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Gold Versus Dollar Devaluations

 -- Published: Thursday, 8 December 2016 | Print  | Disqus 

By Gary Christenson

President Nixon “temporarily” severed the weak link between gold and the U. S. dollar in 1971. The link is still severed.

The economic well-being for most people and the sound dollar have suffered. The dollar is no longer described as “good as gold” as it was 60 years ago. Today we deal with mini-dollars and $ trillions instead of $ billions.

The government grew much larger, the financial complex benefitted, while “fly-over” America suffered, victims of dishonest money.

In the U.S. we view gold in terms of dollars, which often move inversely to each other. Example: The dollar goes up a little, gold goes down considerably, or the dollar drops ten percent, and gold doubles in price.

The monthly dollar index compares the dollar to a basket of other devaluing fiat currencies backed by debt and dodgy promises. Multiply that index by the monthly price of gold, and the result is gold with dollar variations mostly removed. In other words:

  1. How much have the Fed and the government devalued the currency?
  2. How much has gold risen in price because too many dollars chase too little gold?
  3. This does not account for the fictions of fractional reserve paper gold, leasing, swaps, and other tools used for “management” of the gold price.

This log scale graph expresses the dollar index as a fraction slightly more or less than one. Gold prices, with dollar variations filtered out, have risen exponentially for two decades and are currently close to the bottom of the trend channel.

Why an exponential increase? The short answer is exponentially more debt and dollars in circulation. Dollars are borrowed into existence via the creation of debt (fractional reserve banking, QE, etc.). The U.S. National Debt has increased exponentially at about 9% per year for over a century, dollars in circulation have increased similarly, and gold prices expressed in dollars are far higher now than the $42 when President Nixon did the deed.

Examine the same data after it has been smoothed with a 20 month moving average and note the projection in about ten years.

For perspective on debt and currency in circulation, examine 44 years of national debt plotted every presidential election year.

The national debt will increase unless you believe that politicians want to spend LESS money in the future.

More debt means more dollars are created and those increased dollars in circulation create higher prices for most items, including college tuition, banker bonuses, hospital charges, employee salaries, prescription drugs, cigarettes and beer.

The reserve currency status of the dollar is vulnerable. The euro and the pound are weak but eventually the miserable fundamentals for the dollar will manifest as a weaker dollar versus most other fiat currencies. Confidence in the U.S. government and the dollar could weaken considerably. The dollar could fall hard and rapidly if/when global oil is regularly purchased in other currencies and if/when Russia or China issue a gold backed currency. It seems likely that all paper currencies will continue their slow or possibly rapid march toward a value of zero.

Suppose the dollar index drops to its low (or far lower) from the past three decades – about 70.

The trend channel shows a smoothed target of about 4,000. With a dollar index of 70 (0.70 as graphed) the smoothed price of average gold could be about $6,000. A spike higher could easily double that price – well over $10,000 without considering expanded wars, hyperinflation, loss of reserve currency status etc. Imagine $10,000 gold within the next decade. How about multiples higher if confidence in the dollar crashes or our leaders cause or allow hyperinflation? Hyperinflation will create a difficult world for almost everyone (think Zimbabwe, Argentina, and Venezuela) but that does not mean it can’t happen in the U.S. or Europe.

Possible Scenarios:

  • Honest Money: U. S. politicians cut government expenses, crash the economy, resign in mass, refuse their pensions for the good of the country, slash military expenses by over 50%, reduce government payrolls by 40%, abolish the Fed, balance the budget and restore honest money to the United States.
  • Unexpected Gifts: The Easter Bunny arrives amid great fanfare, is greeted by HRC and President Trump in Times Square, and is given a lifetime salary by the Clinton Foundation for regular deliveries, to the Treasury, of dollars in non-inflationary $5 trillion Easter baskets.
  • More of the Same or Worse: More debt, ever increasing government expenses, higher taxes, imminent recession and/or nasty depression, aggressive “printing” by the Fed, much higher consumer prices, possible hyperinflation, politicians blame Russia for the economic trauma, and the dollar tanks while gold and silver skyrocket during the next four years or less.

I suggest the scenario for “more of the same or worse” is most likely.

Gary Christenson

The Deviant Investor


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