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Last Updated: Sep 25th, 2006 - 11:36:04 |
By Kevin Kerr
CBSMarketWatch.com
Friday, May 26, 2006
NEW YORK -- In the currency world, the dollar is often referred to
as "invincible" or a "flight to quality" instrument. Don't bet on it.
A country saddled with debt, ongoing problems with global diplomacy,
and an economy almost solely based on credit -- and the dependence
on the ability to print more money at any time -- hardly exhibits
the traits of a "flight to quality" instrument.
In his eye-opening book "Demise of the Dollar," Addison Wiggin
writes: "The Great Dollar Standard Era is a direct result of the
removal of gold as the underpinning of the world's currencies. ...
The vast overprinting of currency will inevitably debase the value
of the U.S. dollar, and because so many foreign currencies are
pegged to the dollar, the currency of those nations as well."
Throughout the 1970s and early '80s, U.S. investors were filled with
fear that the greenback would continue to lose purchasing power. Few
had confidence in the government's ability to limit the expansion of
the money supply, culminating in a rush to buy precious metals from
1979 to 1980. I remember my father buying gold ingots and Indian
Head gold coins. Everyone had them.
At the time the Federal Reserve did what it could and put the brakes
on money supply growth by putting extremely high interest rates in
place. The Fed's goal seemed to have been reached by 1982 and the
rate of increase in the money supply was on a downtrend as interest
rates fell from their highs, and the specter of inflation
evaporated.
This was the end of the commodities boom cycle and investment
capital began moving from commodities into other financial assets.
The great bull market in equities was underway while commodities
more or less languished for the next two decades.
Chris Mayer, editor of newsletter Capital and Crisis, writes
that, "Since the end of the Bretton Woods agreement in 1971, the
dollar has been an irredeemable currency, no longer defined or
measured in terms of gold. Nonetheless, in an ironic twist, it has
become the world's dominant currency and the core reserve asset of
central banks all over the world. It has replaced gold as an
international currency. The transformation has not happened without
consequences. One of these is that the discipline imposed by the
gold standard is no longer operative. Another consequence, related
to the first, is the profound effect this has had on international
trade."
Recent exploding interest in gold is no coincidence. "Gold is the
best money, because for centuries, as a result of countless
individual choices, it has evolved as such," Mayer reasons.
Gold may seem antiquated and a relic of days gone by; an impractical
alternative -- but it's far from that. Central banks are adding to
their reserves -- and so are individuals. Remember, gold has been
around for millennia while the mighty U.S. dollar has only managed
to survive a couple of hundred years -- a rough couple of hundred
years at that.
Mayer puts it best when he quotes Murray N. Rothbard. "Though the
old classical gold standard was not perfect, it was, in Rothbard's
words, 'by far the best monetary order the world has ever known, an
order which worked, which kept business cycles from getting out of
hand, and which enabled the development of free international trade,
exchange and investment.'"
Gold may not be on a perfectly straight road to higher prices as
evidenced by the volatility of late, but one thing is clear: Gold is
the best alternative to the current fiat fiasco of fiscal policy.
The U.S. dollar is on trial in the world financial markets and I for
one am not waiting for the verdict. I am hedging the outcome with
gold now while it's still very cheap.
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Kevin Kerr is editor of MarketWatch Global Resources Trader.
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