So instead of reviewing the week's events, I thought I'd tell you about a noteworthy phone conversation I had on Friday morning. "Australians are staking a lot on their understanding of what's really going on with gold. I want this conference to be Australia's premier gold bug conference, where investors and serious thinkers can talk about gold and hear from some of the best minds in the the world about it."

We then discussed what I think will be one of the most interesting and thought provoking conversations about gold you will hear this year. And it's being held November 2nd-5th at the Australian National University in Canberra.

Now if you don't think gold is money or aren't much interested in the subject at all, then you can probably take a pass on the rest of this week's letter. But for 160 people, I reckon the weekend could be incredibly energising. So let me tell you a bit more about it, and how you can guarantee your participation.

"Gold is not an investment category," says Daily Reckoning founder Bill Bonner.

"It is more like a religion or a political position. True believers stick with it through thick and thin. When gold goes up, they are insufferable. When it goes down, they are unrepentant."

If you're a fan of the yellow metal, you'll know exactly what Bill is talking about.

And, chances are, you're preparing to once again play the insufferable 'gold bore' at dinner parties.

Bullion has hit $1,000 an ounce again... and even though it dipped below that level late in the week...it sure seems pretty comfortable there...

"It's interesting that the price has hovered around this level for longer than it has in the past. It seems to suggest that people are more comfortable with this price than they have been," says CRU analyst Prem Chaphekar. "It wouldn't be a surprise if it went up and stayed up."

Looking at the financial press, you'd think this recession is over and recovery is underway.

But looking at the gold price - an option on financial chaos - you'd think the world is about to end—or that the financial markets are finally giving serious thought to gold's real role in the monetary system.

So what is really going on?

You'll know that we at the Reckoning understand that gold persists because it is no one else's liability. What's more, no monetary system lasts forever. This current global fiat currency system is, historically speaking, an impromptu experiment, at best; premeditated larceny at worst. It's already lasted longer than most marriages. The bust-up, contrary to what the newspapers say, has yet to happen. And when it comes, it threatens to be nasty and expensive.

How will the final act of this financial crisis play out?

What role will gold bullion play?

And which gold-related investments will thrive as the final curtain falls on the global monetary system as we know it?

I invite you today to participate in a unique event where you'll discover answers to these questions and more...

Some of the smartest 'metal-heads' on the planet will be in attendance. (And, extraordinarily, I've been asked to deliver a presentation as well, which I've agreed to.)

If you are as fascinated by gold as much as I think you are, you'll want to secure one of just 160 available places right now.

Because - and I really mean this - there has NEVER been a more crucial time for gold.

In an effort to return to the bubble era, central banks across the planet printing mind-boggling amounts of money. They will keep doing so until inflation rates go up. They make no effort to hide it. They have as much as warned the world: prepare to be robbed.

The gold market now anticipates this inflation.

We have told this story ourselves; we still believe it. But today, I caution you: there may be a plot twist.

The problem with inflation is that, as yet, there is none.

Consumer prices are falling in China, Europe and America. But, with Feds are pumping the money supply as hard as they can, how can this be the case?

The problem is all this printed money has yet to reach the real economy.

The US money supply figures that relate to actual cash in people's hands - M1, M2, and MZM - are shrinking, at 28%, 4.9% and 6.2% respectively. Why?

In short, the Feds' money goes into cool bank vaults and hot speculative trades.

When it tries to find its way to the consumer, it gets lost.

This happens because the transmission mechanism has broken down. We live in a bust economy, not a boom one. In a bust, consumers can't borrow. They have nothing to borrow against. Both their wages and their assets are going down. Who would lend to them under those conditions? Not a bank that almost went broke itself twelve months ago.

Even if consumers had access to credit, they wouldn't take it. Consumers too almost went broke a few months ago. Instead of saving money during the boom years, they spent it - or gambled with it. When the bust came in 2008, they realised they were ten years closer to retirement with little money saved. Now they have to make up for that lost decade by cutting spending and saving as much as they can.

In the absence of consumer demand, consumer prices do not rise.

That's why inflation has yet to rear its ruinous head.

But that's about to change...

There are bull markets everywhere right now.

But not all of them have integrity.

The bull market everyone knows about is in stocks. Since March, aside from the odd correction along the way, stock markets around the world have kept going up.

The ASX 200 and the FTSE are up over 40%. The Dow Jones is up 45%, the main European stock markets, France and Germany, are up 48% and 52%. Emerging markets are flying even higher: Egypt +91%; Peru + 117%; Kazakhstan 129%.

But why are stocks going up?

Simple: investors think world economic growth is back on track.

Problem is there is no proof. Not. A. Jot.

According to one UN trade 'think tank' "the current financial market rebound is not a "real recovery" and any world economic growth recorded in 2010 was unlikely to exceed 1.6 percent."

This is not a real recovery.

As I've said many times, you cannot correct the global imbalances of a leveraged boom with more leverage.

There is no real integrity to the massive stock market rallies that we're seeing.

So which of the bull markets are worth buying into? The ones that are better placed to preserve your money in an inflationary environment - think hard assets like metals, energy and agricultural commodities.

More specifically: think gold.

Gold has finally broken above the magic $1,000 an ounce level. That's a massive psychological level and one that traders have been battling over since it was last above there in March last year.

Whenever the gold price has approached $1,000, sellers have driven the price down.

They've overcome the buyers. But it was only a matter of time before there were fewer bears left to sell. The fact that gold has now made it above $1,000 suggests that the bears are being gradually worn down.

There's a lot of money that has been waiting on the sidelines to jump in if it broke the $1,000 barrier. That money could be ready to crash into the market just as soon as gold looks like it is holding the $1,000 level.

Simply put: it's an exciting time for gold investors. And I'd like you to join me in November to get some ideas on what you should be doing about it...and to gain a better understanding of the real forces at work in market right now.

If you're serious about gold, you'll want to secure yours right now.

You'll hear from a stellar line-up of speakers who are coming from all parts of the globe. You'll get four days of brilliant gold-related investment strategies and ideas you can't find anywhere else. Consider it a chance to listen to and rub elbows with some of the smartest gold analysts in the world.

The conference will start by tackling the obvious but critical questions:

Will gold push on from $1,000 an ounce? How high is it likely to go? And what are the smartest gold plays you can make?

But that's just the beginning. You'll also be provided with thought-provoking insights into how the global financial crisis will develop in 2010, including:

• What next for the global monetary system? The truth about the current stock rally... The 'perfect storm' in the currency markets... And the prospects for gold during a rapid and deliberate inflation of money supply...

• The Gold Standard: Out-of-date relic, or merely pushed aside for the time being?

• Hoarding in the East: Why the Chinese government is urging its people to load up on gold and silver.

• The mechanism of capital destruction: How falling interest rates over the last 20 years have siphoned away your wealth... and what to do about it now...

• Revealed: why COMEX warehouse gold holdings are expanding in the current climate. If open Comex interest were a country, it would be one of the world's top ten holders of gold. You'll learn why this is the case.

• Gold mining and exploration - the coming dominance of gold Failing currencies mean that gold and gold mining will be centre stage going forwards.

• The gold 'backwardation' phenomenon explained: what it means for the mining industry and your mining stocks

The answers to these questions, and many more, will affect your financial decisions for the next decade... not to mention your everyday life.

They are answers you simply won't get reading the Financial Review.

Why? Well, because the mainstream still doesn't get gold.

In fact, even with the gold price once again knocking around the $1,000 mark, the majority of mainstream fund managers aren't much interested. They say that weak jewellery demand (a symptom of the recession) makes the "fundamentals" of supply and demand look bad; and, most frequently, they say it makes no sense for gold to have a role as a currency in the modern financial world.

They miss the point...

Gold investment demand is up 46% on this time last year.

The fact is that right now the gold price has little to do with the demand for bangles and brooches across the world's shopping malls. Instead, it reflects gold's monetary role: whether you think it makes sense or not, gold is seen by a large number of people as having a monetary function.

Most currencies are being debased in one way or another.

Doesn't it make sense to hold one that can't be?

As Bill Bonner likes to say, gold is most useful in extreme monetary conditions - when "other money goes bad".

Bill isn't the only one with this view. Secure your place at The World Financial Crisis and the Vanishing Gold Basis and you'll hear from a sensational line-up of speakers and analysts who believe it's gold's time to shine in 2010:

• Prof Antal Fekete (Hungary), The Gold Standard Institute. Few people in the world have more knowledge of the inner workings of the gold market than Prof Fekete. He was appointed Assistant Professor at the Memorial University of Newfoundland in 1958, and since then has been a viting professor at Columbia University in the City of New York (1961), Trinity College, Dublin, Ireland (1964), Acadia University, Wolfville, Nova Scotia (1970), Princeton University, Princeton, New Jersey (1974). Since 2005 he has been Professor at Large of Intermountain Institute for Science and Applied Mathematics (IISAM), Missoula, Montana.

  Prof Fekete has developed the ideas of Austrian economics, in particular with respect to interest rates. He's an expert in the role of gold in the world monetary system and has followed the gold basis since the introduction of gold futures trading in the 1970s. Prof Fekete is a frequent contributor to the internet-based gold community and travels widely as a speaker.

• Philip Bruce (Australia), CEO, Hill End Gold. Managing Director of Hill End Gold Limited, Philip is a highly experienced international mining executive. Former Managing Director of Triako Resources Limited, General Manager of Plutonic Resources Limited, CEO of PT BHP Indonesia, and a Director of Buka Minerals Limited and Ausmelt Limited... Philip knows gold mining inside out and will pass on many potentially profitable secrets over the four days.

• Robert Lambourne (UK). Bob Lambourne is a veteran businessman, long-time gold investor and student of the markets and the international monetary system. His efforts to understand the structure of the bond market and long term interest rates led him to study in particular the link between gold and real interest rates.

• Darryl Robert Schoon (USA), www.drschoon.com. In the 1990s, Darryl began studying the Great Depression and realised his preconceptions about money and the economy were just that, preconceptions. After much time and research, he now has some insights to offer on what's taking place inside the global financial system.

• Bron Suchecki (Australia), Perth Mint. Born in Sydney in 1969, Bron was blissfully unaware of gold until 1994, when he joined the Perth Mint as an Administration Officer in their Sydney retail outlet. In 1998, he moved to Perth to work in the then fledgling Depository Division. He has held a number of roles since then in the treasury, risk, and governance areas of the Mint.When not hurtling through the Perth bush on his mountain bike, Bron spends his spare time sharing personal views on precious metals in his Gold Chat blog.

• Nathan Narusis (Canada), Bullion Management Group. Nathan Narusis, CFA, has been a gold advocate since he entered the investment industry in 1996 and is a long-time student of Prof Fekete's work. His particular interest in the Professor's work lies in its application to investment strategy during the transition to a new gold monetary system. Currently Nathan sells gold for Bullion Management Group, a Canadian-based global mutual-fund operator and bullion storage provider.
• Barry Dawes, B Sc F Aus IMM(CP) MSDIA. Barry Dawes is the Managing Director of Martin Place Securities Pty Ltd, a boutique investment company specialising in investment opportunities in small-cap resource and energy companies. Martin Place Securities (MPS) has raised A$650m in the past six years as underwriter, lead manager or lead adviser for ASX, NSX and AIM listings for resources and energy companies. MPS is well known for its support of successful growth companies in these sectors and for its views on the outlook for the resources commodity sector. Barry has had over 30 years experience in the resources sector and prior to establishing MPS had worked in senior executive roles of investment management with BT Australia, equities research for Bain Deutsche Bank and equities research and corporate finance for Macquarie Bank. Barry Dawes is also Director of ASX listed Uranium Exploration Australia Ltd, of Superior Coal Ltd, of several investment companies and of a number of unlisted public operating companies and has arranged development finance for dozens of listed resource companies.Well known and well respected for his outstanding knowledge and understanding of the resources sector Barry has helped MPS to be the company that leads the way for investing in Australian growth companies.Barry is a fellow of the Aus IMM and a master of SDIA

• Sandeep Jaitly (UK), mathematician and gold basis specialist. Sandeep Jaitly read Mathematics at Imperial College, London. On graduation, he began working in finance at Odey Asset Management in London. He is currently an analyst concentrating on global equities, with a bias towards India and China, at Soditic CBIP. Since encountering Prof Fekete's work, Sandeep has been concentrating on its application to practical investment.

• Philip Barton (Australia) , The Gold Standard Institute. A long-time watcher of the gold market, Philip is an Australian businessman and founder of The Gold Standard Institute.

In short, it's some of the world's greatest financial and gold market minds gathered in one place, both on the stage and in the crowd — sharing ideas and strategies you would have to spend thousands of dollars to learn about otherwise.

You'll get real ideas... real predictions... with a few actual investment recommendations thrown in for good measure.

If that sounds like something of interest, here's the deal...

As I said, the conference takes place over four days from Monday 2nd November to Thursday 5th November, 2009. You'll need to free up those dates.

It's in Canberra, so you'll need to arrange travel and accommodation.

There will be four one-hour sessions each day (10am-12 noon and 2pm-4pm) with tea/coffee and a nice lunch provided.

I've managed to secure places for Daily Reckoning readers at the same price as 2008: $790. That includes the seminars, networking opportunities, take-home materials plus refreshments and full lunch each day of the conference.

But I need to hear from you now.

The folks at the Gold Standard Institute want to keep this as intimate as possible. As such, only 160 places will be made available.

The interest level in this event is just as high as the 'Australia in the Red' debt summit we held earlier this year. The few remaining seats will fill up quickly. So please do not delay.

As Richard Russell says, a man should count his wealth neither in dollars nor in Euros....He should count it in ounces.

If you share this view, and would like to mix with like-minded 'gold bugs' and precious metal experts, you can reserve your place now.

Do so by contacting conference organiser Dr. Marcus Matthews, who is coordinating the event on behalf of the Gold Standard Institute. He can be reached with your expression of interest or intent to order at feketeaustralia@gmail.com.

See you in Canberra!

Regards,

Dan Denning

The Daily Reckoning Australia

• A Gold Standard, Without Gold
• Australia’s Next Big Export Industry
• A New Bretton Woods Vs. The Old Bretton Woods
• Stock Prices Down Signals Bears to Hold onto Cash, Treasuries and Gold
• Still a Gold Bug

So how does she quantify "relative peace and security"? Well, one good way is to look at the value of the dollar, which would be strong if the country was a good investment, which it was, and in fact, "It had not only retained one hundred percent of its value, it had gained eleven percent. That's right. The dollar we started with in 1776 bought us eleven percent more after almost seven generations."

Then, on the "quiet 23rd of December in 1913", J.P. Morgan and buddies got Congressional quislings to pass legislation authorizing the creation of the Federal Reserve, and to which I add that the jerk Woodrow Wilson then signed it, thus going down in history as the disastrous guy who set in motion the destruction of the dollar by the Federal Reserve creating excess money and credit.

She doesn't make a point of it, but back then, the dollar was still gold, and thanks to the loathsome Federal Reserve creating the money to finance the bubbles of The Roaring Twenties that resulted in the Great Depression, the despicable Supreme Court infamously ruled in 1933 (and upheld by every traitorous Supreme Court case since then) that, contrary to what the Constitution said, the dollar did not have to be made of silver or gold, and that a paper "fiat" currency could be created, without limit, for any reason, even at a mere whim, anytime, day or night, 24/7, including holidays, not realizing that they were the idiots that REALLY destroyed the dollar! Gaahhh!

With this kind of disastrous stupidity, I dryly and humorlessly ask that you don't talk to me about any "wisdom" emanating from the Supreme Court.

I was hoping that Ms. Lilley would spontaneously pick up on the theme of "heap scorn on the Federal Reserve for creating too much money and credit out of thin air and the despicable Supreme Court for letting them."

I was going to suggest that she could, you know, maybe even put in an endorsement for the Mogambo Mindless Mob (MMM) brand of products, like the popular Mogambo Pitchfork (very effective when brandished threateningly) and the classic Mogambo Flaming Torches that will be so hard to get when the proletariat bozos start forming mindless mobs bent on revenge after so much hurting from the horrifying inflation in consumer prices, the pervasive, lingering economic depression, ruination, bankruptcy and the embarrassment of realizing that it was caused by the people we elected to Congress, who picked the people to run the Federal Reserve, which is the biggest failure one can imagine and should be immediately abolished, how Ben Bernanke, its chairman, should be turned over to me for some sessions at my new Mogambo Re- Education Center, where our muscular, trained technicians will slap the hell out of his stupid face, and the stupid faces of Congresspersons (except Ron Paul), and the stupid faces of anyone who still believes in getting, or giving, a free lunch to, or from, anyone, especially the government, which is so corrupt that it once gave smallpox-infected blankets to the American Indians, which is only marginally worse than destroying the currency of the country and makes you reflexively scream in horror every time you see the money supply go up.

Well, it does me, anyway.

Instead, she goes on that the result was that since then, "the purchasing power of a dollar has plummeted over 95%", which means that "We now pay twenty times more than J.P. Morgan did for any item." Yikes!

Suddenly, my ears pricked up as she said, "Few have written on the mechanics of getting back to sound money", which I immediately noticed makes me a genius, meaning that people should worship my gigantic brain, my wife and kids should stop calling me "idiot" and saying how much they hate me and maybe I should get a Nobel Prize.

The reason I am suddenly so enamored of my intellect is that achieving a "sound money" is the easiest thing in the world! Just stop creating more of it! That's all you need! It's simple! It is my Profound Mogambo Genius (PMG) that has solved the puzzle!

Okay, I am embarrassed that I got carried away there, and I admit that I am not very smart, and that is why I stole the whole idea from the fact that this is all the gold standard did; it prevented increases in the money supply, and the only thing that Congress had to worry about was doing smart things so that gold came into the country (increasing our money supply) and not doing something so stupid that it went someplace else better (decreasing our money supply).

But those days are all over now, and the only people who are buying gold, along with silver and oil, are the people who know what happens to an unsound, fiat currency (like the dollar) in the hands of a government composed of a bunch of socialist, commie-think yahoos (like the US Congress) that willingly deficit-spends insane amounts of money thanks to a central bank (like the Federal Reserve) creating it and a population sitting around saying, "Duh! Okay with us!" Hahaha!

We're freaking doomed!

Until next time,

The Mogambo Guru
for The Daily Reckoning Australia

• Gold in the Art of Bread Consumption
• Federal Reserve Has Destroyed the Economy
• A Government of Spendaholics
• Oil Prices Has The Mogambo Guru Sticking His Thumb in His Eye
• Greenspan and His Demented Federal Reserve Chairmanship

It is worth studying the 1907 panic. It was a global panic, though not the first panic to have a global character. The French Mississippi Bubble and the English South Sea Bubble both burst in 1720, and that was nearly two centuries before the panic of 1907. It was the last important financial crash to be stabilised by the actions of private bankers, in this case by J.P. Morgan himself. It led to the ratification in 1929 of the sixteenth amendment of the U.S. Constitution, which made a federal income tax constitutional. It also led to the creation of the Federal Reserve Board, therefore transferring the ultimate management of finance to the U.S. Government and to the Fed itself.

Mr. Vanderlip attributed the crash to the costs of wars and to the political vilification of the financial world by politicians and journalists. "We must run back to some of the roots to the terrific losses which the world's capital experienced as a result of the Boer War costing as it did one billion of dollars, the Japanese-Russian, which cost one and a quarter billions, and the losses of the San Francisco disaster (the earthquake) which footed another half billion. Here we have figures of nearly three billions of dollars directly lost to the world's capital."

Mr. Vanderlip also blamed the demand for capital which had resulted from the boom in American industry. "We have seen railroads and other corporations inexorably pushed to build new lines, to add to their equipment and to extend plant. But although the corporations were forced to make these expenditures by the demands which broadening industry and growing commerce made imperative, they became at last, owing to the exhaustion of the world's investment fund, unable to sell securities to provide money for their forced expenditures. They were unable to sell bonds, even though the security that was offered was wholly above criticism. The investment capital of the world became well nigh exhausted. That phase of the situation was by no means confined to America. It was international in its origin and world-wide in its effect."

Some of this we can easily recognise. Essentially it is a monetarist explanation, but seen from the point of view of the Gold Standard. There is a certain stock of money in the world, ultimately represented by gold coin or bullion, most of which is held in the banking system. The costs of war and earthquake have led to that stock being drawn down. Industrial demand has increased to the point at which there is a shortage of money relative to the demand for capital. This is not all that far from being an alternative way of describing what Irving Fisher called a process of "debt and deflation", or Joseph Schumpeter called "creative destruction". In both cases, money is seen as a real object. The world's limited monetary capital, seen as so many owners of gold, cannot simultaneously be spent on fighting the Russo-Japanese War and building an extension to an American railroad. Because money is limited by the quantity of gold, it imposes choices on Governments and on businessmen.

If one takes Irving Fisher's equation of exchange, in which mv = pt, one can see the choices that are actually available. m stands for money, and in a gold system it can only be increased by new mining or by melting down scrap. In practice gold convertibility makes the money supply a fixed factor.

v stands for velocity. This is the key variable now, and it was in 1907. The velocity of money depends on the level of confidence. When bankers believe that there are surplus available funds, the money markets run freely, and those businessmen who need funds can usually raise them without difficulty. When confidence is weak, velocity will be slow and funds will be scarce.

The other side of the equation is pt - prices and transactions. When money is in short supply, or velocity is slow, prices will be weak and transactions will be reduced in number.

We do not know how far practical bankers, like Mr. Vanderlip, thought in these monetarist terms, but clearly they had to assess the demand and supply of money. In seeking an explanation for 1907, Vanderlip recognises the psychological factor: "The financial crisis," he writes," has by no means been altogether a matter of money. It has, in large measure, been a matter of what was in men's minds."

In 2009, we have had similar experiences, in which real economic events interacted with human anxieties and expectations. All banking depends on confidence. So long as the expectation holds up, credit will be firm. Once expectation turns negative, then everyone becomes nervous of lending. In 1907, gold was the measure of confidence. I do not see what measure of confidence we can now rely on.

William Rees-Mogg
for The Daily Reckoning Austalia

• Irving Fisher Has Come Back Into Fashion
• Building a Financial Panic Room
• The Economic Panic of 2009
• Possible Second Round of Panic Hitting Financial Markets
• Oil and Gold Prices Linked for Most of Recession Period

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
• Investors to Speculate on Gold Instead?
• Gold and Silver!
• Gold is Money
• Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative

"It's getting increasingly evident that this is a once-in-a-century type of phenomenon," he told the ever-fragrant Maria Bartiromo in an interview with CNBC this week, "not the standard type of liquidity crisis that we have seen in the past.

"It's verging on the issue of solvency."

To gauge the true scale of this crisis, Greenspan went on, just consider the fact that it took sovereign credit to stabilize first the UK and then US financial systems. When Northern Rock went belly-up last Sept. and then Bear Stearns blew up this spring, Treasury bonds had to be lent out like adjustable-rate home loans circa 2006, covering short- term black holes with government debt.

Without these loans of government bonds, the banks simply wouldn't lend to each other. They needed securitized tax payments to gain the credibility needed for raising new funds in the market. Short of offering government debt to put up as collateral, they found the cost of borrowing money - when they found any money to borrow - simply too high to bear.

"It's still very evident from [inter-bank lending] spreads that we have not gotten closure yet," Dr.Greenspan continued, pointing to the ongoing premium charged for loans backed by anything other than sovereign credit. So to fix the problem - or at least tease it out for months if not years - clearly the world needs more government bonds for the big banks to borrow and put up against cash loans in the market.

"It's essentially, fundamentally the price of homes in the United States which are determining...the ultimate collateral of mortgage- backed bonds, pretty much around the world."

Looking ahead, he concluded that "we're still nowhere near the bottom of the home-price thing" - the word "thing" standing in for "crash...collapse...crisis...deflation" and all the other phenomena Greenspan must still believe can never apply to real-estate prices.

As key contractor, if not the architect, of today's pan-global banking crisis, he chose to keep US interest rates way below the rate of inflation - making debt pay and savings a suck of real value - for three years straight starting in August 2002.

That period marked the first run of sub-zero returns paid-to-cash since the inflationary '70s, back when loose money worldwide led to a bubble in prices that needed 20% interest rates to revive the world's faith in the Dollar.

The start of this decade also saw the gold price- dormant-to-dead ever since the US took that strong medicine at the start of the '80s - double inside five years.

"First warning," as Marc Faber wrote in his Gloom, Boom & Doom Report of Sept. '07, of trouble ahead.

"Ultra-expansionary US monetary policies with artificially low interest rates led to bubbles all over the world and in every imaginable asset class. The price of Gold more than doubled in nominal terms and against the Dow Jones Industrial Average."

So why didn't gold take a dive when Greenspan's successor - Ben Bernanke - tip-toed his way back to 4% real rates of interest in late 2006...? Because early gold buyers never believed the Fed would succeed in keeping rates there. With housing now a political issue - and home ownership a god-given right for even the flakiest debtors - the first sign of trouble would cause a collapse in real rates, destroying the value of money in the hope of achieving "Reflation Part II".

Hey, it worked after the Tech Stock bubble blew up. Why not again? And faced with a much greater crisis, or so Ben Bernanke believes, he's managed to out-Greenspan the Maestro...pushing real US interest rates way down to minus 3% and worse.

Take gold as a marker of stress, and the true extent of today's crisis becomes clearer still. Bear Stearns' fire-sale to J.P.Morgan in mid- March - which required an open-ended loan of $29 billion from the Federal Reserve - saw gold jump to $1,032 per ounce. We think it's signal that Alan Greenspan ignores it.

"Central banks, of necessity, determine what the money supply is," as he told Congress in a 1999 hearing. "If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.

"The reason there is [now] very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue."

Today, almost a decade later, the Federal Reserve and its peers across the world are trying to prevent the money supply from shrinking again. That was the fear amid the "Deflation Scare" of 2002, which caused the Fed to ordain sub-zero rates, creating not only the bubble in housing but also the collapse of true money values against oil, food and pretty much all raw materials.

The world's nostalgia for gold, in response, has seen it treble in price vs. the Dollar and more than double against the Euro, Yen and British Pound. But the cheerleader for cheap money when running the Fed, Alan Greenspan points instead to government bonds when gauging the size of today's crisis. A true policy wonk, Greenspan thinks only of political bail-outs to protect the system, rather than considering how private investors might choose to protect themselves and their wealth.

Heaven knows they won't get any help from Bernanke's repeat of the Maestro's "reflationary" error.

Adrian Ash
for The Daily Reckoning Australia

• A Gold Standard, Without Gold
• Alan Greenspan Bears Blame for Intensity of Financial Crisis
• U.S. Fed Now Accepts Credit Card Debt as Collateral
• The Stinging Reproach of a Former Fed Chairman
• RBA Buys $780 Million in Residential Mortgage-Backed Securities

I told you it was simple.

The "supply" comes from the currency manager. Today, that's the central bank and Treasury Department or Ministry of Finance. They produce base money, which is actually the only money in existence. Base money is mostly coins and bills, and a little electronic bank reserves. Every other sort of "money" is actually credit, not money.

The "demand" comes from everyone else, who is holding the currency, or, as is sometimes the case with the U.S. dollar today, choosing not to hold the currency.

I bring this up because, at some point in the not too distant future, people may begin to clamor for a solution to the world's worsening monetary problems. Perhaps, as inflation worsens, there will even be interest in a gold standard system. At that point, there will have to be someone who can actually solve the monetary problems. That person will have to understand the fundamental principle of currency management - supply and demand - because, if they don't, their system will eventually collapse as well. Probably sooner rather than later.

People have long believed that a currency "backed by gold" will remain stable, but there is no such guarantee. If you take a mammoth amount of gold, and lock it in a vault, it does not emit magical energy waves that automatically manages the value of otherwise worthless paper currencies. There are many methods of keeping a currency pegged to gold. Some of them involve large hoards of gold, or even making coins of gold, and some do not. However, all of them, if they are to be successful, have at their core the fundamental principle.

Which, as I mentioned, is supply and demand.

Indeed, if you understand this fundamental principle, you can peg a currency to gold even if there are no gold reserves at all.

Everyone knows that a central bank, or other currency manager, can "print money," either electronically or physically. It is not as well recognized that a currency manager can "unprint money," or remove base money from circulation. The currency manager does this by selling something, typically a government bond, and making the money received in payment disappear. This happens nearly every day in the course of the Fed's regular operations.

For example, the Fed has been rather vigorously lending money to banks. The Fed "prints money" and lends it to the banks. However, the overall supply of base money, according to the Fed's statistics, hasn't changed much. This is because the Fed is "unprinting money" elsewhere to compensate for its direct lending.

Central banks don't really control interest rates. What they do is to print money and unprint money in a fashion that influences interest rates. Or, a central bank could adopt a different operating mechanism. During the early 1980s, the Fed printed money and unprinted money - in other words, altered the supply of money - in an effort to influence various credit statistics such as M1 or M2.

A currency board system prints money and unprints money in an automatic fashion that keeps the currency pegged to another currency. Typically, a currency board has a "reserve" of foreign currency, but this reserve is not necessary if supply is being properly managed. If supply is not being properly managed, then the foreign exchange reserve is typically depleted in short order, and a crisis results.

A gold standard is essentially a currency board linked to gold. Doesn't it make more sense to peg to gold, the ultimate currency of mankind, rather than some government's paper plaything? This used to be very obvious.

It seems that every gold standard advocate has their own special system, involving some idiosyncratic policy of reserve holdings or coin issuance. They will work, if they are based on the fundamental principle. If not, they would soon collapse.

My own idiosyncratic system is the gold standard that involves no gold at all. There are no gold coins, and no government gold reserves. Gold bullion is freely traded on the open market, just as it is today.

In my system, the currency manager (governments today) would adjust the supply of currency on a daily basis to maintain its value at the gold peg. When the value is a little low, you unprint money. When the value is a little high, you print money. In effect, it is a currency board linked to gold.

The idea of a gold standard with no gold usually drives the traditional "gold bug" insane. They are very attached to their piles of ingots and eagles. I use it mainly as a teaching device. When a person fully understands the fundamental principle - supply and demand - they say: "Yes, of course that would work." If they are still attached to the idea of locking gold in a vault, they think it's ridiculous, because there's no vault.

Because many gold standard advocates do not understand the fundamental principle, they fall back on another, more primitive principle, which is to use gold coins exclusively. This system is best suited for a more primitive world. Yes, gold or silver coins are better than a wheelbarrow of paper money when you're trying to buy bread in a hyperinflation. But consider: Warren Buffett just took part in a buyout by Mars Inc. of Wm. Wrigley Jr. Co. for $23 billion. What if they had to make payment in gold? Would they put $23 billion of bullion in an armored car? In the ninth century, this is how businessmen in China made large commercial transactions. The process of loading ships and wagons with silver coins was so cumbersome that they invented paper money, pegged to silver.

In 1910, the gold standard centered on the British pound and the Bank of England encompassed the world. At the time, the Bank of England held only 7.2 million ounces of gold. This was only 4% of all the gold held by governments and central banks in 1910, and only about 1.2% of all the gold in the world. The Bank of England didn't have much gold, because they didn't need it. They understood the principle of supply and demand.

When the U.S. left the gold standard in 1971, the government held 291 million ounces of gold. This had been depleted from 630 million ounces in 1942. Unfortunately, the Fed did not understand the principle of supply and demand. They were printing money aggressively to pump up the economy, with the result that everyone (especially the Bank of England and the Bank of France) wanted to dump the excess paper back on the Fed and get the gold in return. The system failed, even though the U.S. held forty times more gold than the Bank of England did in 1910.

In a fairly short time, as central bankers' embarrassment becomes total, people may again search for someone who can manage a currency like the Bank of England did in 1910. Prepare now, or we will have to bear further decades of monetary chaos and ignorance, instead of the Golden Age we deserve.

Regards,

Nathan Lewis
for The Daily Reckoning Australia

• Gold Standard: The Long-Run Value
• Gold Coins for $870-$890 An Ounce
• Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative
• Gold is in a Bull Market
• Gold is Money