Bailout Pricetag

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In the post of March 11th, Big Day on Wall Street, I restated a Financial Times news story in gold terms but neglected to translate the Fed's bailout price of $200bn… When I went to make the correction, I was stunned!

On March 11th, 200 billion USD had a value of 6,413 tonnes of gold.

That's a LOT of gold! In fact, the total US Gold Reserve is 8,133 tonnes… so the announced bailout will cost about 80% of the total US gold reserve. In fact, the US Bullion Depository in Fort Knox only holds 4,570 tonnes of gold, with the rest in other vaults, primarily the Federal Reserve Bank of New York's underground vault in Manhattan.

Will Fort Knox be emptied to pay for this massive boondoggle? Of course not!

US Dollars are accounting entries with no intrinsic value whatsoever. The Fed will work all kinds of hocus-pocus – creating them out of thin air and using them to buy the bad loans and other non-performing assets of the banks that are in trouble, restoring their balance sheets to "robust health".

But you can be sure of one thing: in the long run, issuing 200 billion more dollars won't increase the purchasing power of the ones in your bank account!

In the short run, however, the USD could rise quite a bit – maybe 25% – and still be in a bear market. I suggest that you take advantage of any updrafts in the USD (bear market rallies like the one we saw late last week) to build your cash position by selling high-risk high-volatility dollars, and buying gold.

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Unsound Money

You might have noticed that my previous post on Silver and Stocks didn't once mention the US Dollar. Why? Because it's irrelevant. It may go up, it may go down. Most likely down, but so what? I try not to hold any more of it than necessary, unless I have reason to believe it's in an extended uptrend and decide to speculate.

Unlike stocks and commodities such as silver, individual fiat currencies do not have cycles that repeat over time – they are introduced, invariably debased at varying rates, occasionally supported for short periods, and eventually replaced as they leave the world stage worthless. This is the pattern that repeats, over and over through the centuries. The details are driven by the exigencies of war and politics. There is nothing new or different about the current US Dollar, Canadian Dollar, Euro or Yen.

Rome, France under John Law, Argentina, and the Weimar Republic in Germany are often cited as examples of failed fiat money systems. Of course the US had its own Continental Dollar (which created the saying "as worthless as a Continental") as well as Lincoln's "greenbacks" and the currency of the Confederacy.

Now, you might say that these are just banana republics and ancient history. Not so! Rome was the biggest economic powerhouse the world had ever seen, and it took over 700 years for its money to go from "good as gold" to worthless. Ever heard the phrase "as rich as an Argentine"? And France and Germany were counted among the world's most powerful economies; Germany, after several failed monetary regimes, is once more the mainstay of Europe.

"Yeah, but that was in the old days. It's all different now…", I can hear someone muttering. I don't think so – as I am writing this, Zimbabwe's Dollar is going through the same fate. Once a shining example of prosperity for the rest of Africa, it took about 13 ZWD to buy one gram of gold in 1980. Today it takes more than 225,000,000 ZWD to buy one gold gram, and inflation in Zimbabwe has been estimated at over 100,000% per year and rising.

My advice? Keep on hand what you need for your day-to-day transactions and to repay your fiat currency debts. Anything more than that is a wild speculation… too risky for my taste! And please don't be fooled by FDIC insurance on your bank accounts – they only promise to give you back your dollars. There is no guarantee that those dollars will buy as much as they did when you deposited them. Your FDIC insured account with a healthy $100,000 balance was worth 3,718 grams of gold on Dec 31, 2007. Today it is worth 3,089 grams. Think about that: a 17% loss in less than 3 months, in a fully insured cash account. And you can't even deduct the loss for tax purposes!

The point of all this? Forget the incredible shrinking dollar. Don't wait for some monetary messiah to return the world to sound money – take control of your own future, right now! Track your investment performance in real terms and always make your investment decisions by pricing them in gold. Say "BUY!" to things that are growing in gold value, and say "SELL!" to those that aren't. It's as simple as that.

Your financial future depends on it, and I'm here to help.

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Silver vs Stocks

I realized yesterday that it is easy to calculate the price of an ounce of silver in gold grams if you know the gold-silver ratio (Duh!) You just divide the ratio into 31.1035 (the number of grams in an ounce.) And the ratio is well documented throughout much of history. For instance, the website Measuring Worth provides annual values for the gold-silver ratio going back to 1687. I've used this data to create a new long term chart showing the price of silver from 1700 to today, and added it to the Silver chart page.

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.

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Thousand Dollar Gold

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So what? It used to take about twenty US Dollars to buy an ounce of gold. Now it takes over a thousand of them.

That ounce of gold hasn't changed one bit. In fact, an ounce of gold is still an ounce of gold, just as it has been for thousands of years. It can be used to make the same amount of jewelry, it can be beaten out into the same amount of gold leaf, it can plate the same amount of wire, and in general, can be exchanged for about the same amount of other goods and services as it always could. It buys much more of many items than it used to, thanks to global trade, the productivity improvements of automation and the wonders of Moore's Law.

Unfortunately, those same factors have enabled the mass production and distribution of huge quantities of US Dollars, as well… and this is not good for the value of a currency, however convenient it may be in the short term for bankers and politicians.

Remember that dollars are created and destroyed by fiat. They are mostly accounting entries that can come and go at the speed of light, changing the purchasing power of your bank accounts and investments without notice. Don't be fooled by this slight of hand – keep your eyes on the true value of things you care about by pricing them in gold.

Note that many charts on the site have been updated to March 14th. I am still working on getting the wheat, copper and CAD charts working – please be patient.

If you have questions or comments please email me or call the hotline at 888-868-5656.

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Gas Price News

Another fun look at the news, without the distorting effects of the US Dollar. For context, be sure to check out the charts on crude oil and gasoline.

From a March 11, 2008 story in the Associated Press:

As originally stated in dollars:

Gas Prices Rise to New National Record

NEW YORK (AP) – The cost of filling up the family car climbed to a record high Tuesday, adding to the challenges consumers already face with falling home values and rising food prices.

Gas prices at the pump rose overnight to a record national average of $3.2272 a gallon, according to AAA and the Oil Price Information Service. That's a tad higher than the previous record of $3.2265, set last May.

On Tuesday, light sweet crude for April delivery surged to a new trading record of $109.72 on the New York Mercantile Exchange before retreating after the Energy Department and International Energy Agency cut crude consumption forecasts for this year. Futures settled 85 cents higher at $108.75 a barrel, a new record.

Where gas and oil go from here is anybody's guess. Many analysts expect prices to moderate, while others predict oil could keep rising to $120 a barrel, or higher. And with demand for gas expected to rise as warm weather arrives, analysts say pump prices could spike as high as $3.75 a gallon, regardless of what happens with oil prices. The Energy Department on Tuesday raised its forecast of how high prices will rise this spring by a dime to $3.50 a gallon.

Restated in gold:

Gas Prices Rise, but Remain Among the Lowest in the Last Decade

NEW YORK (AP/PricedInGold) – The cost of filling up the family car rose slightly Tuesday, but not enough to add to the challenges consumers already face with falling home values and collapsing stock portfolios. In fact, falling food prices and the lowest gasoline prices since 1996 are among the brightest spots in the consumer's financial picture.

Gas prices at the pump rose overnight to a national average of 103.6 mg of gold per gallon, according to AAA and the Oil Price Information Service. That's less than half of the recent high of 217.4 mg, set back in September of 2005.

On Tuesday, light sweet crude for April delivery rose to 3.518 gold grams on the New York Mercantile Exchange before retreating after the Energy Department and International Energy Agency cut crude consumption forecasts for this year. Futures settled 25 mg higher at 3.487 a barrel, about 5% below their price at the beginning of the year.

Where gas and oil go from here is anybody's guess. Many analysts expect prices to fall, possibly retesting 2007 lows around 2.5 grams, while others predict oil could keep rising to retest the 2007 highs of 3.85 grams a barrel, or higher. Even with demand for gas expected to rise as warm weather arrives, analysts say pump prices are unlikely to rise above 125 mg a gallon and more likely to drop below the 100 mg level, regardless of what happens with oil prices. The Energy Department on Tuesday raised its forecast of how high prices will rise this spring to 112.3 mg a gallon.

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Big Day on Wall St

Another story that caught my fancy, restated in terms of gold for your entertainment. Enjoy!

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.

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How to read the news

Here are excerpts from three news stories from 7-Mar-2008 Marketwatch.com, as they were written, and as I would read them. In each case, I have simply taken the USD figures given in the story and converted them to gold grams, then reworded the story to fit the new numbers. In some cases, I've added YTD data to put the reported figures in a larger perspective.

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!

More on How to read the news

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New Home Price Chart

I've added a new chart to the US Home Prices page. The Case-Shiller Home Price Index is calculated on a monthly basis by Standard and Poors, using a sophisticated algorithm. Several major markets are tracked and then combined into an overall composite index.

The index, called the CSXR, is scaled with 100 as the value for January 2000. I have taken the index values, multiplied by the gold value of the US Dollar for the month in question, and rescaled the result so that January 2000 again has index value 100.

At the end of 2007, the index stood at 74.3, down from a high of 146 in 2005, and about the same as its level ten years earlier, at the end of 1997. Based solely on the decline of the USD in January and February of 2008, the index should be about 60 at this point, and lower if home prices have fallen, as I expect they have on many of the tracked markets. This looks like an area of strong support from a technical perspective – but will it hold?

Never forget that any value given in dollars is "subject to change at the whim of the management". Keep your eye on true value: price things you care about in gold.

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Chart Updates

As the likelihood that an official "recession declaration" will be issued for the US economy increases, true prices of many items continue to fall. Gasoline, for example, is now at it's lowest price in about 10 years. Uranium also continues to slump, ending January at 2.63 grams per pound.

Stocks (as indicated by the Dow Jones Industrials at 474) were last this low in September of 1996. But in those days, they were on the way up – about 15 years into a 20 year bull market – just leaving the foothills behind in the dramatic run-up to almost 1400 gold grams in 1999.

Some commodities have rallied, however. Platinum in particular has shot up dramatically – from about 54 to over 70 grams/oz in the last month. Silver is also showing some strength.

Going forward, remember that the tax refunds, rate drops, and mortgage relief plans all amount to devaluation of the money in in your pocket and in your bank and brokerage accounts. Never trust values given in fiat currency: they are subject to the whims of those who issue that currency. Keep your eye on the true value of your investments and assets – their value measured in gold.

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2008 Gets Underway

With the US Dollar making new lows, and the stock market in disarray, 2008 is off to a shaky start. The Fed is faced with few options, none of them very pretty. If they cut rates to try to soften the recession and prop up asset prices, they further lower the value of the currency those assets are priced in, hurting their true value. But the political consequences of doing the right thing – letting a recession wring the weakness out of the economy – are just too painful to seriously contemplate, especially in a presidential election year.

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!

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