All Signs Pointing to Gold
by Frank Holmes
by Frank Holmes: Where
Wealth Thrives and Innovates
syringe of quantitative easing being injected into the U.S. economy's
bloodstream, Ben Bernanke is giving the markets their liquidity
fix. The Federal Reserve's action reaffirmed my stance I've reiterated
on several occasions that the governments across developed markets
have no fiscal discipline, opting for ultra-easy monetary policies
to stimulate growth instead.
liquidity shot promptly boosted gold and gold stocks, as investors
sought the protection of the precious metal as a real store of value.
You can see below the strong correlation between the rising U.S.
monetary base and growing gold value. Since the beginning of 1984,
as money supply has risen, so has the price of gold.
declined due to the Fed's easing, which isn't surprising, given
the fact that gold and the greenback are often inversely correlated,
and increasing money supply generally causes the currency to fall
is that currency decline was what Richard Nixon sought to avoid
when he ended the gold standard in 1971 and announced that the country
would no longer redeem its currency in gold. During his televised
speech to the American public, Nixon translated in simple terms
the "bugaboo" of devaluation, saying, "if you are
among the overwhelming majority of Americans who buy American-made
products in America, your dollar will be worth just as much tomorrow
as it is today."
As you can
see below, more than 40 years later, a dollar is worth only 17 cents.
This significant decline in purchasing power only strengthens the
case of gold as a store of value, likely prompting Global Portfolio
Strategist Don Coxe to propose making Nixon the "patron saint
of gold investors," during this year's Denver Gold Forum.
As Milton Friedman
once said, "Only government can take perfectly good paper,
cover it with perfectly good ink and make the combination worthless."
In its long-term
asset return research charting economic history in comparison to
current markets, Deutsche Bank illustrates multiple ways how "the
world dramatically changed post-1971 relative to prior history."
While the research firm makes it clear that returning to the gold
standard would be "disastrous," DB finds that the "lethal
cocktail of unparalleled levels of global debt and unparalleled
global money printing" are relatively new governmental developments.
Prior to the
last four decades, deficits only occurred in extreme situations
of war or severe economic setbacks, such as the Great Depression.
Balanced budgets were a "routine peace time phenomena in sound
economies." Since 1971, surpluses have been rare. The U.K.
has had an annual budget deficit 51 out of the past 60 years and
Spain has had 45 years of deficit spending over the past 49 years,
according to DB.
countries are in a predicament, as fiscal austerity attempts have
led to weaker-than-expected growth in Greece, Ireland, Portugal,
Spain and Italy. DB asks, "Can we really be confident that
the developed economies that we have created over the last 40 years
have the ability to withstand the effects of austerity and cut backs?
Do our modern day econometric models have the ability to understand
the impacts of fiscal retrenchment after a financial crisis having
been calibrated in a period of excessive leverage?"
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Frank Holmes is chief
executive officer and chief investment officer of U.S. Global Investors
Inc. The company is a registered investment adviser that manages
approximately $4.8 billion in 13 no-load mutual funds and for other
advisory clients. A Toronto native, he bought a controlling interest
in U.S. Global Investors in 1989, after an accomplished career in
Canada’s capital markets. His specialized knowledge gives him expertise
in resource-based industries and money management.
© 2012 Financial