Redux: Let’s Get Physical

Well, now, gold is (as we speak) making itself comfortable above $1,300.  Some profit-taking is being reported, of course, but, as a metal trader at LaSalle Futures Group in Chicago puts it, “There’s nobody in the dollar-bull camp. The Fed is cranking up the printing press again, and the dollar is going to suffer for it.”  ‘Nuff said.

For those that think this is merely “yet another bubble” in the forming, think again:  Gold is a long way off yet from it’s inflation adjusted high of roughly $2,200 per ounce.  More to the point, the dollar has never been quite this damaged before, excepting the post-revolutionary and post-civil war eras, perhaps.  What we’re seeing here, really, is the nascent stages of the bursting of a bubble, in this case: the dollar bubble.

Silver, by the way (also referenced in the article linked above), is much, much further away from it’s inflation adjusted high, but, that high would reflect the infamous Hunt Brother’s silver heist in 1980.   As a result, I’m inclined to favor the historical relationship between this “poor man’s hard currency” and gold, at roughly 20:1 or somewhat lower.  It’s (today) nearer to 61:1.  At 20:1, gold at $2,200 would put a silver at a “corrected”, inflation adjusted high nearer to $110 per ounce or around 5X where we are today.

This is old, old news, of course, to anyone who’s really been paying attention over the past (I don’t know how many, probably four, five, nine?) decades. Why, yes, it seems that you can get away with playing Russian Roulette for quite a while. 

Gold bulls have been around at least as long as the Jehovah’s Witnesses and, of course, have been disappointed almost as often.  But, then, never say never.

Arguably, the formation of a major dollar bubble was more-or-less “baked in the cake” back in 1944 at Bretton Woods, but you could, just as easily, set the date at the 1913 inception of the Federal Reserve, or at Nixon’s closing of the gold window in 1971.  Doesn’t really matter, any one of these were akin to putting matches and a can of gasoline in your baby’s crib:  you just know “that ain’t gonna work out well”.  

Hard Assets:  (from Investopedia):  A tangible and physical item or object of worth that is owned by an individual or a corporation. In currency transactions, hard assets are synonymous with currencies that the public generally has faith in, such as the U.S. dollar or the euro.  A hard asset is the opposite of an intangible item such as goodwill or a patent. Hard assets often refer to items such as buildings, cash or other fungible assets. Hard assets are considered particularly valuable because they can be used to produce or purchase other goods or services. (emphasis mine)

Simple Question:  What happens when a tangible asset is turned into an intangible asset? Simple Answer:  Wealth is moved to (and stored in) more tangible assets.

Duh.  That horse dead yet?  Maybe, not quite.

As I’ve noted recently, their are very real dangers associated with undermining our currency.  Yes, those dangers can be (and often are) masked by the simple fact that “everyone else is doing it” too.  For the U.S. the role of the dollar as world’s primary reserve currency has also facilitated the accrual of more damage as the usual near-term effects are deferred.

The nexus between real tangible assets (like oil, for instance) and presumed tangible assets (like the currency that we exchange for real tangibles) are tested periodically, such as in 1973.  Yes, this is generally characterized as a geopolitically driven event, but it’s impossible, really, to ignore the role that currency devaluation played in it. 

Similarly, when the price of crude oil hit an unprecedented $147 per barrel in June 2008, it is simply impossible to ignore the feedback loop effect of US trade deficits, and corresponding weakness of the dollar, on the parabolic rise in oil prices.  Arguably, the (conveniently timed) sub-prime fiasco actually saved the United States from a major currency crisis at the time.  Well, not so much saved, really, as deferred.

Deferred payment on accrued debt can only work for so long before the debt is called. 

So, how do you know we’re looking at a currency crisis?  Good question, and one that can’t be easily answered here.   There are quite a few metrics that can be used to evaluate a currency, such as the dollar index, which does illustrate an inexorable slide over the past decade.  The problem with that metric, however, is that it relates the dollar to other imploding currencies.  As there’s no fixed reference involved, there’s no depiction of the real damage being done.  It’s bad enough, I suppose that the “relative” damage is worse than with our largest trading partners.

In the meantime, however, gold has always served as the market’s only real fixed reference point.  That’s because, as any gold bull will tell you, gold is money.  It is the ultimate hard asset.  And, for that reason, anyone concerned about the future of the US (not to mention the global) economy should sit up and take notice.

Harry Tuttle

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