Is Gold Going Parabolic?

Reply to Adrian Douglas

On January 7^th Adrian Douglas wrote an important article for Le Metropole Cafe claiming that Gold has been in a 35 year bull market, that the so called 20 year Bear Market 1980-2001 was really a period of manipulation that took Gold out of its uptrend which it has now resumed. He writes (my underline):

"When Nixon closed the gold window a bull trend in gold started as shown by the channel called the "Nixon Trend". Investor zeal blew gold out of this trend in 1981. This was an extra trend anomaly. Volcker raised interest rates and gold fell back into the bull trend for another 8 years. How can a Bear market have commenced in 1981 if the price continued in its bull price trend for eight more years? The gold price only exited this price channel to the downside in 1989! Eight years is a very long time and can not be dismissed."

This theory has much merit but I would like to make a few comments to put things in a slightly different perspective. Was the Gold spike to $850 only an anomaly? Was it not perhaps something much more important?

I would argue that it was not investor zeal that caused the parabolic rise in the Gold price. It was genuine fear that the US Dollar was heading to zero. The monetary authorities HAD TO ACT. Gold forced the issue. Volcker did not raise interest rates. He surrendered to Gold’s authority. In 1980 the market, rather than the Fed, set interest rates which proceeded to rise to a level that compensated US Dollar holders for the inflation in the system. Volcker did promise to control the Money supply.

Gold is natural Money, the market choice of the Monetary Standard. The Monetary Standard (Gold or otherwise) must meet certain requirements, both practical and moral. Money must act as a medium of exchange, a measure of value and most importantly must preserve its value through time.   When Nixon tried to get rid of Gold, the market rebelled.  Why?  Because the monetary unit must preserve value through time.  The US Dollar clearly cannot do that. If the Monetary system is not preserving value through time it's because someone is stealing that value.

Gold is also the regulator of interest rates. In a fiat monetary system, imposed by coercion through legal tender laws, the monetary authorities must contain gold. After all, the purpose of fiat money is to tax. To tax surreptitiously through inflation. Unlike the income tax which makes claims against current income, inflation taxes accumulated wealth. Some taxpayers are aware of this and try to protect themselves with various strategies. An example, and a popular one, is to "invest" in housing which the public has been tricked into believing is an appreciating asset. The authorities encourage investment in housing by allowing mortgage deductions, exemption from capital gains taxation, subsidized mortgage rates, starter loans or some combination of these and other measures. However, houses, despite the propaganda, are in reality a depreciating asset. Depreciating against what? Well, Gold of course.

Gold was chosen as the Monetary Unit by trial and error. It achieved this distinction because, among other attributes, it is most efficient at retaining value over time. Monetary authorities don’t want you to know this.

The events of the 1970’s saw the Gold price rise more than 20 fold. At first other commodities appreciated faster than Gold or more precisely held their value better against a depreciating Dollar. But by 1979 Gold’s unique characteristics reasserted themselves. In that year Old Masters went up 17%, Diamonds 25%, Silver 77%, Oil 92%. And Gold? It was up 104%.

This was no blow off spike on a chart. Gold was indicating that the US Dollar was going the way of all fiat currencies. The Fed had no choice but to act. But how? There were really only three choices:

a) Control the Money Supply

b) Let interest rates clear

c) Sell Gold

They chose a) and b) and this satisfied the market. If they sold Gold at the time they haven’t told us.

Later they added a new defense. Official Disinformation. Bogus CPI numbers, bogus employment numbers, bogus GDP numbers, bogus budget deficit numbers. Bogus Gold Reserves. The purpose? To hide inflation. The finance minister to King Louis XIV put it well: "The art of taxation," said Jean-Baptiste Colbert, "consists in so plucking the goose as to obtain the largest amount of feathers with the smallest amount of hissing."

This allowed them to change tactics especially during the 1990’s. They decided to sell Gold, multiplying by the use of derivatives the effect this had on the market. They invented Hedonics and arm twisted government statisticians until they produced they required benign data. Interest rates were forced down, money supply increased dramatically and as we all know a series of bubbles resulted. Not in Old Master and Rare Stamps but in the Stock Market and later Housing.

So here we are again. Is Gold going parabolic right now? Sure looks like it.

The monetary authorities must act now! a) or b) or c) or some combo. As we all know the situation is much more extreme than in 1979. Global debt is now so high that positive interest rates would collapse the system.

And let us not forget the geopolitical and global financial aspects to all this. On the one hand the US Dollar is the global Reserve Currency. Other nations are very jealous of the numerous benefits attached to this status. They would like nothing better than to share these benefits. On the other hand, and this is key to understanding the dilemma central bankers face, if the US Dollar is pushed down too hard all fiat currencies may go with it. They tried for the past few years to prop up the Dollar by getting the Fed to adopt it’s "baby step" approach of raising rates signaled well in advance. They (the Asians) added even more Dollar Reserves to their already enormous holdings. They (the Europeans) sold gold from their rapidly depleting Reserves. They (all of them) encouraged a global housing boom by lowering regulatory standards. Anything to keep the public from hissing.

The nominal Dollar Price of Gold is unimportant. What matters is the rate of change. The Dollar has fallen 25% in six months and this is accelerating. All fiat currencies are falling-some faster than others. The dramatic change has attracted unwanted attention to Gold. Why hold fiat instruments with negative real returns when the safety of Gold beckons. Nothing is more efficient at preserving wealth through time.

Will we return to the Nixon Trend or will the Dollar collapse? It all depends on the response from the authorities. We all watch with interest.

Cheers from Auckland, Ed Wener
ed.na@xtra.co.nz