Gold Price Keeps Rising as US Dollar Supply Increases

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We spent most of last weekend catching up with old friends in Buenos Aires.

Americans are happy down here; it is one of the few places where the dollar is not going down. You go into a restaurant and you are pleasantly surprised, rather than depressed, as you are in London or Paris.

How come the dollar and the peso stick together? It is partly because the Kirchner government controls the peso/dollar exchange rate – trying to hold the dollar at around 3.15 pesos. And partly because, north of the Rio Grande and south of the Rio Plata, both governments are destroying their currencies at about the same rate.

We have no figures for Argentina, but M3 – the broadest measure of the money supply – has been increasing in the United States at a 14% rate, the fastest in 35 years. Thirty-five years ago, the US government was struggling with trying to pay for “guns and butter” at the same time. That is, the Johnson administration had decided that it could have a war in Vietnam and a war against poverty at the same time. It lost both of them. And one of the costs was domestic inflation, which rose throughout the ‘70s to a peak of 12%.

Gold reacted to the rise in inflation by rising too…it went up 20 times – to over US$800 an ounce. Imagine if you had just looked ahead at the (now obvious) consequences of the Nixon administration’s decision to cut the dollar loose from gold in ‘71. You could have bought gold at, say, US$50 an ounce…buried it in the ground…and you would have beat every other asset class or investment category that we can think of. No commissions. No taxes. No worries. No hassles. You would have avoided the collapse of US stocks in the ‘70s…the rise and fall of Japanese stocks in the ‘80s…the dotcom euphoria of the ‘90s…and the housing bubble of 2001-2006.

Then, if you sold your gold your now…you’d have 15 times as many dollars.

But wait? Why would you want to hold dollars now? And if it doesn’t make sense to hold dollars now…when will you EVER want to hold dollars? And if your wealth just sits in the ground, like a forgotten tomb, what is the point of having it at all?

You’re right, dear reader. You’re better off playing the ups and downs of the markets. It’s more fun…if you like that kind of thing.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

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.
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Comments

  1. “You would have avoided the collapse of US stocks in the ‘70s…the rise and fall of Japanese stocks in the ‘80s…the dotcom euphoria of the ‘90s…and the housing bubble of 2001-2006.”

    What do you mean??!! The price of gold peaked in 1980 and went down till 1999. The price of gold is volatile. See http://www.usagold.com/reference/prices/history.html

    Reply
  2. The First Rule of Life: There a downside to being a dummy. The US and the Fed have been dummies with their fiscal and monetary policies for a few decades now and the downside is becoming obvious.

    Robert Chandler
    October 16, 2007
    Reply

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