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Gold Is Shining Again (After the Fed Killed King Dollar…Again)

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For weekend reading, Gary Alexander, senior writer at Navellier & Associates, offers the following commentary:

After fueling inflation in 2021, the Fed’s greatest hits of 2022 are to destroy the housing market, injure the stock market, end a 40-year bond bull market, puncture the Bitcoin bubble, drive up the interest on the federal debt by a factor of about five, and now it has even managed to dethrone King Dollar, once again.

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For the first 125 years of American history, 1788 to 2013, the dollar was stable under a program of gold and silver coinage drafted in 1792. Since the creation of the Federal Reserve in 2013, however, the U.S. dollar has lost about 96% of its value to the Consumer Price Index, and about -99% to an ounce of gold.

Consumer Price Index

However, there are short-term spurts when the dollar can appreciate against other global paper currencies.

At the end of the third quarter, the U.S. Dollar Index (DXY) peaked at 114, up from 90 at the end of May 2021 – rising nearly 27% in 16 months – due mostly to zero interest rates in Europe and Japan. In the last four months, however, the European Central Bank has raised its rates faster than the Fed, so the DXY is down over 10% to 102, while gold is up 19% and silver has risen 27%.

Some other key commodities have not followed suit: Crude oil has actually fallen 3% in those same four months, thanks to President Biden trying to buy votes from motorists by draining our Strategic Petroleum Reserve (SPR) by record amounts.

SPR

As Ed Yardeni and many other analysts have pointed out, gold tends to trade in a negative correlation to the U.S. dollar, so when gold was declining (in dollar terms) during the first nine months of 2022, it was rising fairly briskly in terms of the euro, pound, and yen.

Here is Ed Yardeni’s long-term (nearly 30-year) chart of the inverse relationship of the price of gold (blue line) to the U.S. Dollar exchange rate (red line).

price of gold

In addition, it is now far more widely assumed, by a growing army of analysts, that the Fed is far closer to the end of its rate-raising cycle than previously thought, and that is good news for gold. Even though gold reached its all-time high (in real terms) in 1980, when U.S. interest rates were also at their recent high, the general assumption is that gold offers no interest or yield so it can’t perform as well when rates are high.

In the third quarter of 2022 (the latest quarter with compete statistics available), central banks bought a record high amount of gold, and in the fourth quarter China entered the fray, officially, although they had been rumored to be in the central bank accumulation market through clandestine means in previous years.

central banks bought a record high amount of gold

Long before its invasion of Ukraine, Russia began selling dollars to stockpile gold to defend its ruble in any future crisis, so that Russia could make the ruble convertible to gold on a limited basis last year:

Russia began selling dollars to stockpile gold

At Navellier, we are one of the few stock-centric advisory services that respects gold for its historic role as a currency alternative. Gold has outperformed all currencies over time. It is not meant or designed to compete with stocks, as some “gold bugs” mistakenly believe. It is a superior currency alternative over time, even to the “new kid on the block,” the cyber-currencies.

For those who feel that the coming tax consequences or regulation of Bitcoin and other electronic money are a serious federal intrusion into your financial freedom, you ought to consider what the Feds have done to punish gold hoarders over the years.

 

America’s 41-Year War Against Gold Investors, 1933-1974

When FDR assumed office in 1933, he said, “We have nothing to fear but fear itself,” but he soon added two new fears – (1) we couldn’t access our money in the bank, since FDR declared a bank holiday by closing all banks for four days, and then (2) he called in all gold coins and bars under penalty of fines up to $10,000 and 10 years in jail.

Later, on FDR’s 52nd birthday, January 30, 1934, once most of those coins and bars were in government hands, FDR revalued gold from $20.67 to $35.00 per ounce, a 69% return for the Feds – and a birthday gift to FDR denied to all other Americans – devaluing the dollar by 41%.

FDR

Gold was near $200 when it was legalized 41 years later. Americans missed the 10-fold gain from $20 to $200, so don’t complain about Bitcoin regulations. Whatever happens is small potatoes compared to gold.

Late January is an important historical time for gold from many angles:

  • January 21 marked gold’s high-point in real terms at $850 per ounce (a one-day spike) in 1980.
  • January 22 was the start of China’s ‘Year of the Rabbit’ in 2023, an auspicious gold-buying day.
  • January 24 marked the 175th anniversary of the discovery of Gold in California in 1848.

The world changed on January 24, 1848, on California’s American River. It took over a year for the 49ers to finally make their way west, but about 2% of American males tried one of three treacherous routes – over the Panama isthmus, across the American plains or around the tip of South America by ship.

Thousands of immigrants from China, Germany, and almost every other nation also came to California, but the real winners were the shovel and pick merchants, the food importers, and Levi Strauss’ jeans shop.

Such is the lure of gold. Nobody ever sailed around Tierra del Fuego to mine a bitcoin – not yet anyway.