Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Gold, Hard Money, Soft Metal

Commodities / Gold and Silver 2011 Jan 21, 2011 - 05:47 PM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleSoft gold prices without hard-money rates? Not for long, says the world's 40-year unbacked money so far...

JUST HOW MUCH ABUSE can soft money take? Two-thousand-and-eleven sees a big, but so far little-noted ruby anniversary. Expect to hear lots more about it as August 15th draws near.


Because that day will mark 40 years since the United States' government finally stopped redeeming its dollars for gold. That ended over 250 years of formal "gold backing" for the West's dominant currencies. It also took the entire world off precious-metal money for the first time in 5,000 years of civilization.

Gold wasn't being used as money in Aug. '71, of course. Long banished to central-bank vaults, the ageless metal was represented instead by paper notes – the medium of exchange – in purses, wallets and tills. Nor did gold bullion bars back more than $1 in every four in circulation, gradually slipping from the 40% cover-ratio set during the Great Depression. And unbacked money had also been tried many times in the past as well. Persian kings, Mongol emperors, Scottish chancers in the French court, desperate men at the Reichstag...they all thought they'd found "the secret of the alchemists", as Marco Polo called China's paper-note chao in his Travels of the late 13th century – and they all found it disastrous.

But irredeemable money had never been applied worldwide before, and never without some element of "hard money" (meaning gold or silver-backed notes) running alongside. Since US citizens were pretty much barred from owning physical gold, however, removing the metal from inter-government settlement looked a small, inconsequential step to most, especially next to the wage and price controls Richard Nixon also announced in his "Sunday special". (Tricky was apparently worried about upsetting voters by delaying the latest episode of Bonanza on TV, but he was more anxious still to break the news before markets opened on Monday 16th August.)

Indeed, refusing to redeem foreign governments' Dollars for US gold bars should have played well to the crowd. Because Nixon was defending the States' ultimate hoard against those overseas partners who dared to doubt Uncle Sam's promise to...ummm...redeem his paper dollars for gold. France alone had swapped $250 million for gold in "recent months", the Financial Times reported on 5th August, helping draw the US gold reserve down to "just over $10,000m, the lowest point since the early 1930s," as the paper said four days later.

"There has naturually been a revival of the traditional theory that when the gold stock hit $10,000m, the US would simply close the gold window," the FT explained on 9th August, adding that "There is no evidence that the Nixon Administration plans such action," even as the Dollar crisis continued to make its front page each day.

Slamming the window shut, just as the "theory" suggested, "We must protect the position of the US Dollar as a pillar of monetary stability around the world," Nixon told the nation (and the world) on 15 August, 1971. But as his central-bank chairman, Arthur Burns of the Federal Reserve, had feared ("What a tragedy for mankind!" wrote Burns in his diary) the early results soon proved as awful as they were entirely predictable.

Freed from gold's seemingly arbitrary limits, money bred so fast – everywhere – that wholesale and consumer-price inflation reached untold peace-time levels, crushing savers in both the equity and bond markets pretty much worldwide. Freed from its official peg, in contrast, gold prices rose 20-fold. The public grew so discouraged that, within a decade of Nixon's decision, his Republican successor, Ronald Reagan, ordered a commission to consider reversing it.

But thanks to those falling bond prices, however – which came thanks to bond buyers everywhere demanding ever-higher interest rates if they were lend money for any period of time to government – Washington got to ignore the Gold Commission's minority report, and extend the world's experiment with unbacked money for another 31 years (and counting...).

Because by 1980, and thanks to those soaring bond yields, central bankers had already stumbled upon the solution to unbacked money's first global crisis...

Hike interest rates so high that cash-on-deposit actually starts paying a positive real return, post-inflation. The effect on gold – and so on any thought of returning to gold-backed money – was signal, as you can see.

Over the first-half of the 1980s, real interest rates – paid over and above inflation – averaged nearly 5% per year. Major-currency savers hadn't seen anything like it since Great Britain fought to defend (and lost) its own Sterling Gold Standard half-a-century before. And together with those desperate Gold Standard-style interest rates, the Dollar recovered something like a Gold Standard poise.

Peaking at almost 15% in 1980, the pace of US inflation then fell by more than two-thirds in the following half-decade. The Dollar gold price did the same, sliding from its (then) record peak of $850 per ounce to less than $285 five years later.

Why? Mining supplies rose, and the peak prices of 1979 and 1980 unleashed a torrent of scrap-metal supply back to market, too. But negative real rates had forced a growing number of otherwise cautious savers to abandon money for gold throughout the 1970s, just as they have again since 2001. Whereas strongly positive rates, in contrast – and positive like nothing since the scramble for gold of five decades earlier...when global bullion flows determined (and were thus targeted to maintain) international currency values – worked the opposite way. Because no one needs an inflation hedge, a defense against devaluation, when cash-in-the-bank pays 5% more. And that victory was so hard-won, the stability it brought to unbacked money continued even as real rates eased back...pretty much until they neared zero a decade ago.

Here in early 2011, cash savers and central bankers alike stand so far removed from gold-backed currency, let alone from gold-as-money itself, the idea of returning to redeemable notes seems ridiculous. But those killer rates of 1980-85 remain the only sure lesson of how confidence in unbacked money can be won back once it's begun to dissolve. This month's gold-price jitters, therefore, are both understandable and absurd. Most sensitive of all assets to a switch in interest-rate sentiment –and so clearly buoyed by the Fed's repeated promise of "exceptionally low levels...for an extended period" – gold has turned 6% lower on inflation data that points higher, even as Western central banks make plain they've no plan of responding, and China holds its real rates some 1.5% below zero for cash savers.

Soft gold prices without hard-money rates? Not for long, we'd guess...not after faith in unbacked money has begun to dissolve. But the feint of 1975-76, however, might say otherwise.

Check the chart above. Gold prices halved even as real US rates stayed sub-zero but pushed upwards. Gold then rose 8-fold as rates fell again, finally forcing those very same hard-money rates which confidence in unbacked money demanded.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules