On January 21, 1980, gold spiked to $850 per ounce. The next day, it settled at $738. For the month, the average price was $675. This was the highest monthly average, from the beginning of the dollar until May of 2006.
If gold was priced today, at $47 per ounce, would you be a buyer? How much would you want? Why?
Some people think gold is an ancient relic. Some people say it has no real value or purpose. Someone once looked out my office window and said, “Gold has no more value than that tree. It only has value if someone else thinks it does.” I have a hunch, that VP, of one of our nation’s oldest financial companies, would be a gold buyer at $47 an ounce.
So would you rather have 47 little pieces of paper, or one ounce of gold? (If you’re not confident in your answer, go to a coin store and ask to hold a one ounce gold coin, an “American Gold Eagle.”)
Compared to 1980, gold is currently priced at $47. To understand this, let’s begin by looking at the price chart for gold, since 1970.
Some financial geeks like to take the gold price chart and adjust it for inflation. It is easily understood, why: the dollar purchased more in 1970 than now. In 1970, a first class postage stamp was six cents. The average home price was $27,000. A frozen TV dinner was 39 cents. The point is, we can’t compare a 1970 dollar to a 2016 dollar, without thinking about its purchasing power.
The price of gold, adjusted for inflation, using the government’s highly manipulated and fraudulent Consumer Price Index, looks like this:
There is a better way to judge the price of gold. Most financial people miss this fact: on January 1, 1970, our U.S. monetary base (think, the “quantity of money”) was $62 billion. On January 1, 1980, it was $132 billion. This month, December 2016, it is $3,600 billion. The growth looks like this:
We’re still using green pieces of paper with pictures of dead presidents, but our money has changed. In 1970, the dollar was redeemable in gold (by foreign governments). Today, the dollar is only valuable if someone else thinks it is valuable. Otherwise, it’s just a piece of paper.
Today, the creation of dollars is arbitrary. We might refer to the Fed as “printing money,” but in reality, the Federal Reserve just adds zeros to an Excel spreadsheet and—through electronic magic—the gods of money create new dollars. If we could do it, it’d be sweet. But if everyone could create money, it would look like this: Duck Tales Inflation Lesson.
If we adjusted gold for the annual increase in the quantity of our money, the price of gold would look like this:
In relationship to our money supply, gold has almost never been cheaper, from 1970 to today. When we do the math, today’s gold price is like buying it at $47, compared to the price at the peak of 1980.
What does this mean? Could this help explain why China and Russia are trading dollars for gold? Could it also explain why Russia, China, Iran and Turkey are completing international trade in their own currencies, rejecting the use of the reserve currency, the dollar? What would happen if other countries do the same? What would happen if our “friend,” Saudi Arabia, began accepting other currencies than the dollar in their oil exchange? How would the value of these pieces of paper hold up, if there was a greater supply than demand?
Professor Ben Bernanke taught us, dollars only have value to the extent they are limited in supply. He said, by increasing the number of dollars, the U.S. government can reduce the purchasing power of the dollar and increase the prices of goods and services. (For his 2002 economics lesson, click here.)
As Federal Reserve chairman, Bernanke did his magic and exploded the quantity of money. But he didn’t change the laws of economics. What he taught us in 2002, will be the consequence of his digital hocus-pocus. When the dollar loses purchasing power, the price of gold will be adjusted … upwards. My guess: there will be a time in the future, when we would have wanted to buy a lot of gold at today’s $47 an ounce.
“Dollar” Bill is a real guy, with real knowledge on our nation’s financial calamity, and real solutions for what must be done to dig ourselves out of the hole we are in. Due to his career, Bill must remain “disguised” to protect his position. “Bill” loves America, sees the impending cliff we are all headed towards, and hopes that by sharing his inside knowledge of the failed monetary policy in our nation, that a fiscal “nuclear” event can be averted.