An Undeclared War is being waged against your money, wealth, stock, bonds, and physical assets. The war is being fought with disinformation, easy credit, deficit spending, questionable accounting and the primary weapon: fiat currency. The deficits that have occurred since 9/11, about 2 trillion USD, represent roughly 25% percent of all dollar denominated Federal debt since the country began accounting for debt. This deficit financing is the proximate cause of the inflation that wreaks such financial havoc on individual investors over the long run.
Let's look at a chart of the Dow Jones Industrial Average (DJIA) of the last 5 years:
This chart is pretty flat, some dips, some raises, some more dips, not a lot of change on average. It is reputed to be a very accurate indicator of the state of the economy. The DJIA is a dollar denominated statistic, thus it is not inflation adjusted.
The price of gold is immune to inflation since it is a commodity whose scarcity does not change significantly over small periods of time like 5 years. Very little of the gold produced is actually consumed so it has a tendency to accumulate over time (we are not running out of it).
This data plot, which was found on the Internet from the gold vendor Kitco, is dollar-denominated and as one can tell the price has steadily risen over the last 5 years, which in conjunction with the increased gold production worldwide and lack of industrial consumption indicates that the "value" of the dollar as a money equivalent is dropping precipitously.
Let's look at a graph of gold over the last 5 years and comparing US Dollars versus Euros.
The graphs started at almost exactly the same value 5 years ago. While gold has been rising relative to the Euro it has not been rising as fast. That is, the Euro is not losing its value as quickly as the dollar when compared to gold. Thus European socialists are devaluing their currency slower than "conservative Republicans."
Historically gold has been the money reserve of last resort and universal exchange. The US Dollar is not in fact money. Nowhere on any dollar bill will you find the word money. This is not an accident. The architects of the Federal Reserve System understood the nature of money and have legally separated the US Dollar from what economists consider as money (see Von Mises link later on). It is a currency and it says that is legal tender for all debts public and private.
Finance is what an individual does with their money, currency and capital. Economics is what the government does with everyone's wealth. Some personal finance, I am sure at best I am an average American, so my house has "risen" in value about 30% over the last 5 years, my 401K is flat (a loser when indexed against inflation) and neither are anywhere near as good an investment as gold since 9/11.
This brings me to a discussion I had with some coworkers shortly after 9/11. I made the argument that the war on terror would be expensive, financed with debt, and would lead to a long term devaluation of the currency, thus buying and holding gold or silver would be a good investment strategy.
Consider the tax preferential treatment of 401K/403B as a form of registration, and highly regulated and inflexible investment vehicle. I am unaware of any of these "investments" that speculates in gold or silver bullion, internationally the real forms of money that have been accepted across cultures for over 2 millenniums.
I am a software developer, and an applied mathematician by trade and training, not an economist. However, as a devotee of Austrian Economics and Ludwig Von Mises for over 30 years, this prediction was as difficult as falling out of a boat and hitting water. My coworkers thought I was cracked, they probably still do.
The "War on Terror" has now lasted longer than World War II. It will soon have lasted longer than American involvement in both World Wars as active combatants. If we look at it from another perspective it is just another big government program that is actually a war on the taxpayer. The inevitable casualties will be your wealth, your lifetime savings and with those possibly your future.
Gold charts provided by www.kitco.com and are for free distribution with attribution.
June 15, 2006