Tuesday, November 06, 2007

Gold Nearing Nominal All-Time High

Take a look at this Kitco graph to see gold fly up and away.

Time again to repeat my mantra:

You can take gold out of the standard, but you can't take the standard out of gold.

Historically, gold has been a barometer for the value of our monetary units, whatever they are at the time; and today is no exception. By rising to this level, gold is signaling to the world that all is not right with our monetary units, and especially the dollar.

To be a little more cool-headed, we must look at the comparative price of gold after taking inflation into account. When we do that, we discover that today's $824 gold price is only about one-third of the price gold attained in 1980. The peak price of gold in 1980, expressed in 2007 dollars, is $2,145, according to this chart at www.inflationdata.com.

[Thanks to inflationdata.com for this chart. Click on it for a larger version.]

That means that the price of gold is nowhere near its peak of 1980, in real terms. However, its dollar exchange value has gone from the low $300s (in 2007 dollars) to $824 today. That movement is a signal that people are losing confidence in the dollar's future.

Compared to other currencies too, the dollar has been hitting some long-time lows. Against what they're calling the "synthetic euro" (a euro value estimated for that period before its creation), and the Canadian dollar, the US dollar is at its lowest ever.

Some economists say this doesn't matter, that the dollar may lose some prestige, but that this is a good thing in the long run; that it will help American exports, that it will re-equilibrate the trade deficit, that it will encourage domestic saving, and that the present strength in our economy will keep the system afloat with no major problems.

Other economists say that this devaluation of our currency is nothing less than legalized embezzlement, that it increases the price of America's imports, that it will soon appear in the core price level and inflation numbers, and that the banking and mortgage irregularities that went on for the last five years will cost us dearly.

What is certain is that experts can no longer say that those who control our economy haven't already stolen our purchasing power. I submit that the problems we are experiencing in the credit markets are a direct result of actions by the Federal Reserve to devalue our currency, even though that wasn't their first objective. (They did it in the name of "saving" the global economy.)

By lowering their rates and pumping credit into the system over the last 20 years, the Fed is directly responsible for the various booms and busts we have been experiencing. We may not yet have a rise in core CPI; but we have experienced disruptions. At first it was the hedge fund crisis of the 1990s; then it was the dot.com boom/bust cycle; now we're in the housing boom/bust cycle that is touching hundreds of thousands of households.

Economists cannot gloss over the pain of so many people--those who lost money in the stock market crashes of 1987 and 2001, and now those who are having to pick themselves up from some bad real estate investments--and say that it doesn't matter, that these people are worth sacrificing for the good of the global economy. Or if they're going to say that, I say shame on them.

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Blogger indianist said...

I have been trying to know why the dollar rate is rising and why is the rupee value falling? When will all these get over and India will have a better economy? Please share your ideas with me if you are aware of it.

11:09 PM  

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