-- Posted Thursday, 8 April 2004 | Digg This Article
The U.S. dollar has been in a state of sharp decline for about a year and a half against the euro, the yen, the Canadian and Australian dollars as well as numerous other currencies. A multitude of financial analysts have recognized this condition and have attributed the rise in gold’s price to the dollar’s decline on international markets. They largely believe that the gold price is simply a reflection of the dollar’s international value. The reasoning goes that if the dollar declines on world markets it is favorable to gold and if it rises, gold’s price falls. On a superficial level this appears logical and I too have erred in this belief. However, if one looks deeply below the surface it is actually the dilution of the dollar’s worth, caused by an increase in their number, that causes gold to rise. Similarly, it is the recognition of the cheapened dollar that drives foreigners to shed their dollar holdings in favor of their own currencies. This is the real reason underlying gold’s rise in dollar terms, and the dollar’s concurrent fall on international markets.
The number of U.S. dollars in existence is the basic factor which determines the price levels of all dollar denominated items. If the extant dollars and the goods and services available in the U.S. are constant, a balance will occur. In this instance, an equilibrium will result and the dollar price for each good or service will be stable. Responsible management of the money supply dictates that additional dollars should only be created to reflect the value of the goods and services that have recently entered the marketplace. In this fashion, overall price stability will be maintained as the newly created dollars will be in balanced with the value of the new goods and services. Unfortunately, we do not live in a perfect world.
Politicians have forever been pressured by the demands of their constituents to provide services that may or may not be necessary, but that the public desires. Further, political leaders have learned that in order to remain in office, the more that they spend on various popular projects, the more votes that they can garner. It is human nature to desire something for nothing! Thus, in truth, it is the public’s demands and the politicians willingness to satisfy these, that create a condition where the government cannot live within its means; it spends more than it takes in via taxes. And, the way that governments fill the gap between their tax receipts and their expenditures, is by creating additional purchasing media.
When excessive dollars are issued it upsets the delicate balance between those dollars already in circulation and the nominal prices of the various goods and services offered in the marketplace. By supply and demand, the newly created dollars gradually cause the dollar price of each good or service to rise. Similarly, the greater the issuance of inflationary purchasing media, the difference between the total number of dollars minus the dollar value of the goods and services offered, the more that the purchasing value of each dollar will decline. Gold is the most sensitive barometer to the amount of inflationary purchasing media in an economy. This is the reason that the gold price has historically advanced prior to the rise in a nation’s general price levels.
Since the beginning of civilization, man has been attracted to gold. Whether it was due to its beauty, its mass, the effort that must be exerted to dig it from the bowls of the earth, or for whatever reasons, it has been forever coveted. It has a long history of acting as sound money because it cannot be created at the whim of politicians as can paper currency. In this fashion it acts to keep public officials honest. Further, since the inception of paper money, it has sounded an alarm whenever a government irresponsibly increased their supply of paper money.
Gold’s rise from its nadir at $252 an ounce during the summer of 1999, is today’s warning that something is amiss. It is sounding yet another alarm that our politicians have once again begun to inflate our money supply. This is destined to greatly damage the dollar’s worth in both the domestic and international arenas. Despite what most Americans have been led to believe, there are many who have learned from history and have been acquiring gold in order to preserve their purchasing power. They recognize that gold is their potential lifeboat in what may become a tumultuous financial and economic storm.
There is an ancient French saying: “even the poorest French peasant hides gold under his mattress”. This resulted from the numerous currency cancellations and devaluations that France has suffered. During these times great hardship was foisted upon its citizens. The only fashion in which their people survived was by owning gold. This was because these troubled periods were accompanied by rising gold prices. Each time that their currencies fell in their domestic purchasing power, the gold price invariably rose. This allowed even the poorest Frenchmen who possessed gold, to save at least some portion of their earlier wealth.
The desire to own gold is frequently motivated by fear. It could result from the desire to protect oneself from the overthrow of a government or a country by either external or internal forces. It might be to protect ones assets from government confiscation, as has often occurred throughout history. Or, it could result from the fear of currency purchasing power loss which has historically been embodied in an inflationary event. In all of these situations, gold has been the one item that has protected those who understood its enduring usefulness to mankind.
The U.S. government has long been posting annual budget deficits. Recently, due to the recession and the “war on terror” they have substantially increased. Additionally, our government anticipates annual deficits of $500 billion or more for the foreseeable future. How will these and future deficits be financed?
The current plan is that they will be paid for by creating new dollars from nothing! It is to this fear that the yellow metal has been reacting! It has been bid higher in price as more people begin to recognize that even governments cannot create something from nothing, without paying the consequences.
Our nation cannot pay for the wars in Iraq and Afghanistan as well as for the “war on terror”, while concurrently supporting the economy, by simply creating dollars. At some point not only foreigners but also decent Americans will vote with their checkbooks. Foreign nationals will rush out of the dollar which will cause it to plunge on the world’s markets, and our citizens will rush into gold and tangibles as the dollar’s domestic purchasing power collapses.
Gold soared from its government-mandated price of $35 to $875 an ounce during the 1970's for similar reasons. That era witnessed an inflation rate that peaked at over 12%. I do not know if inflation is in our immediate future, but there are numerous indications that it is. Soaring prices pervade the daily commodity charts, the dollar’s international decline must ultimately translate into higher prices for all imported goods sold in the United States, the Fed is fostering an exploding money supply, wage pressures are beginning to appear, etc. Yet, deflationary pressures also abound. The stock market is in a Bear Market and could collapse at any time, the economy is struggling to extricate itself from a recession and might fail, and the amount of private and public debt are at unprecedented levels and must be serviced. If interest rates rise, which has always been a side effect of inflation, it would generate massive debt defaults. This would severely damage the economy as Americans cease their spending binge.
At this stage, it is impossible to predict how our monetary or economic futures will unfold. During the latter part of the 1970's, the U.S. experienced a simultaneous economic and financial condition that was labeled stagflation. This was a combination of economic stagnation and a serious inflationary episode. Some called it “the worst of all worlds”. To my mind, this would be the best scenario for which we can hope, given the path that our country is following. While I do not yet know how the inflation/deflation question will be resolved, I do recognize that gold will be the beneficiary of either outcome. If inflation ensues, gold will rise as people flee the depreciating dollar. If deflation is in our future our government will act as they have always, and as Fed chairman Alan Greenspan and Fed governor Ben Bernanke have promised. They will put the proverbial printing press into overdrive. This will both drive the dollar’s value substantially lower and gold far higher in price.
I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.
Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.
CAVEAT
I expect to have positions in many of the stocks that I discuss in these letters, and I will always disclose them to you. In essence, I will be putting my money where my mouth is! However, if this troubles you please avoid those that I own! I will attempt wherever possible, to offer stocks that I believe will allow my subscribers to participate without unduly affecting the stock price. It is my desire for my subscribers to purchase their stock as cheaply as possible. I would also suggest to beginning purchasers of these stocks, the following: always place limit orders when making purchases. If you don't, you run the risk of paying too much because you may inadvertently and unnecessarily raise the price. It may take a little patience, but in the long run you will save yourself a significant sum of money. In order to have a chance for success in this market, you must spread your risk among several companies. To that end, you should divide your available risk money into equal increments. These are all speculations! Never invest any money in these stocks that you could not afford to lose all of.
Please call the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and is made available for informational purposes only. Dr. Appel pledges to disclose if he directly or indirectly has a position in any of the securities mentioned. He will make every effort to obtain information from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Dr. Appel encourages your letters and emails, but cannot respond personally. Be assured that all letters will be read and considered for response in future letters. It is in your best interest to contact any company in which you consider investing, regarding their financial statements and corporate information. Further, you should thoroughly research and consult with a professional investment advisor before making any equity investments. Use of any information contained herein is at the risk of the reader without responsibility on our part. Past performance does not guarantee future results. Dr. Appel does not purport to offer personalized investment advice and is not a registered investment advisor. The information herein may contain forward-looking information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties that may affect the company’s actual results of operations. © 2004 by Dr. Richard S. Appel. All rights are reserved. Parts of the above may be reproduced in context, for inclusion in other publications if the publisher's name and address are also included for credit.
-- Posted Thursday, 8 April 2004 | Digg This Article
