THE VALUE VIEW GOLD REPORT
This article will hopefully be the first part of a series
on the dominant global money trend, so important to
Gold investors. Around the world investors have been
repositioning their financial wealth in currencies that
are expected to serve well as a store of value. In most
countries of the world, citizens understand that money
rarely retains its value. U.S. dollar based investors
and businesses are some of the last coming to this understanding.
While this writing may seem elementary to some, new
investors are now clearly evident in the Gold information
network. To them these articles are primarily dedicated.
Full appreciation of the risk in currencies will not
likely come to U.S. dollar based investors and businesses,
anywhere in the world, until such time as a significant
devaluation of the dollar occurs. Gold investors have
understood the situation for a considerable time, and
many have moved to protect their wealth by investing
in Gold. Others are doing the exploration and study
necessary to understand the importance of Gold in a
portfolio. One senses a growing body of "Gold students"
At the risk of angering more than a few, a distinction
is drawn between Gold, a real asset, and stocks, which
are financial assets. Regardless of the outlook for
Gold, stocks are still paper assets. As paper assets,
they represent a residual claim on the income and equity
of a company. As paper assets, their valuation is still
subject to all the vagaries of all paper assets. Stocks
are not an ownership interest in Gold. The stocks, may
in the short-run, trade like "options" on
Gold, fast and wildly, but they should not be the primary
source of an investor's exposure to Gold.
Investors need to understand that the monetary dynamics
in process around the world are extremely positive for
Gold's dollar price. The source of this outlook is a
global reshuffling of money that has been in process
for decades. Investors, therefore, should go to the
heart of the matter, adding Gold to one's portfolio.
Why go to a secondary methodology? Why put someone or
some structure between the returns on Gold and the returns
earned in your portfolio? That said and with enough
stock investors now upset, we can move on to understanding
the situation. Once one understands the global monetary
shift in process, acceptance of this view becomes more
While many readers are seasoned Gold bugs, enough new
individuals are building an interest to justify some
return periodically to the basic fundamentals. The price
of Gold is simply the inverse of the Gold price of a
currency. While that sounds like campaign rhetoric,
the statement is true. Gold at $400 per ounce is the
equivalent of 0.0025 ounces of Gold per U.S. dollar.
Alternatively, one U.S. dollar is equal to 0.0025 ounces
of Gold. The relevant price is Gold ounces per dollar.
The dollar price for Gold is simply a convenient form
of stating the matter. The relationship being discussed
is portrayed in the first graph, and taking some time
to understand it is recommended.
Most have suffered through one class in school where
supply and demand curves were portrayed graphically.
We learned that an increase in supply would cause price
to fall. A reduction in demand would also cause lower
prices. The important matter here is that the price
being discussed in those graphs would be the Gold price
of a dollar, not the dollar price of Gold.
If the supply of dollars increases faster than the supply
of Gold, the price of dollars will go down. Note though
that the price that will go down is Gold ounces per
dollar. Excessive dollar creation might push the price
down to, for example, 0.0022 ounces per dollar. In the
conventional statement of price, that would be equal
to approximately $455. Either price can be found by
taking one(1) and dividing by the other price. Thus,
the declining value of the dollar, in ounces of Gold,
is what pushes up the dollar price of Gold.
An alternative way of looking at the situation is from
the side of the demand for U.S. dollars. Many questions
come in on the bubble phobia of so many Gold investors
and analysts. If a financial bubble bursts in the U.S.,
foreign investors may develop a reluctance to accept
and hold dollars. In the words of an economist, demand
for dollars would fall. If the demand for dollars declines,
the price of dollars will decline. The relevant price
is again Gold ounces per dollar, and that price would
fall. A falling ounces per dollar price implies a rising
dollar price of Gold. Hopefully, this short but meaty
discussion will answer the questions which are in so
The second graph may be an aid in visualizing this
concept. Along the horizontal axis is the Gold price
of the dollar. On the vertical axis is the "demand"
for dollars. Those actual numbers mean nothing as we
simply needed positive and negative values on the axis
to do the graph. Positive numbers indicate positive
demand for dollars. Going up the vertical axis means
that demand for dollars is rising. The reverse is the
situation for the negative values.
As demand for dollars rises, going up the vertical axis,
the Gold price of the dollar increases. If the demand
for the dollar rises, the world would be willing to
pay more Gold for each dollar. Each dollar buys more
Gold. As shown in the previous graph, this means the
dollar price of Gold falls. If the demand for dollars
falls, declining on the vertical axis, the Gold price
of the dollar falls. In this case, the dollar price
of Gold rises. This relationship is what makes all of
the Greenspan Financial Bubbles so dangerous, and why
so many Gold investors and analysts are concerned with
If for any reason foreign investors become reluctant
to hold dollars, the demand for dollars will fall. Bubbles,
economic policy ineptness, or just bad luck could cause
this shift. The bubbles do matter. Fannie Mae's accounting
methods do matter. Monies require confidence to bolster
demand. At present the economic and monetary policies
of the U.S. are built on a willingness to put that confidence
at risk. Ignoring bubbles is not wise.
With all the focus on bubbles we may be forgetting the
global shift away from the dollar that is developing.
Bubble phobia is what day trading is to a multi-year
move in the market. Makes for a lot of fun discussion,
but the trend is where the profits come from not the
trading. That trend, which is the source of Gold profits,
for the dollar is negative and investors should heed
it. Not since World War One have global financial markets
made a shift similar to that occurring in the monetary
However, major differences exist between now and the
early 1900s. One, global financial markets now exist
for money, accessible by almost anyone anywhere. Individuals
around the world can now shift their wealth from one
money to another with the click of a mouse. Two, national
monies were still rising in popularity in the early
part of the 20th century. Today that popularity is fading.
Three, investors around the world are consciously and
actively managing the money exposure of their wealth
with far faster and friendlier technologies. Cell phones
and the internet are clearly an improvement over carrier
pigeons.(And no, I have no idea what technology stock
to buy to get a play on that.) Consumers and investors
are no longer willing or required to keep their wealth
in any particular money, and are exercising that right.
National monies, like either U.S. dollars or Canadian
dollars, are those individual currencies produced by
individual countries. National monies were created for
reasons other than wealth enhancement as we understand
the concept today. National monies were created for
a variety of reasons. Included in the motivations were
the perceived need to foster and manage national economic
growth and to have national identities(Helleiner,1998;Helleiner,2003).
Appropriate attention was not necessarily given to what
might be the standards to which they should be managed
over time. National monies were essentially assumed
to be necessary to be a complete sovereign nation.
The attitude toward the sanctity of national monies
has been changing. On the higher plain, Robert Mundell's(1961)
exploration into optimum currency areas was the effort
that started serious reflection and first elevated the
matter to a higher level, both in the academic and practical
worlds. His receipt of a Nobel prize certainly added
respect to his work. Helleiner(1998) brought attention
to the historical rational for national monies. Motivations
for these creations were as often political as economic.
At the time of their individual births, national monies
were established for what seemed near rational national
reasons. The test of time was not to be so kind.
At the ground level, attention to the subject of national
monies received further impetus in the 1990s for principally
two reasons First, the record of national currencies
was acknowledged as poor(Shuler,2003;White,2003). A
seemingly endless chain of currency crises had developed.
Second, the European Union was soon to abandon individual
national monies in favor of the euro. Never in financial
history have so many national monies been eliminated
in one peaceful moment.
The record of national currencies has been far from
an exemplary one. Table I summarizes a sampling of those
national currencies that have experienced severe stress
and caused significant economic dislocation within the
respective country and/or region. This list is not intended
to include all exchange rate problems, only the major
ones. Not included in this list are those countries
that are minor in importance or have experienced repetitive
problems through inflation, devaluation and confiscation.
Significant Currency Devaluations & Crises
1Dellas & Tavlas
National monies have, on balance, been financial disasters
for those holding them. No wonder skepticism over Federal
Reserve policies is widespread. Individuals around the
world are no longer willing to hold a dubious money.
When the dollar comes again under this cloud of money
disfavor, a significant destruction of the dollar's
value will develop. That is the reason why understanding
that the value of the dollar is the concern for this
era, and so important for the prosperity of investors
A general recognition has developed that money simplification
through elimination of national monies should increase
trade, prosperity, and interchange between peoples of
different countries(Rose & Engel,2002;Mundell,2003).
A record such as that in the above table is not one
that might promote trade, financial prosperity, global
economic progress and general harmony. The European
Union's creation of the euro was in part accomplished
because of the dismal record of currencies. The EU is
coming to be recognized as not a panacea to all the
economic changes needed but as one of many steps toward
removing roadblocks to economic growth in that area(Allegret
& Sandretto,2002). That tendency toward agreement
on the advantages of money denationalization and/or
union is evident by the way individuals and countries
are "voting" with their national monies, but
that is for the next article.
The length of this article has now approached that which
calls for a close, and a quick summary. The 1990's was
an era of an ongoing series of currency crises. For
investors, the key to understanding Gold is the issue
of currencies, more importantly the likely problems
for the value of the U.S. dollar. In the next article
this discussion will be extended to the developments
with the Euro and the meaning for the dollar and Gold.
Comments and questions are encouraged. Those of you
early in your Gold travels and learning have been the
motivation for this writing, so write us. The Gold market
recently has produced some exciting gains, as shown
in the last chart. A new leg on this Gold Super Cycle
may well be developing. Prices for Gold under $400 per
ounce or, as you now know, 0.0025 ounces of Gold per
dollar, will likely not be available in 2005.
Allegret, J.P. & Sandretto, R.(2002). The Euro as
a Stabilizing and Harmonizing Force in the International
Monetary System. Eastern Economic Journal,28,105-120.
Retrieved March 25, 2004 from ABI/Inform Complete.
Dellas, H. & Tavlas, G.S.(2003). Lessons of the
Euro for Dollarization. In Salvatore, D., Deon, J.W.
& Willett, T.D.(Eds.), The Dollarization Debate(pp.283-298).
New York: Oxford University Press.
Eichengreen, B., Rose, A. & Wyplosz, C.(2003). Exchange
Market Mayhem: The Antecedents and Aftermaths of Speculative
Attacks. In Eichengreen, B.(Ed.), Capital Flows and
Crises(pp.99-153). London: The MIT Press.
European Central Bank(2004a). Frequently Asked Questions:
EU Enlargement and Economic and Monetary Union(EMU).
Retrieved August 10, 2004 from http://www.ecb.int/ecb/
European Central Bank(2004b). ECB: The Euro Area. Retrieved
August 19, 2004 from http://www.ecb.int/bc/intro/html/map.en.html
Helleiner, E.(1998). National Currencies and National
Identities. The American Behavioral Scientist,41,1409-1436.
Retrieved December 20, 2003 from Proquest.
Helleiner, E.(2003). The Making of National Money. Ithaca:
Cornell University Press.
Hysteresis.(1993). In Random House Unabridged Dictionary(2nd
ed.). New York: Random House
International Monetary Fund(2004). Retrieved from http://www.imf.org/external/np/sec/pn/2003/pn0390.htm
Mundell, R.A.(1961). A Theory of Optimum Currency Areas.
American Economic Review,51,509-517.
Mundell, R.A.(2003). Currency Areas, Exchange Rate Systems,
and International Monetary Reform. In Salvatore, D.,
Deon, J.W. & Willett, T.D.(Eds.), The Dollarization
Debate(pp.17-45). New York: Oxford University Press.
Oomes, N.(2003). Network Externalities and Dollarization
Hysteresis: The Case of Russia(IMF Working Paper 96).
Washington, D.C.: International Monetary Fund.
Rose, A.K. & Engel, C.(2002). Currency Unions and
International Integration. Journal of Money, Credit
and Banking,34,1067-1089. Retrieved March 25, 2004 from
Schuler, K.(2003). What Use is Monetary Sovereignty?
In Salvatore, D., Deon, J.W. & Willett, T.D.(Eds.),
The Dollarization Debate(pp.140-153). New York: Oxford
White, L.H.(2003). Currency Competition and Consumer-Driven
Unification. Cato Journal,23,139-145. Retrieved March
25, 2004 from ABI/Inform Complete.
Wolf, M.(2004). Why Globalization Works. New Haven:
Yale University Press.
Ned W. Schmidt,CFA,CEBS
is publisher of THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS, to
help investors identify timely points for buying Gold
and Silver. You can join him for the Gold Super Cycle
His monumental report, "$1,265 GOLD", which
has now been read in 12 countries, has 255 pages and
98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at email@example.com.