Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19
Betting on Next British Prime Minister Tory Leadership Betfair Markets Forecast - 10th June 19
How Can Stock Market Go Up When We’re Headed Towards a Recession? - 10th June 19
If You Invest in Dividend Stocks, Do This to Double Your Returns - 10th June 19
Reasons for the Success of the Dating Market - 10th June 19
Gold Price Trend Analysis - Video - 10th June 19
US Stock Markets Rally Hard – Could Another Big Upside Leg Begin? - 10th June 19
Stock Market Huge Cosmic Cluster Ahead: Buckle Up! - 10th June 19
Stock Market Higher To Go? - 10th June 19
The Gold Price Golden Neckline… - 10th June 19
Gold Price Seasonal Trend Analysis - 9th June 19
The Fed Stops Pretending - 9th June 19
Fed Rate Cuts Soon; Bitcoin Enthusiasts Join Wall Street in Bashing Gold - 9th June 19
1990s vs. 2010s - Which Expansion Will be Better for Gold? - 9th June 19
Gold Price Trend Analysis, MACD, Trend Channels, Support / Resistance - 8th June 19
Gold Surges Near Breakout - 8th June 19
Could Gold Rally Above $3750 Before December 2019? - 8th June 19
5 Big Lies About Precious Metals Investing Exposed - 8th June 19
ADL Predictive Modeling Suggests A Big Move In Silver - 7th June 19
US China Trade War Will Start a Recession, or Worse… - 7th June 19
Land Rover Discovery Sport Brake Pads Expected Life, Worn Pads Dash Warning - 7th June 19
The Post Room Selfies Fun at Meadowhall Sheffield, From Game of Thrones to Desert Island... - 7th June 19
SAMSUNG - South Korean Electronics Giant - Investing in AI Stocks - Video - 7th June 19
Gold Price Rally or New Bull Market? - 7th June 19
Digging into the Rising Gold: Trade Tensions, Recessionary Worries and Dovish Fed - 7th June 19
The Risky Stocks Big Lie That Keeps Many Investors Poor - 7th June 19
Gold and HUI Short-term Strength Is a Strong Call to Action - 7th June 19
Fear Drives Stock Market Expectations - 7th June 19 - Chris_Vermeulen
Next British Prime Minister Tory Leadership Betting Markets - 6th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Investing in Gold - A short history of Monetary Mistrust

Commodities / Money Supply Mar 25, 2007 - 02:16 PM GMT

By: Adrian_Ash

Commodities What does it take to stop people hoarding gold instead of cash...?

16th SEPT. 1992 – and led by the chancellor in London, Norman Lamont, the Bank of England raised its lending rates from 10% to 12%.

This was the largest hike in 8 years. But the Bank also promised a further increase to 15% later that same day.

Why the sudden urgency? The Old Lady was desperate to defend the Pound Sterling.

Somebody had to.


Speculators across the world, most notably the multi-billionaire George Soros – former partner of Jim Rogers in the Quantum Fund – had got it into their heads that Europe's exchange rate mechanism (ERM) was about to collapse, demolished by the British Pound's weak fundamentals. The "hot money" was selling Italian Lira for the same reason, too.

A precursor to the Euro currency, the ERM had set "trading bands" for Western Europe's currencies. Each central bank was charged with defending these limits, easing volatility on the currency markets before Europe joined together to launch a pan-continental monetary unit.

Ever the Euro-skeptic, however, Britain was lagging the Franco-German vision of a united Europe. Three years into a house-price collapse, Britain had slipped into a recession that put more than a million people out of work. That meant that Sterling now looked horribly over-valued inside its trading band.

Or so the speculators thought. And the speculators were right, as it turned out. By the close of trade on that autumn day in 1992, the United Kingdom had abandoned the ERM. It had also spent the equivalent of $1.6 billion, trying to prop up the Pound.

George Soros, on the other hand, was $1 billion richer. And Sterling interest rates were cut back to 10.5% the very next day.

Two years later, higher interest rates failed to defend the Mexican Peso. The government in D.F. had squandered more than 80% of its foreign reserves in 1994 trying to prop up the currency. Its devaluation in December scared foreign investors so badly, they deserted Mexican bond auctions despite interest rates topping 40%.

Yet again, the markets were right and the government was wrong. The Mexican Peso had already lost half its value against the US Dollar in just 12 months. Over the next five years, it halved again.

This same mistrust of money at any price also whacked the US Dollar in the early 1930s...even as deflation hit and the value of money seemed to be rising.

The Great Depression led American citizens to hoard gold before cash. "During 1932 the US Federal Reserve raised its discount rate to defend the Dollar," as Sam Hewitt noted for Sun Valley Gold in a paper 10 years ago. But fearing an imminent devaluation of the Dollar, "the American public continued to hoard non-interest bearing gold."

The American public was right to fear devaluation – just as the Sterling raiders and foreign investors fleeing the Peso were right to mistrust rising interest rates, too.

In the end, it took the Presidential executive order of 5th April 1933 to force US citizens back into the Dollar. President Roosevelt made gold ownership illegal, punishable by $10,000 fines and/or imprisonment.

He also devalued the Dollar by 40% at a stroke.

Fast forward to March 2007. Investors, householders, businesses and government right across the developed world now refuse to hold cash. They'd rather spend it, gear it up for investment, lend it out or swap it for financial assets – any financial assets – rather than hoard it.

But no one's refusing to accept money in payment, not yet. So the issue of what it would take to restore confidence in official currency – including the US Dollar...Sterling...Euros...Pesos and all the rest – looks purely academic. Today's disdain for paper currency remains a long way from loathing.

Right?

"Gold is a depletable resource," wrote David Ranson of H.C.Wainwright & Co. for a World Gold Council research paper in 2005, "and large discoveries are becoming increasingly rare. Thus gold's purchasing power will remain stable, and its role as a measuring rod will become still more secure."

Ranson's study found that changes in the price of gold bear a 0.50 correlation with consumer-price inflation 12 months down the road. Oil prices, on the other hand, have only a 0.23 correlation with the cost of living one year later. That conclusion might be at odds with the received wisdom of CNBC and Bloomberg pundits. But rather than gold acting as "an inflation hedge", the metal in fact gives us a lead indicator of inflation in the cost of living.

Put it another way, and that means gold signals the forthcoming devaluation of paper money.

"Inflation is a monetary phenomenon," Ranson went on, "by which we mean it is governed by the purchasing power of a currency in terms of 'hard money' benchmarks. How to tell whether government actions are combating or accommodating inflation? Watch gold, not oil."

The US Fed once knew this, too. It might still do today according to the debate that rages over illegal manipulation of the gold price in the open market. But under Paul Volcker, the famously tall chairman from 1979-87, the Fed clearly saw gold as barometer of inflationary expectations.

At one policy meeting in late '79, the Fed committee noted that "speculative activity" in the gold market was spilling over into other commodity markets. An official at the US Treasury called the gold rush "a symptom of growing concern about world-wide inflation."

"There was a kind of great speculative pressure," said Volcker in a PBS interview of Sept. 2000. "We had to deal with inflation."

"It was the years when everybody wanted to buy collectibles from New York. The market was booming, and other markets of real things were booming – because people had got the feeling that things were inflating and there was no way you could stop it."

Volcker hit on one way of stopping inflationary expectations, however. He took US interest rates to 19% and stopped the great gold speculation dead in its tracks.

His strong medicine also took real US interest rates – above and beyond increases in the cost of living – to more than 9%. That destroyed long-dated bond prices, but no one wanted them anyway anymore. Treasury bonds had become known as "certificates of confiscation". Only high real returns, guaranteed by the US government, could entice fresh finance via the bond market once again.

So far, no one's prescribing the same kind of strong medicine for paper money today. But how might this slow-motion destruction of confidence in government-issued currency be resolved in the long run?

It might take more than a few 0.25% hikes in interest rates. But if Washington were to make owning gold illegal once again – just as it did to defend the Dollar in 1933 – at least US investors now have the option of hoarding physical gold offshore...beyond the reach of their government's caprice and diktat.

You can learn more – and claim a free gram of gold, vaulted in Zurich on your behalf right now – by visiting BullionVault.com...

By Adrian Ash

Adrian Ash is head of research at BullionVault.com , the fastest growing gold bullion service online. Formerly head of editorial at Fleet Street Publications Ltd – the UK's leading publishers of investment advice for private investors – he is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.


© 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