Why?

Because there is a market in money. All the world's currencies compete against one another. Each has a large "captive" user base, mostly in it's country of issue, but all are traded on exchanges, just like stocks. Traders who see a currency with weakness not yet reflected in its price will sell the weak one and buy something stronger. Although there can be price distortions, over time these tend to correct, and traders are rewarded for their insight.

Gold is one such currency, although it has no captive user base at the moment. The US dollar is another, with a large domestic user base and popularity around the world as central banks hold it in their reserves, individuals hold it for savings, entire countries use it as their means of exchange, and important commodities like crude oil are priced in it. Euros, Pounds, Renminbi, Yen, and many others also compete in this marketplace.

Gold is the strongest, safest form of money mankind has yet discovered. It has many uses, it is easily tested for purity and easily divided in convenient units. It does not rot, rust or corrode, it is rare enough that it takes real effort to obtain more of it, but not so rare that it cannot be had by anyone who wants to own some. Of course it is not perfect; nothing is! But for thousands of years people have been experimenting with various forms of money, and gold is the one form that has withstood the test of time, again and again.

Most people use the local brand of currency because it's easy. All the local banks use it, all the prices they see marked on the shelves when the go shopping use it. It is easy to obtain, easy to save, and easy to spend. In some countries, at some times, people have had little choice; use of the local currency was mandated by law. Holding or trading in foreign currencies without special permission from the government was a punishable offense. Often, taking the local currency out of the country in any meaningful amount was also a crime. In almost every country, "legal tender" laws force many types of transactions to be conducted using the local currency. You will need some, too; but just enough to facilitate your day to day transactions.

The last 30 years or so have been a time of fairly strong monetary freedom; people from all over the world have been able to own whatever currencies they wanted. They have been able to open accounts in other countries, to travel the world and exchange their home country cash for local cash or use their credit cards to make purchases when traveling, or from home over the Internet. Most have been able to own gold.

Storm signals are now flying, however – signaling the end of this period of relative freedom. Austerity measures, deficit reduction programs, tax increases, and new reporting requirements all point to a period of increasing government control and regulation. A period of increasing nationalism, of homeland security, of tightening borders. A period of diminishing freedom and privacy in many ways, but especially in terms of money and travel.

With a tip of the hat to The Daily Crux, I recommend this piece from the Expected Returns Blog:

There are certain periods of time in history when seemingly obscene prognistications are right. I believe we are in one of those times. It is at times like these that "conspiracy theorists" (whatever that means) become what I like to call "reality theorists." 

Economic shocks come from nowhere. One day the global economy is humming along; the next day it collapses. Crashes don't occur because the fundamentals suddenly change; they occur because the public at large recognizes the fundamentals and heads for the exit at the same time. What's crashing next is the public's confidence in governments across the Western world. You can guess how that will affect the price of gold.

And how it will affect freedom in general.

A great place to start is by dumping the local currency as your unit of account. Start thinking in gold terms, not in terms of the local funny money. But that is just the start.

If you do not own any physical gold, buy some now. Buy one little coin, even if it just one-tenth of an ounce. Hold it in your hand, put it somewhere safe, or carry it in your pocket, but get started.

If you do own some gold, think of it as your core savings position. Is it enough? Add to it until you can sleep well at night, knowing that whatever transpires in the markets overnight, when you wake up you will at least have that core position to work with. If you own stocks or other liquid assets that have been appreciating in gold terms, take some of your profits off the table and bank them as physical gold. If your stocks and other investments are declining in gold value, consider selling them and buying gold with the proceeds. You won't be making any money by doing this, but you will not be in a losing position, either. You will simply be holding the best, safest form of cash, keeping your powder dry until the time is right to invest in other assets that will appreciate in terms of gold.

You may want to diversify some of your savings into silver as well. Silver is more volatile than gold, and as it has significant industrial uses, and most of its production is as a side of-effect of base metal mining, its price is more strongly influenced by the state of the economy in general than is gold, which is primarily a monetary metal. Still, silver has a long monetary tradition, and because it is less rare than gold, it is more useful in smaller, everyday transactions. This is why the US issued silver dimes, quarters, half-dollars and dollars, but used gold for five, ten and twenty dollar coins.

Holding gold and silver is a great start, and provides you with a form of savings that is insulated from the devaluations and defaults of governments, both subtle and blatant. This will give you options and expand your freedom, but it is not enough. Money is a wonderful thing, but it is not the only thing, or even the most important thing! Think about what is most dear to you… and try to set up a framework that will give you options to maximize that.

Protect yourself from the coming blizzard of restrictions and regulations while there is still time to maneuver. You want to be able to decide where you will live, where you will travel, who you will associate with and do business with, as well as what money you will use, and where you will keep it. Having viable choices is what freedom is all about.

The key is to act before it is too late, before everyone else is rushing to the exits. Do not allow yourself to be lulled into a sleepy daze by the entertainment spread around you by the media. Do not drowse in the warmth of the water in the pot as it heats slowly toward the boiling point. Do not allow the other crabs in the pot to pull you back in if you decide the time has come to make a break for it.

Do it for yourself. Do it for your family. Do it for future generations. But get started now!

Using gold pricing to get an accurate measure of your investment performance will enable you to do more than just survive the upheavals ahead – you will be able to make a fortune!

I urge you to watch the video, understand where the actions of governments and central banks are taking us, and most importantly, I urge you to look over your portfolio, to look over your life, and take action!

If you have questions or comments, send me an email, leave a comment, or call the Priced in Gold Hotline at 888-868-5656.

I think it's time we all switched to using gold as our unit of account, as the fiat currencies of the world continue to be consumed in a firestorm of inflationary "money" creation. Whether or not we hold actual physical gold (which we should, as our bedrock cash position) we should be seeking to own stuff that is rising in value in gold terms. The real problem is that the signals we get from investments priced in EUR, USD, JPY, etc. are being seriously distorted by the massive issuance of these currencies, resulting in investors continuing to hold them and even add to them, believing their value is rising when it is in fact falling.

US government bonds are a prime example – widely considered the safest investment in the world, and rising fairly steadily for years as interest rates drifted lower, they have in fact fallen to about half their 2002 value. Here are the details, using TLT, the 20 year T-Bond ETF as an example… In July of 2002, when the ETF was launched, you would have paid $82 per share for it. Over the years, you would have collected $29.71 in interest, and today you could sell each share for about $90. A nice, safe 46% return over 7.75 years, or 5% CAGR. But measured in gold grams, the picture is radically different. Each share cost 8.4 grams in 2002, and paid a total of 1.8 grams in interest over the years. Today, you could sell each share for about 2.5 grams – a 49% loss over the same 8 year period, for a -8.4% CAGR. I have created a chart of TLT in USD and gold, based on the "adjusted closing price" as calculated by Yahoo finance. Take a look at it to see what I'm talking about.

And this is just the start of the collapse… as more dollars are created, bond buyers will begin to worry about the value of the dollars that will eventually be returned to them, and the interest they demand will skyrocket. This will create a double-whammy drop in bond prices as their value in dollars falls, and the value of each dollar falls as well.

Of course, just holding gold doesn't earn any profit (as measured in gold) but it doesn't lose value, either. There are plenty of investment strategies that have risen in gold value over that same period, but buying and holding most stock indices, bonds, real estate are not among them.

I'm working on a DVD series called "The Truth About Gold" that will detail some strategies for dramatically expanding your wealth, as measured in gold. I will be making a few copies available to early adopters on a pre-order basis; if you are interested, drop me an email at truth@pricedingold.com

I've recorded an expanded commentary on this topic as a podcast. You can download it or listen to it here:

In summary, prices had been rising since 2003, and began 2006 around the 11,000 level. They continued a relatively steady march to a new all-time high around 14,000 in the fall of 2007. The credit implosion of 2008 rapidly forced the index to a low around 6,500 in March of 2009, but since then it has been recovering strongly, returning to the 11,000 level today.

This is the conventional story… but what is the truth?

The problem is that the Dow Index is measured in US Dollars, a highly volatile currency. As a result of the credit crisis, there has been tremendous creation of new money by the Federal Reserve to keep the monetary system afloat, causing a drastic reduction in value of the USD. In spite of this, there have been moments when the urgent need for US Dollars, to pay off debts and de-leverage, has forced the dollar's value higher, in a kind of "short squeeze", and occasionally problems in other countries have become so severe that the USD was seen as safe by comparison, increasing demand for it, and temporarily boosting it's value. (As Doug Casey recently observed, the US Dollar may be toilet paper, but at least it's three-ply!)

So when we remove the roller-coaster value of the USD from the picture, by pricing the Dow Jones Industrial Average in gold, what do we see?

From 2006 to fall of 2007, instead of rising 27% from 11,000 to 14,000 the index actually went sideways, hovering around 600 gold grams. Instead of falling 53%, from 14,000 to about 6,500, it actually fell 63%, from 600 grams to 220 grams. From this low it quickly rebounded to the 300 gram level, where it has been for the last year.

Although it's dollar value has returned to the level seen in 2006 and mid-2008, it's true value, measured in gold, is half of it's 2006 level, and three-quarters of it's 2008 level. Stock prices have not risen at all for the last year. The US Dollar, and most other fiat currencies, have simply fallen in value due to central bank manipulations, creating the appearance – but not the substance – of recovery and growth.

So don't be fooled… Keep an eye on what your investments are really doing, by pricing them in gold!

Americans' net worth rises for third straight quarter

Friday, March 12, 2010

Stock gains boost Americans' net worth

Americans regained more of their shrunken wealth last quarter, mainly because of gains in stock portfolios. The Federal Reserve reported Thursday that household net worth rose 1.3 percent in the fourth quarter of 2009, to $54.2 trillion. Net worth rose 4.5 percent in the second quarter and 5.5 percent in the third. The value of stocks rose nearly 4 percent in the period, to $7.7 trillion. Higher home prices helped a bit: Real estate holdings edged up 0.2 percent.

Americans' net worth would have to rise 21 percent more to get back to its pre-recession peak of $65.9 trillion.

– Associated Press

===========================

Here's the story as priced in gold:

Americans' net worth falls for second quarter in a row

Friday, March 12, 2010

Currency losses gut Americans' net worth

Americans saw their wealth shrink again last quarter, mainly because of losses in the value of the dollar. The Federal Reserve reported Thursday that household net worth fell 8.7 percent in the fourth quarter of 2009, to 1,526 tonnes of gold. Net worth had risen 2.5 percent in the second quarter and fallen 1 percent in the third. Aside from the second quarter's uptick, net worth has been falling every period since the third quarter of 2007. Falling home prices caused a major hit: Real estate holdings dropped 9.6 percent to 467 tonnes. The value of stocks fell 6.3 percent in the period, to 217 tonnes of gold. Underlying all of these drops is the continuing debasement of the US Dollar, as bogus "bailouts", "stimulus plans" and other reckless deficit spending take their toll.

Americans' net worth would have to rise 227 percent to get back to its pre-recession peak of 5,000 tonnes of gold.

– Associated Press and PricedinGold.com

I've been wondering about that for some time now. My kids are young enough that I still have about 10 years before they will be looking at colleges, but it raises an interesting question: how much gold do I need to save now to cover their college costs in ten years?

After looking around for tuition numbers, I decided to focus on Yale University. They publish A Yale Book of Numbers and an update that contain all sorts of interesting data about Yale (including tuition costs) from 1701 to 1999. More recent data is available in news reports, press releases, and from Sallie Mae. I've compiled some of this data into the chart of Yale College Tuition, and I will update it annually going forward.

Although dollar costs for tuition, room, and board have risen tremendously, from about $700 per year in 1900 to $48,622 per year in 2009, their price in gold has only risen from 1,053 gold grams in 1900 to 1,726 gold grams in 2009. It's been a wild ride, though!

Before we continue, re-read that last paragraph carefully… in dollars, prices have risen to 70 times their starting price! SEVENTY TIMES! In gold, they are up 64% over a 109 year period. Interestingly, Yale tuition was almost exactly the same in the 2008-2009 school year (1,633 grams) as it was in the 1932-1933 school year (1,589 grams). It works out that 2008's annual tuition is just $30 more in the gold coins of 1932. In fact you'd get a couple of silver quarters and a silver dime back in change from your $10 eagle and $20 double eagle. This is in spite of a 44x increase in dollar prices, from $1,056 in 1932 to $46,000 in 2008.

Prices were quite stable until World War I, when they began to rise, peaking in the early 1930s at around 1,600 grams – not far from today's price! Although tuition prices in dollars were stable or rising very slowly, the collapse of the dollar in 1934, from about 1.5 grams to .88 grams, lowered tuitions as measured in gold dramatically.

They stayed low until after World War II, when they began to rise strongly, from about 1,000 grams to a peak of 3,441 grams in 1970. When Nixon gave up the defense of the dollar and closed the gold window, the dollar again collapsed, and although tuitions doubled in dollar terms, they fell in gold terms to a low of about 450 grams in 1980. As the dollar doubled in value from 1980 to 1999, and tuitions continued to rise in dollar terms as well, tuitions priced in gold rocketed to a new all-time high of 3,929 grams in 1999.

Since then, despite rising about 50% in dollar terms, the plunging value of the dollar has cut the cost of tuition to less than half of its old high.

As for the future? I don't own a crystal ball, so I can't be very specific… Still, it looks to me as though the current economic troubles could pull tuitions (priced in gold) lower from here. Technically, there seems to be good support at about 1,000 grams, and 500 would be a real bargain. It may take a few years to reach those levels, though. And 5 years after that, when I'm looking at college expenses for my kids? I suspect that the same 1.5 kg of gold that would cover most of a year today will still do the job then, even if the US Government is printing $1,000,000 bills and it takes a wad of them to buy a Big Mac.

"If you want to end up with the economy of Pakistan, the politics of Ukraine and the inflation rate of Zimbabwe, bank nationalisation is the way to go."

They suggest some ways to avoid a few of the potholes in the bank recovery roadmap, but ultimately it comes down to having the political will to do the hard things, to deliver sufficient pain to the banking and financial elite that created the mess in the first place with the willing collusion and encouragement of government. Pain that must be confronted to cleanse the system of toxic waste and moral hazard. What is the chance of this type of solution coming out of a bipartisan working group? And if it was offered, what are the chances of it being implemented? And if tried, how long would it last before being abandoned as "un-workable"?

It is so much easier to just put the patient on an IV drip of stimulants and pain killers… which the Fed is happy to provide in many forms, most powerfully by "quantitative easing" and "expanding it's balance sheet", also known as "printing money".

Of course, most of the "experts" say that once the crisis has passed, and things are "back to normal" (whatever the heck that means) the Fed can simply "drain excess liquidity out of the system" to avoid any serious inflation. This is roughly the equivalent of taking the patient, now living in a happy pain-free daze, out of the heart-lung machine, pulling the IV drip, and sending him home to go cold turkey. And handing him a huge bill – equal to a large fraction of his annual income – as he checks out of the hospital.

You get the picture.

What is the solution? Have some money that has no counterparty risk and cannot be counterfeited, even by governments. Of course that means gold, preferably physical gold in your personal possession. How much? That's up to you; but with gold paying about the same interest as treasury bills, with much lower risk, and with the multitude of economic problems still lurking out there, I think 10 to 20 percent of your liquid assets would be a good place to start, and going over half would not be at all imprudent. At the moment, Cash is King, and gold is the King of cash.

Don't get swept up in illusory losses and gains due to the volatile pricing of fiat currencies like the US Dollar, either. Track your investments and net worth in gold, and don't be afraid to cut the under-performers from your portfolio. However ugly things look now, you want to be worth more gold next year than you are worth today.

Let me know if there's any way Priced in Gold can help.