Tax & Financial Consulting Services
by Larry Edelson
How Gold and the Dollar Got Irrevocably Separated
It's 1947. We're looking into a London office on St. Swithin's Lane. Inside are six members of the London Gold Committee. A bullion expert from N. M. Rothschild & Sons says, "Gentlemen, it is eleven o'clock. We begin."
Each member immediately calls his office on a special direct telephone line to determine how much gold is available for sale and how much is bid for.
All heck is breaking loose because there's not enough gold for sale to meet demand. Reason: Investors around the world have been jittery for weeks. They've been watching the U.S.'s financial position deteriorate.
In fact, America's balance sheet is in such terrible shape that Treasury Secretary John Snyder had earlier been forced to announce new bond offerings to help cover the worst budget deficit in the history of the U.S. ($45 billion in the red), not to mention a $247 billion national debt.
The price of gold is $35 an ounce and climbing. It seems like everyone wants the metal. They're worried about the cost of World War II still hanging over the market. They're worried that the value of the U.S. dollar will plummet in international currency markets. Everyone's hanging onto the gold they have, making the market even tighter.
Over the next several months, the buying pressure mounts, driving gold's price up to $43.25, a gain of 23.5%. There are frequent rumors that the U.S. Treasury's stockpiles of gold are dwindling. The squeeze is on!
The bull market in gold lasts until 1951 when Washington announces the so-called Treasury-Federal Reserve Accord, which stipulates that the Treasury and the Federal Reserve will act separately with respect to "dollar policy" and "monetary policy." The agreement effectively begins the process of cutting the link between the dollar and gold.
Twenty years later, the prior agreement on currencies — the Bretton Woods Agreement — was disbanded. Then, on August 15, 1971, all ties to gold were officially cut by President Richard Nixon.
The moral of the story — authorities will always opt for a weaker currency when they smell trouble. And boy, is there trouble now! Here just three of the problems:
Inflation is rampant: You can see inflation in nearly every major asset — stocks, bonds, and commodities. You can see it in the plunging dollar, an undeniable signal that inflation is bursting to the fore. And you can see it every time you go to the grocery store, buy gasoline, or pay for college tuition.
Washington and Wall Street keep trying to convince us that inflation is "benign." But don't believe them or their manipulated Consumer Price Index (CPI), which leaves out a number of everyday living expenses.
The Federal Reserve no longer controls interest rates: Twenty years ago, the Fed had some say regarding interest rates. But these days, the overwhelming pile-up of debts changes everything. America's government and its agencies owe more than $7 trillion to the rest of the world.
These are huge debts in large, difficult-to-control markets. Add it all up and you'll see that, in the final analysis, the markets control interest rates — not the Fed. The Fed's rate decisions merely mimic market rates, and "rubber stamp" them.
The dollar is weak in the knees: Look at the value of the paper dollar these days. The greenback is a shadow of its former self. It used to be worth more than six British pounds. Now it's worth roughly half of one!
In fact, the dollar's major trend since early 2002 has been relentlessly down. And there's nothing on the economic horizon right now to change that direction. In short, I don't expect the dollar's pain to stop anytime soon.
What does all this mean?
Gold Is Poised to Rocket Much Higher
For centuries, gold has maintained a basically stable value in terms of purchasing power. And that's why investors pile into the yellow metal whenever other markets look shaky.
Gold is real money. Remember, unlike stocks or bonds, gold has no debts, no earnings, no board of directors, no funny accounting statements, and no obligations to anyone but itself.
Gold is the purest investment in the world. While paper money can be printed or devalued at will, the same cannot be said for gold.
But there isn't much gold to go around. All the gold ever mined in the history of the world (about 151,000 metric tonnes) can fit into a cube measuring only 62.3 feet on each side. And gold production is declining despite today's elevated prices.
Consider this: Over the last ten years, gold production in South Africa has plummeted 50%!
So, the way I see it, plunging production, rising demand, surging inflation, and a lack of investor confidence in the U.S. dollar all add up to one thing — much higher gold prices to come.
In nominal terms, gold is already near its all-time highs. But it's still far away from its true all-time highs: In terms of the purchasing power of today's dollars, gold reached $2,176 in 1980. But right now, it's trading a fraction of this inflation-adjusted high. This alone suggests that gold has much more upside.
Even if gold got halfway to its inflation-adjusted price, it would zoom to far more than $1,000 an ounce, a huge gain from current levels.
I believe gold is still one of your best bets, loaded with huge profit opportunities. No matter what aspect of the market I examine, I see much, much higher prices. And that's why, for me, gold is absolutely the asset to own right now.
Four Ways to Get A Stake in Gold
First, you can buy bullion. For small amounts, a convenient vehicle is 1- and 10-ounce gold ingots. It might be a good idea to own some physical gold this way, but don't go overboard. It's too much of a pain in the butt to transport and store it.
Second, I think the streetTRACKS Gold Shares (GLD) exchange-traded fund is a much better way to own larger amounts of gold. Each share represents 1/10 of an ounce of pure gold. And the metal is stored for you!
Third, consider gold mutual funds like U.S. Global Investors Gold Shares Fund (USERX) and Tocqueville Gold (TGLDX). You can pack them away, with a view toward holding them for at least a couple years. In my view, these funds could double, triple, even quadruple, over that timeframe.
Fourth, you can invest in gold mining shares. But be careful here. The irony of today's bull market in gold is that some gold mining companies may actually go out of business as the price of gold soars. Reason: They still hedge too much of their gold production and/or reserves. As I always remind my Real Wealth Report subscribers, you need to be selective.
Tax & Financial Consultant, RFC
866-361-3872 toll free fax
"Those who do not learn the lessons of history indeed are condemned to relive them."
LEGAL NOTICE:This work is based on SEC filings, current events, interviews, corporate press releases and what we've learned as financial consultants. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. G&G Associates expressly forbids from having a financial interest in any security that is recommended to our subscribers. And all G&G Associates(and affiliated entities') employees and agents must wait 24 hours after an initial trade recommendation is published on the Internet, or 72 hours after a direct mail publication is sent, before acting on that recommendation.