Currency Watch:

After revisiting its all-time low of 21.89 mg on January 3rd, the USD rallied during January, peaking at 23.58 on January 28th, up 7.7%. Since then, it has been drifting lower, and currently stands 2.7% above the all-time low. A similar pattern exists for most other major currencies, though the Yen and Canadian dollar have lost less ground in the past year than the US Dollar and Euro. [Washington's Birthday update: as of 21-Feb-2011, the USD stands at 22.17 mg, only 1.3% above it's all time low.]

Bond Watch:

US Treasuries have been a terrible investment for at least the last 8 years. Since 2002, shares of SHY, an ETF that tracks the 1-3 Year maturity T-Bonds, have lost 74% of their value, despite an apparent increase of 28% when measured using dollars – and these figures include interest paid! The long bond, as measured by the share price of TLT, is just as bad, having lost 69% of its value since 2002, despite a smoke-and-mirrors “gain” of 56% when measured in dollars. And as we'll see in a moment, these losses are not simply due to a “gold bubble”. Priced using dollars, most things you buy every day have increased in price dramatically since 2002 – gasoline has more than doubled, food prices are 2.6 times higher, cotton prices are over 4 times higher! The lion's share of these increases are caused by dollar depreciation. And keep in mind that the so-called gains are taxable… while the real-world losses are not deductible. The government takes your money at full value, repays you with currency that will buy much less, and taxes you on the difference – all part of the miracle of inflation!

Equity Watch:

Major stock indices have been falling for the last 10 years. The Dow Jones Industrials, for instance, hit its all-time high around 1,400 gold grams in 1999. It has since lost over 78% of its value. For the last two years, major indices have been pretty flat after bouncing off the lows set in March of 2009. As with bonds, nominal prices have risen as currency values have fallen, leaving investors with purchasing power losses and huge tax liabilities. One area that has bucked this trend is resource stocks – a specialty of my friends at Casey Research. Selected issues have soared, and even the broad resource indices like the HUI show real gains over the last year.

Commodity Watch:

Each of these commodities has its own story to tell… tales of weather (good and bad), of mine cave-ins, political instability and bureaucratic stupidity.

Silver is skyrocketing, not just in dollars, but in gold value as well, having closed convincingly above its long term resistance level at 0.7 grams of gold. It will be interesting to see that level retested in the weeks to come. If it holds, the 1.0 gram level, last seen in the early 1980s, could be the next stop.

While it is clear that the trend is mostly up, what is not so clear in the numbers above is the bigger picture – that most of these commodities are rebounding off their all-time lows.

Crude Oil, for example, finds its long-term support at around 1 gram per barrel, and hit 1.1 grams two years ago in February of 2009. Although it has recovered to almost 2 grams, crude traded over 4.9 grams per barrel as recently as 2008. Coffee is another example – in May of 2010, it traded under 34 mg per pound. Although it stands today at 61.1 mg, in 1997 it traded over 230 mg/lb (and at a dollar price very similar to today's, highlighting the massive depreciation of the dollar.) Cotton has really been on a tear (pardon the pun) gaining another 2.2% this week following a 12.4% rise last week, and more than doubling in the last year. But these gains are coming off record lows of less than 20 mg/lb in early 2010. Cotton's 30 year average price is 53.2 mg (20% higher) and its record high of 250 mg is more than 5 times today's levels.

Chart of the Week

This chart was inspired by the events in Egypt and elsewhere in the developing world, where concerns over food price rises are playing a major role in people's dissatisfaction with government. As one who is profoundly dissatisfied with all governments, I think this may be a good thing. But what is really going on here? When you strip away the veneer of currency depreciation, we see that food prices are actually near their 20-year lows, not making new highs!

In fact, the overall food price index would have to rise 72% from today's levels just to get back to its 20 year average. The Meat component would have to rise over 140% to get in line with its average. And even Sugar, the fastest rising component, would need to rise a further 20% just to revert to the mean.

The real problem here is that governments are destroying the purchasing power of money – your money – even while technology and intelligent employment of capital are reducing the costs of food, technology, energy, housing and transportation. Unfortunately, governments are kleptomaniacs. They corral your money with capital controls, then steal it openly by raising taxes in the form of new regulations, closed loopholes and higher rates; and stealthily, through currency destruction and the taxes collected on the resulting pseudo-gains. This has left most households with less disposable income than they had in 1950 – requiring them to work two or more jobs just to make ends meet!

But that's a story for another edition…

In the meantime, don't be fooled by bogus government currency shenanigans! Keep track of your investments' true value, using gold.

Sir Charles

And it has been!

The Coffee Chart shows a remarkably stable price since 2002, generally hovering in the area of 50 mg/lb. In 2005 the price almost doubled, peaking at 95.8 on March 17, but by December had fallen back to the mid-50s. Since 2006, the price of coffee has been gradually working it's way lower, putting in a recent low of 33.3 on June 8 and ending June at 41.

Coffee futures are quoted in USD, in the form of cents per pound. In 2002, the USD's value was about 100 mg of gold, making 1mg roughly equal to 1 US cent. For instance, on May 17, 2002, the price of coffee was 48.47 mg/lb or 48.40 cents/lb. But what a difference 8 years makes! Although coffee prices ended June 2010 at 41.055 mg/lb, down 15% from the May 2002 price, the "fun-house mirror" USD price ended June at 164.20, apparently up 239%.

Keep in mind that a pound of coffee is still a pound of coffee, and can be roasted and ground up to brew the same number of cups in 2010 as in 2002. A gram of gold is still a gram of gold, and can make the same fillings, or jewelry, or plate the same number of electrical contacts in 2010 as in 2002. In 2010 there is a slight shift in preference in favor of gold over coffee, but we're talking about 15%.

The US Dollar, on the other hand, has lost about 75% of it's purchasing power over the same time period, that is, it takes $4 today to buy what $1 bought in 2002. Holding onto dollars is playing with lighted matches! And measuring your investment performance in dollars virtually guarantees that you will have a mistaken impression of how well you are doing, and will make it virtually impossible to accurately judge when to buy and when to sell.

Don't be fooled! Always price in gold!

Even though I missed only a few of the general sessions, I can't wait to get my hands on the recordings to go through them again for profitable ideas, and to clarify in my own mind the arguments, pro and con, on issues that will be key to my investment decisions in the coming months.

One of those "out in the hallway" discussions got me to thinking about wages, valued in gold… and I put together a chart of wages (average hourly earnings of US production workers, as tabulated by the BLS in series CES0500000008, to be precise) to see what they've been doing.

I was shocked to see that since January 1964, a total of 534 months, there have been only 36 months in which wages were lower than they are today – mainly in the period from 1979-1981. The most recent period when they were this low was early in 1988, 20 years ago. Since then they have seen a high of 1.75 grams/hour in April of 2001, before falling back to their current level of 0.6 grams/hour in July of 2008.

I thought it would be fun to take a look at how things have changed over that 20 year period in terms of gold prices, many of which can be found in the charts section of this web site. Here is a summary:

1) Although wages are about the same, per capita disposable income is up 9%. I suspect this is due to many factors, including lower tax rates, changes in government "benefits", more dual earner households and smaller families. It could also be influenced by the proportion of "production" jobs in the economy. In any event, this is a modest increase for 20 years!

2) First class postage is down 6%, one of the few things I could find that was down!

3) Stocks were a mixed bag. The Dow Jones Industrials are around 400 now, up from about 125 in 1988 – a rise of 220%, even after their spectacular fall from the 1999 high of 1,400. What a roller-coaster ride! On the other hand, Japanese stocks as measured by the Nikkei 225 Index were much stronger in 1988, and have fallen from 12 to 4.5 – a drop of 63%. I plan to do a more detailed comparison of these markets in a future post.

4) Home prices, as measured by the Case-Shiller CSXR Index, are up about 33%, even after falling more than 50% over the last three years.

5) Commodities are up strongly: silver up 29%, gasoline up 89%, copper up 98%, crude oil up 275%, and wheat up a whopping 347%.

The US government's own debt is also a huge and growing problem. While in 1988 it was a "mere" 2.6 trillion USD, today it is over 9.4 trillion USD, up 262%. If this debt had to be settled in gold, that would require 308,376 tonnes of gold today, up from 204,000 back in 1988. It's a good thing that this debt is denominated in US Dollars that can be created out of nothing with the press of a few computer keys! There are only 8,133 tonnes of gold in the US reserves (even this figure is disputed, as it has not been physically audited for decades.) And to put the size of this debt in perspective, all the gold ever mined, since the beginning of time, is estimated at about 150,000 tonnes – that's less than half of the current US Federal debt.

But these figures, as grotesque and gargantuan as they are, are just the officially acknowledged tip of the iceberg. They don't include off-budget borrowing, consumer borrowing, or the real elephants in the room, the ones no one in polite society wants to talk about – the "unfunded liabilities" and future entitlements of social security, medicare, and related programs. While current taxes are generating enough cash to cover these at the moment, due to changing demographics they are growing at a rate that cannot be met simply by new tax increases. Unless changes are made, their costs will overwhelm even the ability of our printing presses to pay for them!

How did we get to this point? What can we do about it?

At the Vancouver Symposium there was a showing of a new documentary film called I.O.U.S.A. that addresses many of these points via fascinating interviews with Pete Peterson, Warren Buffett, former Comptroller General of the United States David Walker, and other luminaries. It's a wonderful film, well made, very thought-provoking, and highly recommended.

Most people have little grasp of what is happening with their money. Most have no idea what is heading down the tracks toward them financially. If you have family and friends in this situation, I urge you to take them to see this movie. It is fun, fast paced and informative. They may be shocked, but they won't be bored!

There will be a special "one day only" premier showing of the film all over the USA on Thursday, August 21st. I'm going, along with many of my friends who weren't able to see it in Vancouver. You can get details, watch a trailer and check out the special offer Agora Financial is making to those who pre-purchase tickets, as well.

I hope you will join me!

I'm preparing a special report on how to do these calculations, and shortcuts that make it easy to translate anything you're reading from "dollarese" into language that you can understand and act upon.

As you read the examples below, you'll see that some numbers are more or less unchanged. These involve time periods where the value of the dollar is pretty stable, as it usually is from day to day, or where it has made an excursion up or down in value and ended at about the same level as at the beginning of the period.

You will also see some cases where the change in value is dramatically larger than the dollar figures would suggest. These are usually cases where the declining value of the dollar is adding to the decline in the value being reported. Of course, a rising dollar would also add to the increase in value of an asset or security.

And then, there are cases where measuring in gold completely reverses the meaning of the statistics being given in dollars – these are the fun ones!

Ready to explore the world from a new perspective? Great! Here we go!