Gary Gibson

In a world of rising gasoline prices, Forbes tells us that gasoline prices are not actually rising, and in fact are lower than ever.

And they ain’t lyin’!

Writing for Forbes Louis Woodhill gets this seeming contradiction right. He views the price of gas not in terms of the depreciating monopoly money issued by the politically-empowered central bank…but in terms of the market’s favorite money: gold.

When viewed in relation to gold, gas prices are low…only 82% of their average over the past 41 years.

Gas prices aren’t high. The dollar is just falling, its value being undermined by politically-driven over-issue. So if you count the Fed-issued dollars as money — and are actually using it as a savings vehicles — then your world is being rocked by rising gas prices (and rising prices in everything else, too, except for computing power).

But it’s not just the rising prices of everything that threaten all of us. In his article Mr. Woodhill reminds us:

“Right now, the threat posed by rising gasoline prices is not just to family budgets. An even greater danger is that the government will use escalating oil prices as an excuse to do something stupid.

“After President Nixon abrogated the Bretton Woods monetary arrangement in stages starting in September 1971, both gold prices and oil prices started to rise. The government responded by imposing wage-price controls. This made a bad situation much worse.

“This time around, the stupid policies being considered to ‘deal with’ rising gasoline prices include additional cuts in payroll taxes and higher taxes on energy producers.

“During the 1970s, the toxic combination of a weak dollar, high tax rates, and onerous regulations introduced a new word into America’s economic vocabulary: stagflation. Reaganomics banished this word to the history books. Now, President Obama and Fed Chairman Bernanke are teaming up to give stagflation another try. It is not likely that Americans will like it any more this time around than they did 40 years ago.”

Source

It amuses us that the “gold is for nutters” crowd loves to point out when a mere 250 of their beloved dollars could acquire the gold they hate so much. Yet they seem to forget that their dollars could buy more than ten times as much in the past — back before the Federal Reserve was established.

They also write off those times when gold reveals the inherent weakness of their treasured paper currency…like when the gold price surged to $850 in 1980…and now as the price of gold hovers near $2000 thirty years later.

If you look at it the right way — in terms of the eternal golden money — it’s the dollar’s periods of strength that are the aberration.

It’s not gold and silver prices that are volatile. Those have been incredibly consistent for thousands of years in terms of commodities they could buy. And because of the increasing standard of living being raised by free market economies, in a very real sense these eternal monies actually buy more. It’s the dollar that has been erratic in its overall declining trend ever since it’s been cut loose from gold (and silver).

Again, people looking at the cost of a gallon of gas, or of milk, or the cost of a nice suit, or rent from behind their piles of gold and silver are finding very little to worry about. In fact, to them, prices are lower than normal and declining.

Also the price of oil has tended to track the price of silver awfully closely for about as long as oil has been industrially useful. And so it’s no mistake that you can still get a gallon of gas for about about $0.20…as long as that $0.20 is composed of a pre-1964 90% silver dimes.

Or you could use a pre-1964 90% silver quarter for that gallon of gas and get back some change.

You see, the pre-1965 quarter is worth $6.38 as I type this. The pre-1965 dime is worth $2.55. These coins hail from a time when the dollar was still tied to gold (at the official price of $35 per ounce prior to Nixon nixing the gold standard). The dollar was still as good as gold — even though Americans themselves were forbidden to own gold bullion from 1933 till 1974 — and there was actual silver in the coinage until that content was reduced in 1964 and eliminated in 1965.

Those old silver coins shine the harsh light on the strength of the currency and the abuse that currency suffers from the feds and the Federal Reserve.

If you’d been saving in gold, then from your point of view gas prices have been coming down for the past few years. If you’d been saving in that old “junk” silver (pre-1965 quarters, dimes and half dollars), then gas prices are a downright bargain, too.

(In fact, we strongly believe that silver is still severely undervalued. While gold is more than twice its 1980 high in terms of dollars, silver still hasn’t quite hit its 1980 all-time high when less than an ounce of silver could buy a barrel of light sweet crude. Silver may be more expensive in dollar terms than it was ten years ago…but it’s still incredibly cheap in terms of both gold and in terms of oil…

…Back in 1980 at silver’s peak it took less than one ounce of silver to buy a barrel of oil. Oil is going higher…and silver is likely to try to play catch up and outpace both oil and gold. Silver is just as much a monetary metal as gold…and just as much a vital industrial commodity as oil. Yet again, silver is severely underpriced in relation to both gold and oil. And it stands to gain more than both as both climb higher. So physical silver has been and continues to be our favorite, simple way to hedge against the demise of the dollar.

We turn now to the Wall Street Journal where they find U.S. monetary policy more than a little at fault for the rising dollar cost of gas…

“Oil is traded in dollars, and its price therefore rises when the value of the dollar falls, all else being equal. The Federal Reserve throughout Mr. Obama’s term has pursued the easiest monetary policy in modern times, expressly to revive the housing market. It has done so with the private support and urging of the White House and through Mr. Obama’s appointees who are now a majority on the Fed’s Board of Governors.

“Oil staged its last price surge along with other commodity prices when the Fed revved up its second burst of “quantitative easing” in 2010-2011. Prices stabilized when QE2 ended. But in recent months the Fed has again signaled its commitment to near-zero interest rates first through 2013, and recently through 2014. Commodity prices, including oil, have since begun another surge, and hedge funds have begun to bet on commodity plays again. John Paulson says he’s betting on gold, the ultimate hedge against a falling dollar.

“Fed officials and Mr. Obama want to take credit for easy money if stock-market and housing prices rise, but then deny any responsibility if commodity prices rise too, causing food and energy prices to soar for consumers. They can’t have it both ways, as not-so-stupid Americans intuitively understand when they buy groceries or gas. This is the double-edged sword of an economic recovery ‘built to last’ on easy money rather than on sound fiscal and regulatory policies.”

Source

It seems so simple to us. The politicians want to prop up certain markets with inflation from the central bank…while keeping it easy for the government to borrow. But like any man-made abomination worth its salt, those newly created dollars don’t ever behave exactly how their creators want.

Stock and house prices are mostly flat or outright falling. The dollars meant to be puffing them up are instead spilling over into everything else.

The housing market is like a sad, burst balloon. Air just flows in and right back out. The stock market seems to be filled to capacity, its size delineated by annoying fundamentals like earnings. The price for these earnings is just too high right now and more new money in the economy just can’t drive those stock prices much higher.

That new money — the various QEs — is having an affect on other prices though. All the stuff you use to live. If you insist on believing in the dollar — and writing gold and silver off as barbaric nonsense — then you will be able to afford less and less of the life you want and to which you’ve become accustomed. Further if the history of paper monies is any kind, you could find yourself completely wiped out if you store your wealth in dollars or euros or pesos or whatever other paper lie is set to unravel next.

They will tell you that creating new money is necessary to keep the economy growing, to fight unemployment, to promote the general welfare, etc, etc.

But all it does is destroy your savings and make it easier for the feds to keep on borrowing to pay for welfare and wars. If you want to make sure the dollars you earn today can pay for the same amount of food and energy down the pike, trade those dollars for something of real value right now. We heartily recommend the type of money that actually fulfills that “reliable store of value” function.

Regards,

Gary Gibson

 

Gary Gibson

Gary Gibson is the managing editor for Whiskey and Gunpowder. He joins the Whiskey staff as a long-time fan and reader of both Whiskey and Gunpowder and the Daily Reckoning. A graduate of Fordham University, Gary now spends his days reading about and writing on limited government, sound money, personal responsibility and resource investing.

  • Ed_B

    Excellent article and one that every American should read and think about. As a scientist, I understand that every system that is studied needs to include a standard. The standard is an unchanging quantity to which all others are compared; a point of reference, if you will. Having this avoids issues related to the consideration of multiple items that can and do change with time and other variables being too confusing in their apparent changes. In a monetary system, both gold and silver can perform this function. Un-backed paper currencies, however, cannot, as they too are in constant price discovery in relation to all other fiat currencies. With precious metals as our standards, we can then compare the prices and values of all other commodities to a single standard. This eliminates much of the seemingly random motions of similar items in the marketplace. Although I do not own any gold and do not think of other items in terms of their gold price equivalent, I do own some silver and frequently price everyday items in terms of their silver ounce equivalent. Your article is exactly right. It may cost me $70 in US Federal Reserve notes to fill the gas tank of my car but that is equivalent to only 2 oz. of silver. Not at all bad since 2 oz. of silver is about equal to $2.75 in face value of pre-1965 US quarters. Imagine filling the tank of your car for less than $3! This shows the power of REAL money vs. that of ever-shrinking fiat money. Fiat currency may be fine for paying the daily bills but it is very rapidly becoming worth less and less. At some point, it WILL become worthless altogether. This is not the stuff with which we should be saving for retirement or holding in bank accounts. My silver will still be valuable when that happens and so will other people’s gold. This is because both silver and gold are real money and have been for thousands of years. Unbacked paper currency in the US is about 40 years old. I will take a currency that has a history of success that goes back in time before the Egyptian pyramids were built over some phony paper with ink on it any day of the week and twice on Sundays.

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  • Kevin Stowell

    Thanks for that, Mr. Gibson. I seem to have forgotten far more from my undergrad Finance program than I thought.

  • http://http://jjdonnelly.wordpress.com/ John Donnelly

    Gary Gibson surprises us all (not!) that in gold, the price of gas is falling.

    My comment:

    Somehow we forget the problems the world economies experienced trying to grow with the value of money tied to a scarce natural resource. I have read from gold supporters that there must have been a conspiracy to defraud the world as the major global economies of the world went off the gold standard. That is not the case.

    Tying money’s value to gold is a notion that does not support free market mechanics. It depends on fixed exchange rates which are untenable in a growing world economy.

    If you like gold, buy it! It is a great hedge against inflation it seems. So is land. Buy it too! Buy silver! Just leave the money alone. The world’s move towards free floating exchange rates were part of the global free-market economic progress. Money is to facilitate commerce first, let the market decide what it is worth, we do not need to legislate its value.

  • TomW

    Mr. Donnelly,

    I would beg to differ with your comment that “Tying money’s value to gold is a notion that does not support free market mechanics”.

    I think you will find, if you truly think about it, that this is exactly the opposite of what most businesses want. Businesses need “money” that does not fluctuate over time, the more stable the better. Especially when it comes to international exchanges of currency.

    Money, is a medium of exchange and as such businesses need to know that what they have in Money can be exchanged for the same amount of product in the future. Otherwise why hold money for any length of time? A business person would then want to get out of the currency as fast as possible if it is changing all the time. The basic premise here is why should I sell my good now, when I am not sure that the money I change my product for will be worth enough to purchase the raw material to make another product in the future.

    Give me a stable dollar, tied to some internationally recognized commodity, that the government does not control any day! It really is a no brainer!

  • http://nhecon.blogspot.com/ Skeptikos

    The only problem with this essay is that we know the new money isn’t driving up commodity prices, because we know that people aren’t spending lots of money on commodities. There has been no commodity boom recently. (If people are buying lots of commodities due to easily available money, wouldn’t that imply a booming commodity sector?)

    D’oh!

    Commodity price fluctuations right now are being driven by supply-side issues and increasing demand from developing countries like China.

    But don’t pay any attention to me, I am obviously an ignorant heretic….

  • TomW

    Skeptikos, since oil is a dollar denominated product that means that those foreign countries must get dollars to purchase that commodity. Where do those dollars come from?

    New issued dollars are being spent on something! And that something, due to the trade deficits, appears to be foreign goods (and perhaps dollars lent under the table to europe). So dollars flow out of the US, that is then used to buy up dollar based resources. Same thing as using new money, just one step removed.

    I will buy the supply side issues to a lesser extent, but since most of our imported oil comes from places other than the middle east it is a harder argument.

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  • http://LPMeck.org TANSTAAFL

    Mr. Donnelly,

    The biggest flaw in your argument is that in an open and free market there would be competing currencies that could be used to hedge against commodities and other currencies or simply allow choice. Our government not only forbids this but sends you to jail and calls you a terrorist for trying it out. So, I would rather have my money backed by a commodity and suffer some of the limitations that come with it than to have my entire retirement and wealth wiped out by ignorant and self serving politicians!!

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