Lack of Value in US Dollar Means Gold Price Should Be Higher
Dollars are losing value. But that doesn't seem to stop people from wanting more of them. In exchange for gold, you can tender 673 US dollars and get a single ounce. This is 7.80 dollars more than the rate on Tuesday. But it's still lower than the rate at the end of January one score and seven years ago, that is to say, the day Ronald Reagan was first sworn in as President of the United States of America. But that was before the United States had a US$9 trillion public debt...and a financing gap over US$60 trillion. People still had affordable mortgages...and only half as much debt, generally speaking.
The United States was at peace...and still a net-creditor to the rest of the world. Its trade with the rest of the world was still more or less in balance. Derivatives had barely been invented. And the money supply - that is to say the number of dollars in circulation - was hardly a quarter of what it is today (we are just making an educated guess).
You'd think the price of gold ought to be a bit higher. Go figure.
And pity the poor investors in Bear's hedge fund - all their dollars have disappeared. Yes, dear reader, The Greatest Economic Boom Ever is fuelled by dollar creation...and yuan creation...and yen creation...and euro creation. My god, this boom has seen a genesis of money everywhere. But just as the great boom giveth, it also taketh away. We are preparing an essay for tomorrow on this subject, so we don't want to give away the whole story, but readers need to be prepared. Just as we watched the geniuses at Bear and the other financial firms create wealth, we can also watch them destroy it. In a flash, billions...no trillions...of presumed, ersatz wealth can vanish.
Money that is created "out of thin air" - courtesy of central banks and financial firms - tends to go back from whence it came. For every genesis of wealth creation...there is an exodus of wealth destruction. Watch out for it...
Bill Bonner
The Daily Reckoning Australia
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by Deron Kawamoto on 23 July 2007:
Though I despise his economic perscriptions, John Kenneth Galbraith was very effective at observing and describing economic phenomena. His description of embezzlement's impact:
"Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.)"
In other words, until discovered, this crime makes a society feel and act wealthier. Galbraith has precisely described the basis of the Crack Up Boom. The larceny of credit inflation (and its various derivative offspring) is still not understood by its victims. Those folks feel wealthier and continue to spend. Discovery has begun to spread and the results could be earth shaking.
Comment by Chris. Fulker on 23 July 2007:
Well, at $683.50/oz. it looks like gold is now finally on its way up or, rather, the US$ is moving down. But we shall all have to exhibit much more patience soon, I'm afraid. Gold could be de-railed by a number of happenings: 1)The US could suddenly announce a withdrawal from Iraq, sending the $ soaring, 2)Bernanke could "pull a Volcker" and damn the torpedoes raise rates sky-high, or 3)Congress could make a real, or at least convincing, attempt to control expenditures and cut programs. Only #1, and maybe #2, are slightly possible, but empires never have much hindsight so I think the buck is toast...