is small step from rising inflationary expectations to a rising "curiosity" as to where all this "inflation" is coming from. And it is a small step from there to Mr Bernanke, the Fed, and all other Central Banks.
Those who look upon the only real solution to the current financial crisis as "unwanted" differ on many aspects of the problem. But there is one thing on which they are all united. They do NOT want to relinquish control over what is used as money. We repeat the works of Ludwig von Mises: "The Gold Standard ...makes it impossible for them to inflate. That is literally true. No amount of "tinkering" with any aspect of an economy can produce more Gold. But it can, and does, produce more modern "money". This is the crucial difference. The most important "separation of powers" facing us today is the need to curtail the ability of our government to manipulate our money.
On March 17, we added the $US 1000 "X" to this chart - and that is as far as Gold got. As you can see, Gold has descended in three large "spurts" since then, the most recent taking it all the way down below the $US 855 level - Gold closed at $US 850.90 on May 1. Three weeks ago, with Gold at $US 925 on the chart, half the post March 17 fall had been regained. Since then, and with Gold falling to just above the $US 870 level this week, about two-thirds of those gains have been retraced.
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms at the end of January led to bull market highs in all four currencies. And as you can see, in March, Gold improved upon those January levels in all four currencies as spot future Gold closed above the $US 1000 level for the first time ever in the middle of March. But then came the big Gold sell-off - in two stages - the second of which bounced from the $US 850 level to now recover about half of its losses since March by the third week of May.
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