Saturday, May 31, 2008

Gold's past and present

Dear Jim,

A review of the 1970’s shows a period much like the current time. The background of the period was when inflation was rising along with oil and gold. The dollar was generally declining and politicians were all over the media talking about how inflation would be cured in no time. When this didn’t work they started with statements saying they would make gold sales from government inventories (and they did). They went to the media and said gold was a barbarous relic, speculators are destroying the economy and should be punished, congress and the executive branch are blameless, we have not hurt the economy with our monetary and fiscal policy and many more such witticisms.

  1. Gold went from an average price of $35.94 in 1970 to $120.17 in July 1973; an increase of 233%.
  2. Then it fell from $120.17 to below $95 by Nov 1973 for a decline of over 20% in 4 months.
  3. In March 1975, COMEX gold peaked at $187.50 for a rise of over 90% in 17 months.
  4. In August 1976, COMEX gold bottomed at $101 for a 46% decline in 17 months, during this time gold had moved little for the previous 2 years and nine months. Then it began to move rapidly as US inflation began to be a problem in 1977, 1978 and 1979.
  5. In October 1978, COMEX gold peaked at $249.40 for a rise of 147% in 26 months. By this time inflation in the developed world was high and rising much like inflation in the developing world is today.
  6. In November 1978, COMEX gold bottomed at $191.20 for a decline of 24% in one month. Inflation continues to be a problem.
  7. In January 1980 COMEX gold peaked at $873, an increase of over 350% in 14 months. After gold peaks, inflation begins to moderate. Paul Volcker has taken over at the Federal Reserve and administers some strong anti-inflationary interest rate increases which lead to a recession. He is a strong and steady force for moderation in money supply growth and reduces the public’s inflationary expectations.

In my opinion, we are at the beginning of a period of inflation in the emerging world that may be the equivalent of early 1978 in the developed world. The developing nations are making the same mistakes with price controls which incentivize consumption, export restrictions which incentivize global hoarding, tariffs and many other artificial boundaries which create market dislocations and lead to higher prices.

We can be sure that we will see the old stand bys: government threats of sales from their inventories and restrictions on trading commodities in many parts of the world. None of this will work until they implement higher interest rates and other tight monetary and fiscal policies which will slow economic activity and moderate inflationary expectations. The result will be an end to inflation.

Between now and the time that they implement these policies (I don’t know how long it will take them to get wise) we will see more inflation and much higher gold prices. The primary purchasers of gold will be the newly wealthy citizens of the emerging world.

Respectfully yours,
Monty Guild

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