IT'S NOT OFTEN that Sweden gets to lead the world. Saab mimicked BMW. Ericsson improved on Motorola. Abba took The Carpenters and added a hi-hat.

In monetary matters, however, Sweden remains an occasional trail-blazer. The world's first central bank, beating even the Bank of England by 26 years, the Riksbank then copied the Old Lady by when it abandoned the Gold Standard in September 1931. But the Swedes chose to mimic Great Britain before anyone else, quitting the metal within two weeks of London's monetary bomb-blast.

That's why, according to academic consensus, Sweden recovered from the Great Depression before anyone else. (A more likely cause, we guess here at BullionVault, was the resulting 30% drop in the Krona, but economists hate publicly backing competitive devaluation today.) And Sweden really did break new ground in the Thirties by making an explicit rate of inflation its target - six decades before New Zealand, the UK, Eurozone and US caught up.

Inflation targeting wasn't the first or last time the Riksbank got ahead of its colleagues. But it did prove the least disastrous to date.

"A charge was drawn up against Goertz, who was accused of speculation, of having ruined public credit by imaginary money, of having formed a design to destroy the king..."

Thus relates a 19th century history of the first central banker ever to lose his head to an axe, rather than merely losing his head to some new tom-fool theory. Baron George Heinrich de Goertz, a successful minister in the early 18th century, was dumped into the Riksbank to fix more than 100 years of monetary madness.

Sadly for Goertz, his madness served to cap the whole show.

"He minted a representative currency in copper, validated with the king's head and a legal tender face value of a Daler," wrote Paul Tustain, director of BullionVault, on his popular Galmarley gold site back in 2004. "Goertz did not limit the issue, nor ensure the quality of the coins, which were beneath the technical capabilities of the day. Moreover, he attempted this exercise on behalf of an administration which had lost virtually all financial credit with its population, and compounded the error by allowing to develop a widely-held belief that at some unspecified time in the future, collectors would refuse the coins as legal tender payment of taxes.

"In other words he broke every rule in the central banker's book. The coins were detested, and sloshed around the Swedish economy depreciating rapidly"

Poor Goertz! His scheme collapsed with the death of his King and protector, Charles XII, in 1718. The new monarch - Charles' sister, Ulrica Elenora - abolished Goertz' paper money, and had his copper coins re-minted at something approaching their true commodity-price value. Forced to a show trial and denied counsel in court, he tried but failed to defend himself against execution, beheaded in front of a cheering crowd on 3rd March, 1719.

Just like today (as we'll see in a moment), such monetary madness was hardly unique at the time. Destroying public credit with imaginary money was also ruining both England and France, where John Blunt's South Sea Bubble and John Law's Mississippi Bubble would explode in due course in 1720. But just like 2009, the Riksbank was only just ahead of the game. Because the success of its thinking still clearly impresses today.

"The UK should follow the Swedish model," said ex-Bank of England policy-maker Charles Goodhart at a forum last week, "so that for commercial banks reserves held at the central bank of above, say 2%, they are charged 0.5% to hold their balances.

"This would then encourage the banks to buy short-dated gilts or commercial paper, increasing liquidity."

Simple, right? It's now six weeks since Sweden's central-bank governor, Lars Svensson - a great pal of Ben Bernanke's at Princeton - "broke the zero bound" on monetary policy. Yet the world still turns on its axis, despite the Riksbank knocking the interest paid to its commercial-bank users down below nothing, into a brave new world of negative rates.

Cash-hoarding in London is also more weighty at £161 billion ($264bn) than Sweden's own stock - now down 19% from SEK 48 million ($6.7m) just before the fateful decision. And like the US Fed's hoard of commercial bank cash, which rose 40 times over in 2008, the consensus view is that unused bank money is "socially useless" to quote another former Old Lady, Willem Buiter of the Financial Times.

But there's way more at stake, we fear, if the US and UK choose to buck history and now follow the Swedes. Starting with the outright monetization of their government debt.

"There have been suggestions that the Bank of England could introduce negative interest rates on deposits to encourage the commercial banks to lend as the Swedes have done," says one London analyst, RBC Capital's Russell Jones.

"This could also encourage banks to buy more short-term gilts."

As it was at the start of this month, the latest Bank of England policy-vote shocked the currency and bond markets by unleashing a fresh £50 billion of imaginary money for use in its Quantitative Easing. Analysts, investors and savers already fear it's simply funding state debt, passing the new cash straight to the government and walking us all straight to hyper-inflation. Yet today's release of the policy-team's minutes, however, showed the governor - one-time inflation hawk Mervyn King - actually voting for a still-greater injection of money from nowhere, hiking the Bank's total money creation to £200 billion.

That would been equal to half the entire government gilt market, and greater than this year's entire UK state deficit - currently forecast at £175bn, precisely where the Bank of England capped its money creation for now. Still deflation looms, Dr.King said this week, and still the Pound rises...back above $1.65 to the Dollar today.

If this central banker's scheme works, and he keeps his head until, say, the end of this year, how might the US Fed or ECB answer? On both sides of the Atlantic, and all across Europe we guess, expect more "imaginary money" - with or without negative bank rates - often and soon.

Adrian Ash
for The Daily Reckoning Australia

• Gold Coins for $870-$890 An Ounce
• Rare Coins as an Informal Way of Estate Planning
• A Gold Standard, Without Gold
• Bank’s Inflation Projections Will Not Return to the 2 Per Cent Target Figure Until Early 2010
• Negative Equity Becoming the Norm in U.S.A.

WATCHING SOMEBODY ELSE slip on a banana-skin always raises a laugh. Not least in the divine comedy of money and finance.

"It took three generations," wrote a professional metals consultant in Feb. 2009, "but we now seem to have reached the point in the world's history where, for the first time, gold is valued only for jewelry use and speculation.

"The metal today has rapidly diminishing monetary use..."

Whoops! Within a matter of weeks, two of the world's biggest monetary powers - Russia and China - publicly said they wanted to discuss including gold in a new global "basket" to replace the Dollar as reserve No.1...

"What of the idea," The Economist then asked this week, "that China has [already] diversified into other currencies? The statistics are hard to make sense of [because] the State Administration of Foreign Exchange (SAFE), which manages the country's reserves, does not disclose such details."

Hee-Hee! The very next morning, the head of SAFE, Hu Xiaolian, told the world that her country's gold hoard has risen by 75% since 2003 to 1,054 tonnes...

"Just as it was a mistake to assume that the good times would keep on going in the 1990s," Christopher Davis now writes for MorningStar, "it's equally foolhardy to expect lackluster stock market returns to continue forever.

"In fact, the stock market has often gone on to post outsized gains after long periods of drought. [So] the moral of the past 10 years isn't that you should give up on stocks. To the contrary, it's probably a better time to invest in stocks than anytime in years..."

Well, at least he's trying. Because the funniest pratfall a forecaster can make is mistaking where she or he skips today for the path things will continue to take forever and ever, amen.

"Gold has a future, of course, but mainly as jewelry," declared finance historian Niall Ferguson 10 years ago, at the very close of the 20th century. Falling in price for almost two decades, "this ancient form of wealth is less an international currency and stable store of value than ever before," he went on.

"It's just another commodity that swings to the global rhythm of supply and demand."

Plenty of other historians and analysts - plus Europe's big central banks - queued up to throw dirt on gold's coffin, too. The Financial Times, Economist and BusinessWeek all announced the "death of gold" as the Nineties neared their end. Gold-mining directors leased gold and sold it, locking in then-current prices for fear of raising still lower prices in future.

You'll therefore forgive our caution today. Because after what then happened to gold - rising four times over and more against each of the world's major monies - making a grand call at the end of Gold's Decade would be a true buffoon's gambit. Tripping over a forecast only raises a laugh when it happens to somebody else.

So first, let's re-tie our laces and scan the pavement ahead for slapstick bananas.

"We calculate the market cap of all above ground gold, including central bank reserves, equals about 1.4% of global financial assets," reported John Hathaway of Tocqueville Asset Management a little over four years ago.

"In 1934 and 1982, when investor stress reached extreme readings, that percentage was between 20% to 25%."

Fast forward to the financial crisis/meltdown/deflation/depression of early 2009, and by our maths here at BullionVault, investor stress still remains low compared with those historic extremes.

That's not to say gold prices MUST rise, of course. Just that they haven't risen, in terms of the world's wealth, anything like previous bull runs in the value of gold.

World Financial Assets

• $4 trillion in notes and coins (global M0, Mike Hewitt at Dollar Daze)
• $25 trillion in bank deposits (mid-2008, eFinancial News)
• $16 trillion in short-term notes (all issuers, Bank of International Settlement)
• $60 trillion in domestic debt securities (again, both corporate & public, BIS)
• $23 trillion of international bonds (ditto)
• $33 trillion in stocks (World Federation of Exchanges)

Yes, we're ignoring unlisted business, because the numbers just can't be found. And yes, we also ignore both derivatives and real estate, because the one is unfunded (and simply too big to settle) while the other only counts as "investment" when you gear up using another guy's money.

But against this under-played $161 trillion total for the world's paper wealth - spread as it is across cash, banks, bonds and stocks - the value of gold compares at some $4.4 trillion, or scarcely 2.7% of the total. And that figure, please note, includes all gold ever mined in history, rather than simply the investment bars, monetary coins and tradable jewelry beloved of south-Asian consumers.

Whether as teeth, bracelets or micro-chips, best estimates (courtesy of our friends at GFMS via the World Gold Council) reckon just 2% of the 161,000 tonnes un-earthed over the last 5,000 years has been lost for good, slipping down the back of the sofa or buried beyond the reach of metal-detectors. Yet it's the total supply we use here, meaning the number above once again over-states gold as a proportion of investable wealth - a risible 2.7%.

Which again makes gold's still-tiny size all the more note-worthy when you consider what's supposed to have happened to the alternative choices for storing your wealth.

"At the low of 1974," as Mark Hulbert of the eponymous Financial Newsletter noted on CNBC this week, "average P/Es were around five or six. This time they were down more in the low 'teens..."

Indeed, the apparent "bear market" low of early 2009 saw US stocks trading for 13 times earnings - only a little below the 130-year average of sixteen.

"So you know," Hulbert went on, "it's hard to say that market-wide we were at values at all reflective of a major market bottom like in December '74."

"And dividend yields were at what, seven per cent?" chipped in anchor Joe Kernen. "Which they would've been now, if everyone hadn't cut their dividend!"

"That's right," confirmed Hulbert, "and it's interesting that at the bottom of a terrible recession [in late '74] you still had high dividend yields, whereas now we're not anywhere near those kinds of yields.

Outside the boardrooms and on the trading desks, meantime, "Where was the universal excess bearishness that typically marks the end of major bear markets?" asked Albert Edwards of Société Générale pointed out when global stock-markets hit their new low point in March.

"Before I can go overweight equities, I need not just cheap valuations, I need to see despair and revulsion," Edwards said. Which hardly squares with today being "the best time in years" to buy stocks given the chorus of bulls calling the bottom last month.

Still wary of stocks, the world could yet go further over-weight bonds, of course. Which would certainly make governments happy, seeing how many bonds they're going to issue this year in a bid to finance their historic, structural and unavoidable short-falls. Or maybe corporate bonds appeal, what with interest rates already at all-time record lows amid the worst recession since WWII, but without (as yet) a significant jump in defaults. They're also getting no rarer, but the value has already tipped lower. Worldwide - and in US-Dollar terms - the outstanding stock of corporate bonds shrank by 14% in 2008. Outstanding government debt, in contrast, swelled by one tenth (again, in terms of US Dollars) as new issuance of public-sector debt rose by a fifth compared with 2007.

Or maybe you'd rather choose cash...now paying less than even official inflation per month in pretty much every major economy. Again, you'll need to ignore that pesky risk of default (this time by banks) as well as the fresh flood of printing. Or perhaps you'd rather buy into private equity and small, local businesses...what with taxation set to surge (and keep surging) to try and pay for the worldwide stimulus in due course, while private borrowers keep competing with that flood of AAA-rated debt pumped out by the state.

None of this makes gold a buy in itself, of course. But buying gold still makes an unpopular choice against the broad mass of alternative stores of value. Which might just prove close to a tip if history's your guide.

Compared to the Great Depression or inflationary wipe-out of three decades ago, the world's wealth remains very under-invested.

Adrian Ash
for The Daily Reckoning Australia

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events - and must be verified elsewhere - should you choose to act on it.

• When Gold Ruled the Earth, Part I
• Investors to Drive Next Leg of Bull Market in Gold
• China is a Key Driving Force in the Gold Market
• September is the Best Month for Gold
• Prices of Gold in the Top 10 World Currencies

"INVESTORS will drive the next leg of this bull market in gold," said Philip Klapwijk, chairman of GFMS, at the London-based research consultancy's Gold Survey launch in Canary Wharf on Tuesday, "setting a new high above $1,000 in 2009 and with a real possibility of $1,100 per ounce."

Anyone pitching for $1,100 in short order, however, might have their work cut out for them. And all thanks to MC Hammer.

"We have seen people in Europe buying gold in quantities more typical of the Middle East and Asia...particularly in Germany and Switzerland," Klapwijk went on. Because "Inflation is the inevitable consequence of today's rapid money-supply growth and quantitative easing." All told, reckons GFMS, the monetary response to the financial crisis will prove "extremely powerful medicine for gold investment."

So far, so bullish. But why no new high, therefore, in the gold price already this year? Philip Klapwijk attributes gold's failure at $1,000 back in February to the "astounding" flow of scrap metal coming from cash-strapped consumers worldwide. And GFMS's raw numbers would suggest he's right.

Scrap supplies previously lagged both gold-mining output and central-bank sales by a wide margin each year. But recycled tonnage actually overtook new jewelry demand worldwide at the start of 2009 according to GFMS's analysis. That was after rising 27% in full-year 2008 to more than 1,200 tonnes.

Gold mining output, for comparison, came in at barely 2,500 tonnes, down yet again year-on-year despite the on-going rise in prices.

Come Q1 2009 and scrap supply surged further still, reaching above a massive 500 tonnes according to GFMS's research. New jewelry demand, in contrast, halved to just 420 tonnes, as traditional importers - such as former world No.2 Turkey - became gold exporters in a shocking about-turn.

One attendee at the GFMS presentation even thought they under-played it, putting the flow of scrap metal far higher - and dwarfing world mining output - at perhaps 1,000 tonnes during the first quarter alone. Absurd as that sounds, world No.1 importer India took in next-to-no new gold at all between Jan. and March as the Bombay Bullion Association has reported.

That's an event not seen since the Great Depression of the 1930s according to gold-market historian Timothy Green, also chipping into the Q&A at Tuesday's GFMS presentation.

Most crucially for the new dynamic of gold demand-and-supply, the industrialized West has seen high-margin operations led by Cash4Gold - whose advert during this year's Superbowl hardly needs spoofing, featuring as it did MC Hammer and former Tonight Show sidekick Ed MacMahon spoofing themselves - make selling gold much easier for cash-strapped consumers.

"I can get cash for this gold medallion of me wearing a gold medallion!" gasped the Hammer in Cash4Gold's typically gag-laden Superbowl slot. The airtime alone reputedly cost $3 million, so based on the scrap market's average mark-up of 40% - if not the 60% to 80% mark-ups reported in this "consumer crusade" against America's No.1 - you'd have to guess they brought in a chunk of change...as did everyone else touting for scrap metal as the Christmas heating bills came due between Jan. and March.

Hence the "roadblock", or so Klapwijk reckons, on gold breaking above $1,000 an ounce in late February. But we're not so sure here at BullionVault.

First, Cash4Gold's parent company, Albar Precious Metals, reports 775% growth for the last three years. So why the sudden impact on gold prices - an impact regularly dismissed in 2008 in favor of de-leveraged by crisis-hit hedge funds fleeing the futures and options market? More crucially, back in Feb. this year, gold still broke new all-time highs vs. the Euro, Sterling, Swiss Franc, Indian Rupee, Turkish Lira and pretty much everything else bar the Dollar and Yen. Which would suggest the failure at $1,000 was more currency-capped than supply-driven.

More critically still for gold-market analysts, how can we draw a line between "investment" and "jewelry" for those two billion Asians still without Main Street banks in which to keep their savings?

Either way, gold investors might still want to beware the Hammer. Because the only cap on Middle Eastern gold sales after the Jan. 1980 top, as Timothy Green recalled from his experience in Kuwait and Dubai, was the inability of jewelers to raise enough cash each day to buy all the scrap gold offered daily. Whereas Cash4Gold, the leading US scrap buyer, also runs its own refineries as well as collecting scrap metal by post and touting for metal online and on TV.

Looking ahead, an estimated 82,000 tonnes of gold exists as privately-owned jewelry worldwide, some 52% of the total above-ground supply. The vast bulk of recent tonnage has been added by emerging-market consumers, most often in the form of lumpy "investment jewelry" that carries little added-value from fabrication, but which can still lose 10-15% in dealing fees when it's sold to raise cash. So how much of the 2008 and early-09 supply represented forced sales by truly cash-strapped gold hoarders - and how much represented "easy scrap" sales? You know, the really ugly old-fashioned stuff inherited from maiden aunts that the owners never much cared for, similar to that "rabbit gold" buried by generations of Frenchmen fearing (yet another) German invasion but now dishoarded by their grandchildren each year.

In the same way the earth yields up "easy gold" to open-cast mines, before forcing miners to start digging...and digging...down as far as four and even five kilometers below the surface in South Africa, the world's former No.1 gold-mining nation...perhaps the emerging markets are now racing through their "easy scrap" gold. Or perhaps the decision to sell has already been tough, "spurred by losing your job, losing money in the stock market, bad luck, or just needing some extra cash for holiday spending," as Cash4Gold laments on its website.

On the other side of the trade, meantime, GFMS now expects "concentrated buying" on any price dip to $800-850 per ounce. Down there, the consultancy says, pent-up demand will surge while scrap sales fall sharply, just as we've seen right throughout this bull market to date, with Indian jewelry demand triggered at ever-higher dips in the price.

And as Philip Klapwijk noted in London on Tuesday, if it weren't for a surprise jump in gold-jewelry demand during the plunge to $700 an ounce and below in Oct. 2008, "it's undoubtable that gold would have fallen further...down to $650 or lower."

Everyone's got their "deal price" in short - that level at which they're either a buyer or seller, depending on where they last bought or sold. And also depending, of course, on their outlook for inflation from here.

Adrian Ash
for The Daily Reckoning Australia

• Gold Nears Record Highs on Investment Demand
• Gordon Brown’s Gold Sales, 10 Years On
• When Gold Ruled the Earth, Part II
• IMF Gold to be Used
• IMF Deems Gold An Idle Asset

APRIL FOOL'S CAME a day late to the gold market this week.

"The biggest interest-rate cuts in history...An unprecedented fiscal expansion, injecting by next year $5 trillion into the world economy...expansionary policies as long as they are needed..."

So said Gordon Brown, summarizing the G20 summit of world leaders at its conclusion on Thursday.

On top of what's already been promised, the UK prime minister then announced "Additional resources of $1 trillion through the International Monetary Fund and other institutions [plus] $250 billion from Special Drawing Rights [the IMF bank reserve currency] issued to member countries...trebling the resources of the IMF with up to an additional $500 billion" on top.

What's more, Mr.Brown's and the other top 19 world leader have agreed "not 100 billion but $250 billion of trade finance...provided over the next 2 years through export credit agencies, including $50bn through the new World Bank initiatives..."

In short, "More money than ever before," as the prime minister put it.

Meantime, however, the Gold Price dropped $30 an ounce, dipping below $900 for only the fourth time since February.

Why? "A Reuters story released just after noon UK time highlights considerable short-term risk to the gold market" gasped UBS in an email at lunchtime.

"We had expected any conversations and statements about gold at the G20 to be limited to the proposed sale of 403.3 tonnes of gold," went on John Reade, the Swiss bank's highly respected metals analyst in London.

"But a statement from the UK Treasury Minister and [a] G20 source suggests that more than this amount may be sold to support the IMF.

"This is potentially really bad news for gold market sentiment in the near term."

Those 400-odd tonnes, already proposed for sale by the International Monetary Fund (IMF) since February 2008, had look too small by half to several African delegates ahead of the G20 summit.

Gordon Brown himself has been agitating for IMF gold sales for the last 10 years, ever since he himself ordered the Bank of England to sell half the UK's national reserves at rock-bottom prices. (The gold price rose 17% as those sales then took place; when the IMF Sold Gold at the end of the 1970s, "dumping" 1,600 tonnes onto the market, the price rose eight-fold regardless...)

But anyone looking for G20 fresh action - rather than just a re-hash of existing commitments - only got it in money inflation, not in proposed gold sales by the IMF.

Citing only "agreed sales of gold" - and then confirming in questions-and-answers that the pre-proposed 403 tonne sale will be the limit - "Gold of the world is now being used to help the poor of the world," said Brown.

Here's hoping the poor take their chance to squirrel away a little more of that metal on Brown's latest gold-selling success. Because with all that money headed their way - barely 9 months after crude oil hit $150 per barrel and global inflation reached 30-year highs - they might just need all the help they can get.

Adrian Ash
for The Daily Reckoning Australia

• India Beats China to Walk Away With 200 Tonnes of IMF Gold
• IMF Deems Gold An Idle Asset
• IMF Gold Up For Sale to Pay the Bills
• Gold Nears Record Highs on Investment Demand
• G20 Was About Big Government Getting Bigger

NO FOOLING! It doesn't matter which currency you earn, spend or invest, gold bullion has been the best-performing asset class bar none this decade.

That fact bears repeating, so you'll have to forgive me:

Gold has dominated the last nine years for investors, smacking everything else in the nose and pulling their ears, too.

So when finance advisors and hacks finally come to glance back at this decade, they'll see it - in fact - as the "decade of gold". Just as US tech stocks ruled the 1990s, rising 11-fold on the Nasdaq. Just as Japanese exporters owned the 1980s, up more than six times over on the Nikkei-225. Just as gold itself dominated the 1970s.

Of course, this is hardly a unique insight amongst contrarian (i.e. bloody-minded and history-guided) investors.

Hell's teeth, at least one tech-stock heretic - Bill Bonner of The Daily Reckoning - called gold the "Trade of the Decade" just as the decade began.

But even though Bill's call has come good (and come good better even than his blushes would hint), the mainstream investment industry still refuses to notice the cold, hard fact of gold's decade-beating performance.

Take the out-performance of gold for US investors, for instance. Go on - take it! Because nobody in the financial media wants to acknowledge it.

Yet this decade, only residential real estate managed to beat gold consistently (excluding costs as well as rentals), right up until granite-n-plasterboard began to flatten and crater in spring 2006.

Housing has since fallen so hard, it barely matches the risk-free return offered by cash since the start of the decade. Yet that risk-free return in itself stands one-third below the previous five-decade average, with the 10-year Treasury yield paying just 4.6% per annum before tax and inflation.

And as for equities, re-investing every red cent of your dividends for the last 111 months would have added only 15% to the capital value of holding the S&P index today. Sadly for buyers of the Big Double Top in US equities, however, 15% hardly makes up for the index halving in price so far this decade.

Whereas Gold Bullion...? We need to be clear: Its historic reign throughout the Noughties is much more than a matter of "Dollar Decline". The deathless, unyielding metal has beaten all other assets for investors worldwide, whether in Euros, Yen, Swiss Francs, Chinese Yuan, Indian Rupees and the erstwhile "Two-Dollar" Pound.

So, Buying Gold nine years ago now looks a very smart move. (Almost as smart as slashing interest rates to all-time historic lows, while in fact stuffing your own retirement fund with inflation-linked bonds - a trick pulled off by the Bank of England's Pension Fund, as it happens...)

But what happens next? With the decade's last summer now peeping across the horizon, is that it for Gold Investment?

Could be. After peaking just shy of 40,000 points in late 1989, the Tokyo Nikkei sank by more than four-fifths over the next 14 years, retreating towards those 2004 lows just last month. Following its spring 2000 top, the tech-heavy Nasdaq sank by three-quarters inside 31 months, reclaiming only half its peak at the bounce and standing two-thirds down in April '09.

As for gold, a little over 29 years ago it began a two-decade descent...dropping more than 70% from its infamous peak above $800 an ounce - a level breached for just two, short winter days in January 1980.

Over the previous ten years - the last decade of gold - its price had shot 17 times higher versus the Dollar. Gold ended the bell-bottomed Seventies some 13 times more valuable in terms of business assets, as well, shooting higher as the US stock market was crushed by record-high interest rates sparked by yet higher inflation.

If this is the top - or damn near it - therefore, the current decade of gold looks a poor (if not late) performer.

During the 2000s, gold has risen 5-fold in terms of equities, and gained some 250% in nominal dollars. So far, gold remains well shy of previous decade-destroying returns.

More to come in Part II...

Adrian Ash
for The Daily Reckoning Australia

• When Gold Ruled the Earth, Part II
• Right Time for Gold Stocks
• S&P 500 Index Total Return Was Actually Negative
• Gold Reaches One Month Low
• Hell, Meet Handbasket, Part I

Dear Chancellor,

The Office for National Statistics (ONS) just published data showing that Consumer Price inflation in the United Kingdom rose to 3.2% in February from a year earlier.

Not only was that rate of inflation far ahead of analyst forecasts. Nor did it merely rip up a dozen newspaper front-pages, all trying to explain "deflation" to a nation paying nothing but rising prices since 1960.

And nor could the latest data fail to conceal the sharpest month-on-month jump of the last 19 years. (It was only just shy, in fact, of the worst monthly jump since the wipe-out inflation of spring 1980.)

No, the CPI inflation figure also rose more than one whole percentage point above our 2.0% target, as mandated by you. And that requires me to explain, in this open letter, why the cost of living is rising so quickly, rather than tumbling as everyone guessed.

"Oh bugger," as I believe Gordon of Khartoum said when the Mahdi army broke through.

The reason for this letter

Yes, so it's the fourth such letter of the last 10 months. But it's still only the fourth such letter since the Bank was given independence to set interest rates almost 12 years ago.

Only four letters after 142 inflation headlines since May 1997...? That's a far better goal difference than we should have expected. Not least because, since I became Governor, the UK money supply has swelled at an average 11.3% rate per annum.

Just last month, indeed, growth in the broad money supply hit almost 19% year-on-year – the fastest rate of expansion since the late 1970s. And "Few empirical regularities in economics are so well documented as the co-movement of money and inflation," as I used to enjoy pointing out.

Across the final three decades of the last century, in fact, the rate of growth in the money supply and the rate of price-inflation were virtually identical – not only here in the UK (on the Bank's own analysis), but across 116 countries in a detailed study of 1995.

Inflating the money supply only stopped inflating the cost of inflating in the first part of this decade – a period I previously said was all very N.I.C.E. (non-inflationary, constant expansion) but unlikely to last. Most especially with me running the Bank's policy team!

Even so, anyone at the Treasury hoping for a mea culpa today will have to accept this nostrum culpum instead I'm afraid.

Why has inflation moved away from the target?

In reviewing the current data, Chancellor...oh who are we kidding? You and I both know why deflation has failed to appear and why I'm having to write this letter once more.

• Cutting Bank Rate below its 300-year floor of 2.0%;
• Creating £10 billion out of thin air to buy up long-dated government bonds, with a further £140bn now at the printers;
• Announcing £148bn of new gilts to be issued this year to cover your own spending deficit.

Inflate money, devalue debt in short. And with such a very great deal of debt to devalue, that rare empirical regularity of economics would dictate a very great deal of monetary inflation.

It's happening much faster and far more dramatically than I had expected, however. Indeed, the inflation in prices is coming even as money-supply growth for private households has sunk to a four-decade low. That's quite the reverse of what I claimed would happen when this recession began, because I'd missed the plain fact that people spend – and don't save – when interest rates sink.

Debtors merely pay down their debts, and savers flee cash because they're much wiser than our policy models accept. Just recently, for instance, £2.3 billion was withdrawn – net, inside one month – from household bank accounts. We can't account for all of it, but very nearly one pound in every £100 went to Buy Gold at BullionVault.

Returning to Target in the Medium Term

Howsoever it's working, the "pass through" from our forced devaluation of Sterling – the devaluation we've so clearly wrought between us, now running to 28% on the foreign exchanges, and greater still against gold prices than both the IMF crisis of 1976 and the post-Gold Standard drop of the Great Depression – cannot be ignored for much longer.

Not with the Easter break looming, but air fares up 12% from April last year. Not with everyone planning their summer holidays, but finding package deals nearly 7% dearer. And most certainly not with the cost of food here at home more expensive by one-eighth in the last 12 months alone.

What to do? Frankly, I'm stumped – which is why I should most likely consider resigning today. The alternative, here in this letter, would be to lambast you and your administration for nurturing the very inflation that's now exploded, forcing you to take such desperate remedies as issuing public debt worth 11% of GDP over the next year, while forcing us here at the Bank to start monetizing that debt quantitative easing.

A buyers' strike at forthcoming gilt auctions cannot be far off, however, and now that everyone involved in this mess fears the public roasting (if not physical violence) threatened against our senior commercial bank chiefs, I shall opt instead to snipe and snip at your policies during this week's Parliamentary Committee hearing.

Sincerely,

Governor &c.

P.S: Hoping that at somehow, at some point, a withdrawal of this extraordinary stimulus will be both achievable and politically tenable is, quite frankly, absurd. You know it, I know it, and clearly the know-it-all continentals at the European Central Bank have guessed it as well. We mustn't expect the G20 summit to achieve anything like a consensus for any policies we propose. I suggest the PR team get to work selling that failure immediately.

Adrian Ash
for The Daily Reckoning Australia

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

• The Global Inflation Contagion Continues to Spread
• Gold and the Euro Just Hooked Up Together Again
• Irving Fisher Remains Immensely Important in the History of Economic Thought
• The U.S. Federal Reserve’s Inflationary Feast
• Geitner Plan Falls Short

SO BEN BERNANKE SAYS the United States has plunged into a deflationary depression.

Really, that's what Wednesday's Fed announcement said, shouting it loud and shouting it proud.

Because Bernanke's deflation-prevention policies have failed. So he's gone to applying the cure instead.

"The US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost."

So said the Maestro's apprentice when still merely a governor, rather than chairman, November 2002, speaking to the National Economists Club in D.C.

You may recall that Consumer Price Inflation, on the official measures at least, had just sunk to a 38-year low, hiking the cost of living barely 1.0% per year. The asset-price deflation hitting tech stock investors, meantime, had just found its floor (not that anyone knew it) some four-fifths below the peak of 31 months before.

Looked at both preventing deflation (target inflation above zero, say from 1-3% per year; ensure financial stability, by lending freely to banks whenever trouble hits; act "preemptively and more aggressively in cutting rates when inflation is already low and the fundamentals of the economy suddenly deteriorate) as well as curing it.

"Deflation is always reversible under a fiat money system," Bernanke announced, claiming that his conclusion "follows from basic economic reasoning." To wit, "a little parable may prove useful:

"Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days.

"What would happen to the price of gold?"

Fast forward six-and-a-half years, and it's not gold which Ben Bernanke has produced in unlimited amounts at no cost, but US Dollars. But given his obsession with the Great Depression – and given that money was gold seven decades ago – you get the point.

"Presumably, the potentially unlimited supply...would cause the market price...to plummet. Indeed, if the market is to any degree efficient, the price would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce."

Look at the chart, and you can see what the Fed chairman meant. It shows what he did for gold and the Euro with Wednesday's $1.25 trillion devaluation of the greenback. Both shot higher on the news. Neither has given back too much of their jump yet.

But while the Euro had already been ticking higher, the Gold Price vs. the Dollar had been falling. Looking back over the last seven year, in fact, the nine weeks starting mid-Jan. were something of an aberration. The Euro and gold moved in opposite directions. Whereas, seeing how committed to dollar devaluation the Federal Reserve clearly remains – especially now deflation avoidance has failed – both should really move together.

"As I have stressed already," Bernanke explained back in late 2002, "prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation."

Trouble is, if the Dollar falls then other currencies must rise. We've already had clear devaluations from the UK, US and Swiss authorities. The Japanese can't be far behind; they sold their own currency all through mid-decade, desperate to apply Bernanke's "deflation cure" vs. the Dollar.

Once the Bank of Japan fires up its "quantitative easing" again, that would leave only the Euro still to devalue.

Maybe gold and the single currency will soon diverge again.

Adrian Ash
for the Daily Reckoning Australia

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

• Dollar Declines as Gold Rises
• Patching Up The World With Golden Glue
• Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative
• Is Gold Going Up Because People Fear Inflation?
• Contradiction in the Balance of Economic Forces

"I've just heard central banks have been selling. You hear anything?" asked one breathless contact of BullionVault on Wednesday...just before the Federal Reserve's $1.25 trillion shot in the arm gamed the gold price so hard, so fast, the perma-bulls at GATA should demand a Congressional hearing into Ben Bernanke's long Comex position.

More often than not, however, professional dealers get all aflutter about rumors of central-bank buying, not selling. In late 2008, it was supposed to be the Saudis. Last month it was the Russians - or so gossip claimed. Gossip that the Kremlin was only too happy to buoy.

Come mid-March, the People's Bank of China (PBoC) fired up the tittle-tattle - and again, as if on purpose - by forecasting that despite "safe haven" demand for the US dollar in 2009, gold prices would "fluctuate at high levels...possibly breaking through previous highs..."

Now this week a report by the oh-so-sexily-named Central Banking Publications says that out of 39 reserve managers controlling $3.2 trillion in official currency and bullion hoards - some 42% of the world total - well over one-in-two feels Buying Gold would make a smarter move today than it did this time last year.

So are the emerging powers hoarding gold today or not? What's a private citizen trying to look after his or her own to make of this chatter?

Well, as a rule, it means little or nothing for the price of gold day-to-day. And like GATA's claims - highly detailed, much derided - that Western governments regularly fix the gold market to cap its ascent, rumors of central-bank buying never prove quite as dramatic as central-bank action to either defend or debase the currencies against which it's priced instead.

Raise overnight interest rates to double digits, for instance - as the Federal Reserve's Paul Volcker did in the early 1980s - and non-yielding gold will tumble against high-yielding cash. Cut and hold rates at zero, in contrast...while creating, say, $1 trillion of fresh money in a 425-word statement, as Ben Bernanke did Wednesday...and you'll send gold prices higher, just as surely as the Maestro's apprentice strolling into London and buying 50 tonnes on his own account.

Investment-house analysts, meantime, are more focused on the possible 400-tonne sale mooted to help save the world-saving International Monetary Fund (IMF). Yet the really big driver so far this year remains mutual-fund managers buying paper-shares in gold ETF trusts. Western coin buyers paying 10% mark-ups (or more...!) are meantime wrestling with Asian scrap-jewelry sellers as to who can tip the balance of apparent supply and demand.

Large-scale gold purchases by Beijing or the Kremlin would anyway come at the pit-head, rather than on the open market, as they look to "slow and steady accumulation" in the words of UBS's highly-regarded John Reade recently, quoted by the Financial Times. Buying gold direct from domestic miners was how South Africa more than doubled its official reserves in the late 1960s. China and Russia now stand first and fourth among the world's gold-producing nations. Why announce their intentions, sticking a premium onto their dealer's offer, by going through the open market?

But behind the dealing-room noise, howwever, the cold facts of Asian, Middle East and Russian gold hoarding point to a deeper trend - an ugly if grand historical shift that finds its last cyclical turn almost 10 years ago to the day.

In mid-1999, the Swiss, European and UK central banks announced gold sales that did indeed shake the market. Back then, the gold price had been tumbling for the best part of two decades - thanks first to those double-digit US rates, and then to the fast-growing number of high-return alternatives for investment cash that sprouted worldwide as interest rates began to fall back but remained well north of the rate of inflation.

Prompted by investment-bank advisors and analysts, the late 20th century's heavy selling by West European governments coincided not only with both a multi-year low in the gold price and a bubble in earnings-free tech stocks. It also came together with Francis Fukuyama's "end of history" and Tony Blair - the UK prime minister then guilty of neither bombing Belgrade nor Baghdad - declaring his to be "the first generation [in Europe] that may live our entire lives without going to war or sending our children to war."

Put Blair's cant to one side (if you're not retching). Why did Europe's central banks have so much gold to sell in the first place? As BullionVault has noted before, the continent's 30-year scrap between its big nation states was preceded and worsened by frantic gold hoarding amongst the major players. Because a government must trust in another's long-term survival when accepting its paper as payment. Whereas gold bullion, as former Fed chief Alan Greenspan famously said - and just before the UK announced its 415-tonne sales back in May 1999 as it happens - "still represents the ultimate form of payment in the world.

"Germany in 1944 could buy materials during the war only with gold. Fiat money in extremis is accepted by nobody. Gold is always accepted."

Why else did the Nazis march straight to seizing the central-bank vaults on reaching Vienna, Prague and Warsaw? Why else did the United States grow its hoard from 500 tonnes in 1900 to almost 20,000 by the eve of World War Two...nationalizing privately-held gold on pain of a $10,000 fine or imprisonment when F.D.R. took office at the depths of the Great Depression?

Now, two generations later, China's official gold reserves remain unknown and unknowable to outside observers. But it has become the world's No.1 gold-mining state thanks to the collapse in South African output. And the fresh deluge of US money debasement only confirms why Beijing's bankers "hate you guys" as one policy-maker, Luo Ping - director-general of the China Banking Regulatory Commission - put it last month.

"Once you start issuing $1 trillion or $2 trillion," he said to the Financial Times, five weeks before the Fed issued...ummm...$1.25 trillion of new cash..."we know the Dollar is going to depreciate.

"So we hate you guys but there is nothing much we can do. Except for US Treasuries, what can you hold? Gold? You don't hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option."

Further west (but only a little, politically), Russia's official gold reserves have swelled by one-half this decade on the IMF's data, with new purchases peaking in August 2008 - just as the 58th army rolled into Georgia to defend South Ossetia's illegal, breakaway republic.

Under Vladimir Putin, the Kremlin said it wanted gold to grow from 2.5% to fully one-tenth of its foreign currency reserves, meaning four-fold growth of its bullion hoard if not a collapse in its paper assets. Just last month, the central bank stated that it was buying gold. On the available data, it had already added 109 tonnes to its hoard in the 15 months starting Jan. 2007 at a cost of some $27 billion.

Oh sure, that's peanuts compared to the total $4 trillion-worth of gold now thought to be above-ground at today's prevailing prices. But the vast bulk of that gold is held as jewelry, not monetary units like coins or bars. And according to Tsar Putin himself back in 2007, before this burst of gold-hoarding really got started, the ratio of Russian government debt to its national gold reserves was already stronger than for any other state in Europe.

Never mind how wide of the mark that metric was; Putin's claim shows how much gold bullion matters to Russia's political confidence - a confidence only called into use when debt and foreign currencies slide into crisis. And then this week, the current Kremlin incumbent, Dmitry Medvedev, goes and announces that he's "rearming" Russia, using the very word - "rearmament" - that Europe fretted over and feared all through its short 20-year peace between the first and second world wars.

Specifically, "[I will] increase the combat readiness of our forces, first of all our strategic nuclear forces," Medvedev declared Tuesday, piling historical weight onto Monday's more Cold-War-style news that Roscosmos, the Russian space agency, is planning a manned lunar mission for 2015.

Oh, and then there was the overnight news from Venezuela that socialist crackpot Hugo Chavez says Russia's long-range Tu-160 "Black Jack" bombers - each capable of carrying 12 nuclear warheads - are welcome to use the Caribbean island of La Orchila. You know, just for re-fuelling, cleaning the windscreen, emptying the ash-trays...but not ever as a permanent base.

So this isn't the Cuban missile crisis. Not yet at least. But the Kremlin's new saber rattling must still have caused a shock at the White House - just as it shocked anyone not tracking Russia's fast-growing gold reserves. Either that, or Team Obama is so smart, they were expecting some kind of pre-emptive strike ahead of the Fed's nuclear blast in the T-bond market.

"Foreign demand for long-term Treasuries has disappeared over the last few months," writes Brad Setser - an ex-US Treasury and IMF official, former economist for Nouriel Roubini's doom-and-gloom funsters at RGE Monitor, and a visiting or associate fellow pretty much everywhere worth having deep thoughts on big subjects.

Studying the latest official data (released Monday) in his blog for the Council on Foreign Affairs, "It is striking that for all the talk of safe haven flows to the US, foreign demand for all long-term US bonds has effectively disappeared," he explains.

In particular, "Over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills, not from purchases of longer-term notes...and it is also still selling [mortgage] Agency bonds."

All told, China continued to buy US Treasury debt; it is "the only option" for China, Russia and everyone else at this stage of the game, as Luo Ping wailed to the FT last month. But of the $12.2 billion China purchased in January, fully 95% were short-term bills. "Russia also, interestingly, added to its holdings of short-term Treasury bills," Setser says.

And then, with the latest Treasury fund-flow data revealed...BOOM! The Federal Reserve prints $300bn to buy 30-year US debt, plus another $750bn to buy mortgage-agency bonds.

Someone's got to buy this stuff, and the forced buyers of this decade-to-date are starting to tire. They might just be looking to Buy Gold for much more than "portfolio diversification" as well.

There. How's that for rumor...?

Adrian Ash
For The Daily Reckoning Australia

• India Beats China to Walk Away With 200 Tonnes of IMF Gold
• China is a Key Driving Force in the Gold Market
• Are Farm Prices Destined to Rise as More People Compete for Food?
• IMF Deems Gold An Idle Asset
• A Gold Standard, Without Gold

DEUS EX MACHINA has been a "rock opera" band from Italy, a punk band from Greece, a best-selling British computer game for the ZX Spectrum, a character in The Matrix movies (apparently) and also a top-selling video game this decade.

Mixing shoot-em-up with role-play, Deus Ex also features a lot of that speaker-rattling background rumble which is apparently how all dystopian futures will sound when the space age arrives.

Most recently, however, deus ex machina has become the prayer of investors and policy-makers the world over, too. Just click your heels, Dorothy! If only someone (or something) now watching from outside this mess would just step in and fix things.

Y'know, the way foreign money stepped in to save the Asian Tigers when they ran out of cash in the late Nineties?

This god-like visitor, free from the baggage of debt deflation everyone else seems to be stuck with – say, an inter-galactic John Pierpoint Morgan perhaps – could then vanish again...leaving his money behind, of course...and let us all get back to turning a buck from credit and debt, speculation and lending.

"The financial disasters became economic disasters in the countries concerned," wrote a Harvard economics professor two years after the Asian Crisis began. "But fortunately from a global point of view they were like a big recession in Italy, difficult but manageable."

Whereas today?

All the obvious supra-national do-gooders rushed into Asia in 1997. The IMF, the World Bank, the US Treasury...Hundreds of advisors and consultants worked on their tans as they worked on a rescue, gathering pool-side at the Bangkok, Seoul and Jakarta Hiltons.

After all, this was "the gravest global economic crisis in a half-century," as then-World Bank economist Joseph Stiglitz called it before today's global crisis showed up. So you needed the best minds, from the biggest and brightest international bodies, to jet in...survey the trouble...prescribe a solution (while signing a check)...and then jet out again, back to whichever hushed corridors they had just emptied.

Whereas today?

Originally from the Latin – and meaning "god from the machine" – the phrase deus ex machina was coined by arts critic Horace to describe a plot twist, first wheeled out by the Ancient Greek playwrights. This "improbable contrivance" (as Aristotle had sneered) saw a god suddenly arrive on the stage – whether dropped by a crane or jumping up through a trap-door – whenever a play was close to ending with too many loose ends for the hack-author to fix.

In steps the god, out goes confusion. Boy gets girl without having to slit his dad's throat or sleep with his mother. Cue applause and the after-show party.

Sadly, however, financial crises – let alone major debt-deflation depressions – don't mend as easy as Greek tragedy lite. But the logic's the same, or it has been whenever localized crises needed fixing before. A little over 10 years ago, for instance, cleaning up the post-bubble mess in Asia required a full scrubbing of bank-equity holders, soaked in return for a bucket of external cash that washed out the crisis before it become catastrophic.

Yes, it seemed catastrophic back then; "The Asian financial crisis was viewed as the worst since the Great Depression," as Stephen Roach, head of Morgan Stanley Asia, wrote in Tuesday's Financial Times. But it "depicted a squall compared with the current tsunami," he goes on. And "ironically, the seeds of the current crisis may have been sown by policies aimed at arresting the Asian crisis.

"Then, US authorities did everything they could to ensure that the crisis would not infect the real economy. The Fed's three emergency rate cuts in late 1998 worked like a charm. The US consumer never looked back. The personal consumption share of real GDP rose from 67% in the late 1990s to 72% in the first half of 2007. The US antidote to the Asian crisis was the greatest consumption binge in history."

At ground-zero too, the Asian Crisis soon vanished under the weight of cheap cash from the Fed. South Korea, for example, saw 23 of its 30 merchant banks suspended, while a $57 billion fund to support commercial deposits was pumped in by the International Monetary Fund (37%), the World Bank (17%), the Asian Development Bank (i.e. Japan, 7%), and the major Western economies (38%).

In Thailand, some 56 of a total 91 non-bank financial firms were wiped out, leaving the rest to scramble for private overseas cash – cash that overseas banks were only too willing to lend in return for chunky stakes in the equity, bagging phenomenal gains as the crisis began to blow over and the next consumer and real-estate booms got underway.

Over in Indonesia, the central bank's own emergency funds made up just 12% of the $40bn rescue. (Don't these numbers look quaint today!) Eight foreign nations between them stumped up $17bn, with the various supra-national funds and advisors – all financed by other rich nations, of course – making up the bulk of the cash. In return, 16 bankrupt banks were allowed to fail in the first 12 months of the crisis, with shareholders wiped out and only "small deposits" getting compensation up to a limit worth some $1,500.

Why? Because "You have to make the depositors whole," as a consultant involved at the time has since explained to us here at BullionVault. Let the equity hang, in short, but defend the savers if you don't want faith in the entire money system to vanish.

Whereas today? In lieu of globe-trotting advisors bearing deus ex machina solutions, each national government is left trying both to recapitalize its banks and also defend its cash savers. Trouble is, each government's funds are precisely limited to the cash inside its own borders. We, the people, are indeed the state, and you can only tax or rip off the savers for so long before all their money is spent. But everyone else is now stuck in the same fast-sinking boat too, so there's no one stood ready to bail us all out.

Perhaps the Martians might help. Or failing that, maybe we'll have to ask God for a loan. Because we guess that Tim Geithner's money won't do.

And we guess Tim Geithner knows it won't either.

Adrian Ash
for The Daily Reckoning Australia

• Is Kevin Rudd Planning to Steal Your Superannuation and Bankrupt Your Retirement?
• Geithner and His Toxic Asset Bailout Plan
• Irish Govt Pledges Bailout, Who’s Next?
• HSBC Reveals Days of the Dollar are Numbered
• The Geithner Plan

BY THE TIME the War of the Spanish Succession was finished in 1715, the French King - who admitted that he "loved war too much" - owed the equivalent of £300 million.

Across the Channel, Great Britain owed only £49 million. Which might have looked a little like financial victory. But then, the United Kingdom's population was only one-third the size of the French. And those debts - priced in "hard money" weights of gold or silver, both in even tighter supply than they are today - were almost 20 times the sum England had defaulted on four decades before.

But hey, that's inflation for you! Or more properly, that's inflation as it's commonly understood - an absolute rise in the price level. In this case, the cost of running the state and murdering Frenchmen.

Whereas in 2009, three centuries later, the UK Treasury will extend its debts by £118 billion this year alone. That's not only 2,500 times what it owed in 1715 in nominal pounds. It's also twice the entire national debt that forced the last Labour government to beg an emergency loan from the International Monetary Fund (IMF) thirty-three years ago.

Now that's real inflation for you! And for everyone else too, unfortunately.

"From the time the United States went off the Gold Standard in 1933 the wholesale price level has gone up by 760%," noted Professor Roy Jastram, author of The Golden Constant, in December 1981.

"Since England abrogated the Gold Standard in 1931, her price index number has risen by over 2,000%."

Both in the US and UK, the general price level since Jastram spoke to the Security Analysts Society of San Francisco has more than tripled again. All told, here in London, the British Pound has lost 98% of its purchasing power since that fateful September day when the UK government lost its nerve, and the The World Lost Sterling's Gold Standard forever.

"Before that, the two countries had a combined history of 350 years of long-run price stability," Jastram went on. "The price level was the same in the United States in 1930 as it had been in 1800. In England the price index stood at 100.0 in 1717 (the first year of her gold standard) and it was at that figure again in 1930."

And all thanks to the magic of gold - that "golden constant". Right?

To be sure, the gold-backed Pound did a phenomenal job of preserving its purchasing power for the 200 years starting when Sir Isaac Newton - he of the Laws of the Motion, but also Master of the Royal Mint in 1717 - established the Pound Sterling as a certain weight of silver.

Newton thus, since the two were interchangeable as cash payment, also set the Pound as a smaller weight of gold ("a pound weight of fine gold is worth fifteen pounds weight six ounces seventeen pennyweight & five grains of fine silver" to be precise) which over time, won out over silver as the arbiter of currency value worldwide.

As our chart shows (hat tip to Statistics.gov.uk for the long-run inflation data), tying money to gold delivered ups and downs in the price level. But overall, costs stayed remarkably steady for the 70 years starting in 1844 - back when the Bank of England was granted monopoly power to issue the currency.

Then the guns of August blew a hole in the Pound's convertibility. Despite a brief rally after the ill-advised move to restore the old Gold Standard in 1926, Sterling's long-run value just continued to tumble, as Jastram points out.

As for gold, its purchasing power also suffered during Europe's second "Thirty Years War" (in Winston Churchill's phrase), at least when held outside of government hands. Banned from owning it in the United States, private individuals could scarcely trade it for profit in London. Pretty much all of Britain's bullion had already been nationalized long before (right as the Gold Standard Reached Its Zenith, in fact) and now it was needed to buy arms and munitions from across the water.

Don't you know there was a war on? Or as Marc Faber put it in his Gloom, Boom & Doom Report last fall (Is there a way to preserve wealth?, Oct. 08), "I can see the gold bugs jumping off their seats and protesting that gold has kept its value (purchasing power) over the course of history. But the problem is that the owners of the gold also changed over time.

"So, when Timur sacked Aleppo and Damascus in A.D. 1400, it didn't help to have your savings in gold," the Swiss private-client fund manager adds. "You lost your life and your gold. Women had a better chance of survival and got a one-way ticket to Samarkand."

Luckily for investors and savers with something less than their lives or liberty to lose 500 years later, the US and UK governments liberalized gold ownership just in time for Gold Prices to shoot higher on a tide of government-wrought inflation in the 1970s. (It's also worth noting that, in line with how gold owners could survive the four-decade US ban starting at the depths of the Great Depression - and actually benefit from the revaluation of gold that accompanied it - Marc Faber advises holding physical gold overseas, free from the political and/or social risks of your own domestic jurisdiction.)

Finally cut free from artificial government values by Richard Nixon in 1971, gold broke back above its old Gold Standard par in terms of UK purchasing power in 1973. It then spent almost 16 years - after accounting for inflation and changes in gold prices - worth more than it had been throughout the late 19th century, the high-water mark of gold's international power as the only true, single, irrefutable currency.

And amid the current bull market in gold, its real value for UK investors only just broke back above that level again, just as 2008 turned into 2009. For US investors, gold recovered its 1900 value at the start of 2007.

That's the nature of a mean-reverting asset, of course. It reverts, if given time (and free ownership, priced in a free market) to its long-run average value. But that does also mean that the average itself will have to revert as well.

Because the starting point of any particular data series - not least if pegged by mankind, even the genius brain of Sir Isaac Newton way back in 1717 - might not necessarily be "correct" for the long run that follows. We can't judge the "true" value of gold simply from its historical start.

Adrian Ash

for The Daily Reckoning Australia

• A Gold Standard, Without Gold
• Gold is Money
• Gold and Silver!
• Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative
• Where Do the Feds Get Any Money?