2011-SEP-20
James Turk’s Fear Index rose to 3.36% in August. It is the highest level since the months immediately following the October 1987 stock market crash, signalling today as it did back then, the gravity of the financial and economic worries that beset the world.
Before the US housing bubble burst in 2007, a small minority of economists who understood the nature of our fiat money system and the boom-bust cycle, pointed out that rapid money creation combined with low interest rates would make the coming bust more severe than any in decades. Depending on the actions taken by central banks, their work suggested we could see a 1970s type stagflation, a deflationary 1930s like depression or a crack-up boom leading to a change in the monetary system. But regardless which scenario unfolded – and it looks like a crack-up boom will be the likely outcome – gold would play an important role.
As the present ongoing debt crisis melts the value of paper promises and fiat currency almost as fast as central banks can inflate the money supply by turning bad sovereign debts into currency, gold gives us a loud message. It tells us how central bank actions are impacting the world’s trust in government fiat currency. The gold price, however, does not provide the whole picture because it does not accurately reveal gold’s value, which explains why the Fear Index is so useful. By comparing the dollar value of the US gold stock to the broad dollar money supply, the Fear Index eliminates the distortions in the gold price caused by inflation and other dollar debasements that may make gold look ‘expensive’, when in fact it remains good value.
Why gold? Because physical gold owned outright is nobody’s liability, it is the ultimate safe haven. Gold does not default. It does not have counterparty risk. In a world where promises are broken and trust evaporates, gold is a bastion of objective, real, tangible value.
The Fear Index has passed the 3% mark, confirming its multi-year uptrend through a period Keynesian economists term “the great moderation”. However, the real message is not how far gold has advanced, but how far we have yet to go.
The Fear Index is still a long way from the 9.4% level at which it peaked in 1980, at the end of the world’s last decade-long bust. It is even further still from the 29.8% level reached at the end of the Great Depression, not to mention the 40% gold backing typically maintained during the classical gold standard (a ratio that Switzerland followed until May 2000).
Of course, as more central bank printing increases the money supply further, the goalposts keep changing. Regardless, the Fear Index will always provide a useful indication of gold’s relative value.
The mainstream financial press is only just starting to appreciate these facts, something highlighted by Bloomberg picking this as their chart of the day recently, definitely not a common sight in the past decade of gold’s bull market.
James Turk has been writing about the Fear Index for years, as you can see in James Turk’s Free Gold Money Report.
gold price – goldmoney.com, M3 – shadowstats.com, US Gold reserve – US Treasury Bulletin
