Tax & Financial Consulting Services
Everything Is Devaluing Relative To Gold
Dear G&G Reader,
In an effort to stop the deflationary process which was initiated by the collapse of housing, governments and central banks need to create inflation in order to ‘reflate’ the economy. You can see this process happening in relation to the one currency whose supply cannot be controlled simply by pushing the button on a computer; gold.
The Fed's quantitative easing (QE) policy (which Bernanke refers to as a policy of credit easing) can be viewed as the expansion of the asset side of the Fed's balance sheet, but what's really happening is that the dollar portions are expanding relative to what the Fed is holding in gold.
Before QE, the Fed was holding the dollar factors affecting the reserve balance (and therefore the supply of money) relatively constant by holding those items at about $800 billion vs. about $11 billion worth of gold (gold is reported in constant dollars). With all of the Fed's new lending facilities, its dollar holdings have expanded to just over $2.2 trillion but while this has happened, the amount of gold the Fed is holding has remained exactly the same. Essentially, this means the supply of dollars has expanded while gold has remained constant.
All asset classes, including currencies, equity markets, and commodities, are in the process of devaluing relative to gold. This devaluation is an essential part of the ‘reflationary’ process because that’s exactly what inflation is; the decrease in purchasing power of fiat money. Let’s look at the last month as an example (Jan 6 to Feb 6).
The closing price of gold on Jan 6 (measured by the March futures contract) was $864.00 and it closed at $912.10 on Feb 6. In dollar terms, gold appreciated by 5.27% over the period but another way of saying this, is that the dollar depreciated by 5.27% relative to gold. Using closing prices for the pound over the same period, you’ll find that sterling has depreciated by 6.13% relative to gold. The euro has depreciated 9.45% in that time and the yen by 3.45%.
What about stocks? If you set up an S&P/Gold “unit” (the value of the S&P divided by the price of gold in dollar terms) you’ll see how stocks have devalued relative to the precious metal. On Jan 6, the closing price of the S&P 500 was 934.67. Since gold closed on $864.00, the S&P/Gold unit was 1.08 that day. That same unit closed on 0.95 Feb 6 which means that over this timeframe, stocks have devalued by 12.03% relative to gold.
Stocks did go down over this period, but the process is taking place whether stocks go up or down. Let’s look over a longer time frame, one where the S&P has ‘gained’ (at least, in dollar terms). A good place to start would be where the most recent bottom has been made, the Nov 20 closing low on 752.42. In dollar terms, the S&P has advanced 15.43% as of last Friday’s close since then (or, the dollar has depreciated 15.43% relative to stocks) but in terms of gold, the S&P has actually declined by 5.94%.
The decline of oil relative to gold has been the most dramatic. In this case we’ll set up a gold/oil unit only because gold is a larger dollar number. The unit went from 16.41 to 22.60 from Jan 6 to Feb 6, which means that oil depreciated a massive 37.72% in gold terms during that time while in dollar terms, it only depreciated by 23.87%.
PREDICTION --- Look for Gold to hit $1000 an ounce within the next couple of months. Are you going to be one of those people who say "I wish I had purchased some Gold or Silver back in the day?" Or, are you going to be one of those who say "I'm sure glad I listened to G&G Associates and started purchasing Gold & Silver when they told me to?" Start purchasing the only real currency in the world folks...Gold & Silver...what are you waiting on...all your money to disappear from your bank and investment accounts?
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Tax & Financial Consultant, RFC
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LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. 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. Also, please note that due to our commercial relationship with Publc Gold, G&G Associates may receive compensation from a membership purchased at www.publicgold.com/gngpreciousmetals.