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!

The first, called "Gold coin shortage likely to become chronic" by Michael J. Kosares, outlines the reasons why gold bullion coins have been so hard to find at reasonable premiums, and why these forces will probably keep premiums high in the future as well. BTW, Michael's book, The ABCs of Gold Investing: How to Protect and Build Your Wealth With Gold is well worth reading if you are new to buying gold.

The second article was written by the editors of BIG GOLD at Casey Research and published in Dr. Steve Sjuggerud's excellent (and free) Daily Wealth email. Its title, "What You Need to Know About Storing Physical Gold" says it all.

Take advantage of gold's recent pullback (aka the US Dollar's recent strength) to add to your stock of cash that clanks – and keep your investments growing in their gold value!

Charles

PS: Dan Ferris, editor of Extreme Value, a newsletter I recommended to you in Gold101, scored big points with me in his weekly update today. Dan is a dyed-in-the-wool value investor, and his portfolio contains only excellent companies that are trading at great prices. But today he told his subscribers to sell several of his portfolio picks – including some long-time favorites and some very recent recommendations. Why did he do this? Because his honest opinion is that the stock market has further to fall, and having cash on hand will be key to taking advantage of the values that will be available in the future. He is keeping the strongest of his stocks, especially those he calls "World Dominators", and is buying some outstanding gold-related companies. This had to be a hard letter for him to write, but I think he's doing the right thing, and I applaud him for it. Follow his lead: take a hard look at what's in your portfolio, and don't be afraid to sell the weakest things in it, whether at a loss or a profit. Concentrate on strength and building your cash position for buying when things turn around.

When someone talks about the price of gold in some currency like US Dollars, they are talking about the exchange rate between two currencies – gold and dollars. It makes just as much sense to talk about the price of the dollar in gold as it does to talk about the price of gold in dollars. It all depends on which currency is central to your thinking. For most of my life, I've lived in the United States, and used US Dollars to purchase groceries, keep my accounts, and so on. But when I lived in England, I used Pounds to buy my groceries, and keep my accounts. When building a boat in New Zealand, I had accounts in NZ Dollars, paid for the boat's construction in NZ Dollars and paid bills and expenses in NZ Dollars while visiting there. Same for my visits to Japan, Germany, Mexico, Tahiti, and so on. Still, as I traveled, I always related the value of the local currency back to my "home currency", the US Dollar. "How much is that in dollars?", I would ask myself. When I had the answer, I could assess the price and decide "Wow, cheese is a real bargain!" or "Sheesh! Gasoline is really expensive here!".

But to think of the US Dollar as "the center of the monetary universe" with all other currencies circling around it is silly. When friends of mine from England visit the US, they are doing just the opposite of what I did when visiting them – they are relating all the US Dollar prices they see back to their "home currency", the Pound Sterling.

I have now come to realize that we are all travelers… moving through space around the globe and through time as well. As we move to new places and new times we find people using new forms of local money. Sometimes these moneys have the same name, but very different values. Dollars in the US or New Zealand or Hong Kong or Australia or Zimbabwe do not have the same value as one another. And one US Dollar in 2008 does not have the same value that one US Dollar had in 2003.

Gold is a money that is recognized around the world, throughout all of history, and changes value very gradually over time. To my mind, this makes it the perfect money in which to value all the others. The perfect "home currency" to relate local prices back to, to determine whether things are cheap or dear.

In today's world of "floating exchange rates", the market sets the price of one currency in terms of another. Traders buying Japanese Yen with US Dollars, selling New Zealand Dollars for British Pounds, buying Swiss Francs with Euros, and so on, agree on how much they will pay for each transaction made. These transactions are posted electronically and become the bid and ask prices that guide other buyers and sellers, and are called the "spot prices" of currencies. Traders are also buying and selling currencies for delivery in the future, months or even years from now. The prices they set are based on the spot price, but also figure in estimates of future changes in value due to inflation, interest rates, expected demand and other factors.

Bonds are another form of currency exchange – you will be getting your principal back 2, 5, 10, 20 or more years in the future, and receiving a fixed "rental" (the interest) every so often until then. Although the currency lent and repaid have the same name, they are really two different currencies because of the intervening time. For example you might buy the bond with 2008 US Dollars, receive an interest payment in 2010 US Dollars and finally be repaid the principal in 2018 US Dollars. Although bonds are said to have no "exchange risk", many of the other factors that drive currency futures prices also drive bond prices… especially interest rates and inflation expectations. No one will pay $1000 for a bond earning 3% if a new bond with the same maturity and risk profile can be purchased for $1000 that will pay 12%. And if one expects the money returned at maturity to be worth less than the money being used to buy the bond (due to inflation) then one will insist on a higher interest rate… or pay less up front than will be returned at maturity. If a new issue is priced too high (by setting its interest rate too low) there will be no buyers. So traders also set the price of bonds, which is another way to say that they set interest rates.

Of course, the expected future value of a currency can be higher as well as lower. When people expect their money to buy more in the future, they tend to put off purchases because they expect a better deal to come along later. This activity is called saving. The monetary effect is called deflation, because the amount of money chasing after the goods available is declining, making each unit of money more valuable as time goes by.

As I write this, the "Credit Crisis" and recession being experienced around the world is making the US Dollar more valuable. Banks, hedge funds, traders, investors, governments, home owners (in fact, nearly everyone) have borrowed large sums of money to leverage their investments and increase their rate of return. Although this practice is very profitable in good times, it quickly reverses its effect and multiplies the magnitude of losses when the value of the underlying assets declines. When losses get large enough, they can cause individuals and firms to go bankrupt, leading to still more losses for those who were doing business with them. In attempting to reduce this leverage, and thus reduce the rate of losses, firms and individuals are scrambling to get dollars to repay those loans. They sell whatever they can to raise the money. This selling of assets and buying of dollars pushes the value of the dollar higher with respect to almost everything – stocks, real estate, oil, gasoline, steel, copper, even gold.

In investing, it is common to borrow an asset, like a shares of a stock or a large amount of a commodity like copper or silver, and then sell it, anticipating that the price of the asset will fall, and it can be bought back cheaper in the future when it needs to be returned to the original owner. This is called "short selling". It is legal, and can be quite profitable. It improves functioning of markets by making available commodities that would otherwise site idle in warehouses, and enables more accurate pricing of stocks and commodities.

When a large number of traders have short positions in an asset, and the price of the asset goes up too much, those traders are looking at large losses, and some will decide to exit their positions by buying back the asset they had sold, paying a higher price, and taking the loss. This buying pushes the price even higher, causing more traders to decide to buy back the lent asset, and this can become a vicious circle, shooting the value up much higher than is warranted on fundamentals alone. This is called a "short squeeze". Eventually, the sellers who must get out have completed their buying, and the "gravity" of fundamental value reasserts itself. The asset price that spiked higher so rapidly now falls back, often just as fast or even faster than it rose during the squeeze.

If one thinks of money as a commodity, it makes sense that buying a stock (or a house) using leverage is a form of dollar short selling. Just like the silver trader who borrows silver and sells it for US Dollars is "short silver" (he is also "long the dollar" since he lots of that in his account) a house buyer with a mortgage has borrowed US Dollars and traded them for a house; she is "short the dollar" and "long real estate". The same can be said of stocks bought on margin – the trader is short the dollar and long stocks.

And just like any other commodity, the dollar is subject to short squeezes. When, let's say, stocks begin falling in value and many players in the market are short dollars and long stocks, they will be experiencing losses, and if those losses get large enough, they will need to "cover their short" by selling other assets to buy back the borrowed dollars. Note that this has nothing to do with the fundamentals of the dollar as a currency – how sound it is, how large the trade and current account deficits are, how fast the printing presses are running, nor does it matter how sound the assets they are selling are. The dollar short sellers need to get out NOW, and they will do whatever it takes to get out. It should also be clear that lending them more dollars is not an answer to their problem… they have already borrowed too much. They need to reduce, not increase, the size of their dollar short position.

And like all short squeezes, at some point the players who need to repay their dollars have done so, or have gone bankrupt trying. Now fundamentals reassert themselves, and the "overbought" dollar falls while the "oversold" stocks and commodities rise, each according to it's underlying value. Prices oscillate around for a while until balance is restored and the next cycle can begin.

Of course in the real world, there are many other processes going on at the same time. Uncertainty about true asset values, uncertainty about the soundness of trading partners, outright fraud, changes in production and demand, government and central bank policy changes and so on all play a role in determining the evolution of the overall economy.

How can we tell a dollar short squeeze during an inflationary period from a true deflation?

In both cases, the purchasing power of dollars is increasing, but the psychology is very different. In inflationary times, people look at a falling price and think, "Wow! I better scoop up that bargain now; it probably won't last long." In deflationary times they think, "No point in buying today, I'll wait until I really need it; it will probably be cheaper then."

I just experienced this at the local gas station. US gas prices in dollars have been falling since July, and are now about one half what they were then. In gold, they peaked in September, but have also fallen sharply. As I was driving by the station I saw a new lower price at the pump. My tank was half-full. In a deflationary mind-set, I would have reasoned that as I still had half a tank, I might as well wait for a few days to fill up, since the price would probably be lower than it is now, and by hanging on to the money I would be earning interest on it and gaining value. But that was not my reasoning… my reaction was to rush in and fill up quick at this great price while I still could. That is inflationary thinking.

True deflationary thinking takes time to develop. People have to experience falling prices for so long, that future low prices become their expectation. For almost 70 years prices have generally trended up as more and more money has been created.

Will the current "crisis" keep prices falling long enough to reverse that thinking?

It is hard to say for sure, but the fundamentals do not seem to be changing; if anything, they are deteriorating. Bailouts and stimulus programs are ballooning deficits and central banks are doing everything in their power to flood the system with liquidity. Let's look at what that means: the central banks (like the Federal Reserve) are selling dollars to the traders and banking houses who are desperate to reduce their dollar short positions. They are buying all sorts of assets, much of it the "financial toxic waste" that got the investment banks and hedge funds into this bad position in the first place. So now the Fed is shorting the dollar on a massive scale, taking the other side of the de-leveraging trade. But they have a huge advantage over other traders in the marketplace: they can never run out of dollars. No matter how big their losses get, they can always stay in the game. Or can they?

Where do they get the dollars they are supplying to the market? Most of them are borrowed from foreign governments that run trade surpluses, but ultimately, they will create them out of thin air if that's what it takes. And foreign governments and other large lenders will be increasingly nervous as they look at the central bank's balance sheet and see dwindling tax receipts and mostly junk bonds, non-performing mortgages, stock of failing or failed companies, and so on, as the primary source of future repayment. Of course they will get their money back eventually, but if the central bank just prints it up, its purchasing power in 5, 10 or 30 years will be only a small fraction of the value they are lending now. When they truly realize that, the game is over. When the central banks can no longer borrow, they will begin to print money in earnest. Then, it will be like the cartoon coyote running off the cliff: everything is going fine until he looks down and sees nothing but the canyon floor, far below him, and suddenly everything is not fine, gravity reasserts itself, and he is falling out of control, to eventually disappear in a puff of dust as he hits the ground. In economics, this is known as hyper-inflation. Think of Zimbabwe. Think of million-dollar bills, printed on one side only because it's too costly to print on both sides. Think of needing a wad of these to buy a single gallon of gas, or a gallon of milk, or a burger and fries.

But it will still take about the same amount of gold to buy a gallon of gas, or a meal, as it does today. Perhaps, if there is a massive flight to the safety of gold, gold's price may be pushed up compared to most other things, and it may take even less gold to buy a gallon of gas then it has historically, at least for a time, until things settle down again.

At the moment, it is quite profitable to speculate by buying and holding dollars and other fiat currencies. No one knows how high they will go, or how long it will take before they begin to fall again. But it is a speculation in a highly volatile commodity that has terrible fundamentals and is undergoing a powerful short squeeze. It is playing with fire, and it will take both luck and skill to make a profit and keep it.

Gold on the other hand is just a sound money. Holding it will not make you rich, but will keep you from getting poor. It will not build anything, employ anyone, or pay any interest. But it will retain its value. It is true cash that can be traded for enough local currency to buy what you need any place at any time.

If you have experienced large paper losses in your securities portfolio, be sure to evaluate those losses in terms of gold. Remember that the rising dollar may make your losses look bigger than they really are. Be sure to honor your stops: exit positions to preserve your capital, don't go on hoping they will recover. Look at each position and ask, "If I had the cash, would I buy this today, knowing everything I know about the security, the economy, and my own risk preferences?" If the answer is "yes", then keep the position; otherwise close it out, whether at a loss or a profit.

Take advantage of the dollar's rise to accumulate solid assets like gold (your cash position) and stock in the world's best companies, to buy debt-free real estate and to diversify yourself internationally. Invest in yourself. Learn a new skill or a new language. Travel. Improve your health. Exercise. Meditate. Start a business that can be profitable on a small scale without needing to take on debt, one that can exploit the market gaps that will be left as large old-line companies burdened with debt and union contracts go under. Or start an information publishing business to share what you've learned with others and help them weather the storm, prosper and become happier and healthier.

The bottom line is that health and happiness come first. Spend time with your family! Time is a tricky asset… as we grow older, we have less and less of it, and each second becomes more precious. Spend it wisely. Never confuse happiness with financial success. And never confuse your dollar net worth with your true wealth as measured 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!

Silver has historically been both a monetary metal and an industrial metal. Prior to 1872, the prices of both gold and silver were heavily supported by governments worldwide for monetary reasons. Silver has now lost most of it's monetary use and is almost exclusively industrial, unlike gold, which has most of it's above ground supply sitting in the vaults of governments, banks and individuals in the form of bars and coins.

Silver consumption is skyrocketing due to worldwide demand for consumer electronics and power, communications and computing infrastructure, although much of the silver "consumed" in industrial usage is eventually recovered through recycling. On the supply side, most silver production is a side-effect of mining other industrial metals such as copper, zinc and lead. These factors give silver a complex supply-demand picture, and a relatively volatile price when measured in gold, at least since 1872.

It certainly looks like silver is at the low end of it's range at the moment, and headed up. Looking at the "tops" in 1872, 1919 and 1968 it would be tempting to project another top between 2015 and 2020, somewhere north of 1.5 grams per ounce – a potential return of 140% over a 10 year period, given the current silver price of .628 grams.

Stocks are certainly much more volatile, as you can see in the chart of the Dow Jones Industrials. This means the opportunity for larger gains, but also the risk of larger losses. Using similar cyclic logic on the DJIA, seeing bottoms at 1932 and 1980, and tops at 1929, 1966 and 1999, it is again tempting to project the next bottom between 2010 and 2020 somewhere south of 100 grams, with the next top possibly around 2,200 grams but probably not occurring until 2032 or later. With the Dow currently around 370, these would be huge swings – down 75% and back up over 2000%!

Since 1991, silver is up about 80% from .346 to .628 grams per ounce. Over that same period, the Dow is up from about 214 to 370 grams – around 70%. But during those years, the stock index rocketed to 1,400 before falling back to 370. Looking forward, I see support at around 300, 150 and 50. That's a long way down.

For the next 5 to 10 years, I'd much rather be long silver than large cap stocks!

PS – One more thing I neglected to mention… companies can and do go bankrupt. That means their stock can become worthless, wiping out your investment entirely. Zip. Nada. Zilch. Goose-egg.

Even silver mining stocks can and do go belly-up. Physical silver cannot. It will always be one of the highest conductivity metals (both in terms of electricity and heat), it will always take an extremely high polish, and make beautiful jewelry. Its value in gold may rise and fall according to supply and demand, and be influenced by the availability of other alloys and the discovery of other uses, but it will never go to zero. Something to keep in mind in the perilous times ahead.

From a March 11, 2008 story in the Financial Times:

As stated in dollars:

Wall St enjoys best one-day rise since 2002
By Chris Bryant in New York
Published: March 11 2008 13:01 | Last updated: March 11 2008 20:41

US stocks enjoyed their best one-day advance in more than five years on Tuesday after the Federal Reserve announced a $200bn plan to boost liquidity at troubled financial firms.

Banking stocks surged with financial firms chalking up gains of more than 10 per cent, as traders rushed to cover short positions. The central bank plan helped allay fears that liquidity pressures were spiraling out of control.

Energy companies and other commodity producers were among the best performers as crude oil surged to another record.

The S&P 500 closed up 3.7 per cent at 1,320.63 points, its best performance since October 2002. The Nasdaq Composite soared 4 per cent to 2,255.76 and the Dow Jones Industrial Average climbed 3.6 per cent to 12,156.81 points.

The co-ordinated central bank announcement was a welcome salve for equity investors alarmed at the pattern of recent selling.

Until Tuesday the market had retreated for three successive sessions as investors were unnerved by reports of margin calls at hedge funds and soaring home foreclosures.

Tobias Levkovitch, chief US equity strategist at Citi Investment Research, had warned that “hopelessness” was setting in.

Restated in gold:

Wall St enjoys best one-day rise of the last three weeks
By Chris Bryant in New York and Charles Vollum in Honolulu
Published: March 11 2008 13:01 | Last updated: March 11 2008 20:41

US stocks enjoyed their best one-day advance in more than 3 weeks on Tuesday after the Federal Reserve announced a plan to bail out troubled financial firms that will cost 6,413 tonnes of gold – an amount equal to 79% of the current US gold reserves.

The value of the US Dollar (32.07 mg of gold, down 0.02 mg) was almost unchanged by the announcement, but banking stocks surged with financial firms chalking up gains of more than 10 per cent, as traders rushed to cover short positions. The central bank plan helped allay fears that liquidity pressures were spiraling out of control, but astute observers know that the additional liquidity will soon show up in further declines in the value of the already beleaguered Dollar.

Energy companies and other commodity producers were among the best performers as crude oil moved up slightly to 3.487 grams per barrel. Crude prices are still about 5% lower than at the start of 2008, and more than 30% lower than their high of 5.049 grams on August 30, 2005.

The S&P 500 closed up 3.6 per cent at 42.347 gold grams, its best performance since February 13th. The Nasdaq Composite soared 3.9 per cent to 72.332 and the Dow Jones Industrial Average climbed 3.5 per cent to 389.813 gold grams.

The co-ordinated central bank announcement was a welcome salve for equity investors alarmed at the pattern of recent selling, but experts warn that this relief will come at a high price as it depresses the value of the currency.

Until Tuesday the market had retreated for three successive sessions as investors were unnerved by reports of margin calls at hedge funds and soaring home foreclosures.

Tobias Levkovitch, chief US equity strategist at Citi Investment Research, had warned that “hopelessness” was setting in. He may yet be proven right, as even after today's bounce, the markets stand more than 20% below their values starting the year and more than 72% below their all time highs of August 1999.

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!

For the most part, commodities have stayed reasonably priced. Crude oil, gasoline, silver and platinum are all trading in the ranges they have occupied for several years. And even uranium, which saw a tremendous spike in 2007, has returned to about 3 grams per pound.

There are lots of opportunities out there. Just be careful to look at the true value of what you're buying – as measured in gold – and don't be fooled by the inflating dollar prices that are sure to follow in the wake of the monetary stimulus that is likely to be unleashed in the coming months.

ps – There are problems with the automatically generated charts for CAD, Copper and Wheat. I am working to update these so they will display properly. I'll let you know when they're working again. Thanks for your understanding!

I'm not too worried about one-day wonders (or horrors.)  I'm worried about the steep drop in the value of dollar denominated assets of many types, including large industrial stocks, since 1999, and as the dollar continues to shrink in value, it's more important than ever to keep your eye on the ball, and keep your investments growing in gold value!

You can use a strategy that protects you, like trailing stops measured in gold.  Or invest in stocks that are rising in a falling dollar environment – mainly resource stocks, value plays and well managed, fast growing small caps.  Whatever your strategy, I can help with custom charts to keep you focused on the true gold value of your investment options.

From 1904 to 1929 the Dow grew 12 times in value from 47 to 568 gold grams, then gave up 89% of that gain, ending at 64 grams in 1933.  In the next phase, the Dow grew almost 14 times, to 893 grams in 1966.  This was followed by a long decline, losing almost 96% of it's value, finally bottoming around 37 grams in 1980.  Then the next bull market emerged, growing over 37 times to 1,393 gold grams in 1999.  The 8 years following this all time peak have been a downward march, representing a loss of almost 56% to the August 31, 2007 close of 618.262 gold grams.

What will the future hold?  I would love to hear comments from technicians on this topic… But if the last two market cycles are any guide, I suspect we will see the Dow trading below 200 gold grams sometime in the next 5 to 10 years, and it may not be until around 2035 that a new high is made.

There are many roads that could lead to the 200 gram level; the Dow could move sideways as the value of the dollar shrinks, or the Dow could keep making "new highs" in terms of a plummeting dollar, or the dollar could stabilize or even strengthen while the Dow collapses in nominal terms.

But if your goal is to build your real wealth, the key is to keep your eye on the ball: investing in assets that are growing in gold value, regardless of their price as viewed in the fun-house mirrors of fiat currencies.  The Custom Chart service can help you identify those opportunities, and we will be bringing more tools online in the future as well.