The Economy Guy

Issue: 10/2/07 Tuesday

By Global Economy Guru, Tom Harvey…

The markets took a deep breath today, and relaxed a little.  After strenuously moving in their last direction, most markets eased back a little.  Except Gold.  Gold decided it was way too high, and went down $18 today.

All in all, today’s news was just boring.  All the excitement of the “sky is falling” just didn’t materialize.

So, I think I’ll take the chance to use this space to educate you a little in the ways of our government over the past few decades in the area of gold.  Most of you know that our currency used to be backed by gold.  “Backed” means that you could take your paper dollars down to the government and turn them into gold.  After the government printed so much money, and owed so much gold – the majority of the gold it held – it defaulted during the Nixon administration on its gold standard obligation, documented by the Bretton Woods Agreement of 1944.

After the US default, the value of gold started to go up.  It was controlled by various mechanisms in London to keep the price of gold around where it used to be, $35 per ounce.  The key participants during that manipulation were the central bankers of the western world, Swiss bankers, and the USSR Central Bank sale of gold to pay for US wheat purchases.  That kept the lid on the price of gold.  The Swiss were recommending that all their customers should hold at least 10% of their wealth in gold.  This was a titanic battle within the gold marketplace.  This battle lasted about 15 years.

The market always wins, and the buyers had more purchasing power than the sellers of gold.  In the end, gold became a commodity that could be bought and sold, like other commodities.

However, central bankers didn’t give up on trying to keep the lid on the price of gold.  They continued to sell their stock of gold to keep the gold price down.  The reason that central bankers sold their gold reserves was that they were afraid that a high gold price would reveal the central banker’s inflationary practices.  All of this has occurred in recent history – the last 40 years, a blink of time.

Understand what most central banks did.  They sold gold; an asset that is increasing in value.  In other words, central banks reduced the future net worth of their country by selling gold.  Gold has risen 20 times over its last fixed rate of $35 per ounce.  It has done this twice now.  I wonder if inflation has been 20 to 1 over the same period.  We can’t compare a Big Mac, but we can compare food staples like bread.  If bread used to be 10 cents a loaf, and it’s $3.00 a loaf today, that’s a 30 fold increase in price – not too far off of the gold increase.  I don’t want to oversimplify this concept, but I do want all readers to understand that gold is, and has been for over 5000 years, THE measure of value.  That’s why I report on today’s gold price.

So, the key question is “What does that mean to me in US Dollars?”  Well, nothing, providing the US Government never defaults on its debt.  Also, nothing, providing that inflation doesn’t get ahead of your own personal wealth.  Also, nothing, providing there is always a confidence in the US Dollar.  Otherwise, it will destroy most the existing wealth of the majority of US Citizens.

History dictates that any nation that skates away from the gold standard pays the ultimate price.  This lesson of history should make you vigilant to this issue.  It is way too easy to become complacent, and then be surprised by world events.

Here are Today’s closing details:

DJ30 – 14,047 (Down 40 points)

10 year US Treasury Bond – 4.53%  (Down 0.03%)

US Dollar - $1.4155/Euro.

Gold closed at $736 per ounce. (Down $18)

Oil Closed at $80.05 (Down 0.19)

Gasoline is $1.98 (no change)