Gold

Protection Against Untrustworthy Currencies
A Daily Reckoning Special Report
by Bill Bonner

“Gold is the answer,” we keep saying.

The only trouble is: we haven’t quite figured out what the question is.

What will be higher next year? Gold ? We don’t know…

What is the safest place for your money? Gold ? We don’t know…

What starts with a G and ends with a D and rhymes with ‘old’? Ah, there… GOLD

The Clinton Years look like golden years in many ways. Not because of anything the Clintons did. They came in at the tail end of a huge boom – and managed to avoid messing it up.

The boom had begun during the Reagan Administration – in fact, it turned around on almost the very day that Ronald Reagan was inaugurated. We attended his inaugural ball, sure that the trends of the last 20 years would certainly last a few more years. Consumer prices had been rising steadily…and were now going up at 12% per year.

And gold had gone from $41 an ounce at the beginning of the ’70s, to more than $800 by the time the ’79 election results were in. How were we to know that that trend had run its course?

But Paul Volcker, meant business. The country had seen what stagflation would do to it. It had had enough. Even economists recognized the need for a change. Easy money policies were out of the question; the bond ‘vigilantes’ already had their eyes on M3, the broadest measure of the money supply. And consumers were ready to ditch the dollar. Volcker knew he couldn’t hope to go along and get along. He had to jack up rates – over 20% – to save the dollar; recession be damned!

And come the recession did – with the economy going into the worst recession since the ’30s… But it worked; and the price of the dollar – measured in gold – rose for the next 20 years. Woe to the “gold bugs” who stuck with it…

…but wait, suppose the gold bugs actually did stick with it? Suppose they looked up on August 16, 1971 and read the handwriting on the wall. The day before, Richard Nixon had “closed the gold window” at the Treasury. Henceforth, you could rap on the glass all you wanted. Even if you were Charles de Gaulle, you still wouldn’t be able to trade your paper dollars for the gold you were promised.

This was a major default. And it clearly augured more bad things to come. Now that the dollar was no longer anchored to gold, the entire world money system – which was anchored to the dollar – was adrift. And you didn’t have to tell us gold bugs what that meant. It meant that the dollar would soon be worthless. Every time governments tried paper – pure paper – currencies, it was just a matter of time before the paper money sank to a value less than the paper itself.

Of course, that didn’t stop the central bank of Argentina from doing some predictably silly things regarding its currency. For example, back in the late ’90s when the bank had a hoard of gold coins that it was just itching to get rid of. “Who needed gold coins when you had the dollar, right?” our friend Eduardo explained.

“Well, they put the coins up for auction. No one was especially interested…even though these were valuable coins…mint condition…from the 1880s. So I bought them. I bought all I could. I paid about 52 pesos for each of them…”

We took a look at one of the coins…a pretty thing…about a quarter of an ounce of gold. Let’s see, the gold alone should be worth about $180. And what’s 52 pesos worth? Hmmm…about 16 bucks.

“Good trade,” we commented, making a mental note: Dear Readers might want to make the same trade with their pesos…oops…dollars.

“I’ve done better. I found a gold mine out in Chile. Nobody seemed to be paying much attention to it. I bought it very inexpensively. It has hundreds of thousands of ounces of gold – still in the ground. I could do like you do…buy gold coins and bury them in the ground. Why bother? I just buy them before they ever leave the ground. It’s a very cheap way to buy gold…”

All this being said, what will it be now? Will it be another ‘golden era’ when the Clintons come back? Or a final, inflationary blowout bubble in the world’s markets? Or will it be the comeback of tougher times…like the stagflation of the pre-Volcker years?

The big question is probably this: can the Fed now save stocks, housing and the economy by destroying the dollar?

We’re not sure, but we think that gold is probably the answer to at least one of those questions.

Related Links on Gold Investing:

Kitco.com – one of the world’s premier retailers of precious metals.

World Gold Council – The global advocate for gold.

Gold-Eagle – An informational site that provides articles, analysis, and charts about gold investment trends.

The Daily Reckoning Gold Page – The Daily Reckoning is a freewheeling Web site for libertarians, gold bugs and doom enthusiasts of every stripe.

The Gold Rush – A complete compendium on the California Gold Rush

Gold Investing -Wikipedia

History of Gold

How Bankers Control the Price of Gold -Whiskey and Gunpowder