This is not a Halloween fright event
2011-OCT-20
Despite the drop in the gold price in September, GoldMoney's Fear Index remains above the 3% level, which should indicate a high alert to anyone paying attention.
Growth in the money supply is accelerating, with M2 starting to follow the upward spike in M1, which had been shooting up since 2010. Even M3 is showing accelerating growth for the 8th month running, albeit at a lower pace than the other Ms. Monetarists who have pointed to plummeting velocity as a buffer between monetary inflation and consumer price inflation should take note; money velocity is also showing signs of picking up.
Price volatility is to be expected. In fact, an increase in volatility is the easiest factor to predict as a consequence of increased money printing, as new hot-money runs around looking desperately for security and a rate of return, but both are increasingly difficult to find as one market after another falls to interventions or blows up in speculative bubbles.
Even the old adage that in troubled times “cash is king” falls by the wayside because in a world of fiat currencies, cash is not what it used to be, unless of course you avoid debt-money, which is money-by-decree. You can find a safe haven in free market money, which is the premier money chosen by people all over the world for thousands of years: gold and silver.
The history of the Fear Index proves that when times are tough, risk increases, and paper assets evaporate, gold is indeed king. In the words of J.P. Morgan in 1912: “Gold is money and nothing else”.
Economists seem to have forgotten this truth; even some goldbugs often call gold “an investment” or see it as a commodity. More bizarrely some economists, who should know better, have tried to equate gold with diamonds by invoking Hotelling’s rule as a good model for its price, while simultaneously referencing that curious exchange in which America’s central banker cited “tradition” as the reason for holding gold. Anybody even remotely familiar with monetary history will recognise his opinion for the red herring that it is.
Gold has been free market money for thousands of years. It was official money until four decades ago, and it still performs the functions of money better than any fiat currency: It is a superior store of value, unit of account and even though rarely used today in its third role, it is still a medium of exchange. So there is no need to resort to obscure academic models to understand the price of gold in dollars. Just rely on Gresham’s Law, which has been known to economists since the 16th century, that bad money drives good money out of circulation. Its exceptional track record makes clear that gold is not a “wonkish” distraction.
The purpose of the Fear Index is to measure gold’s value, and the way to achieve this objective is to compare it to its peers, namely, other forms of money, or in this case the US dollar.
What is the Fear Index telling us? That gold is still very much undervalued in historical terms when viewed in terms of dollars, which is the world’s reserve currency. If the dollar money supply had to be once again 40% backed by gold, the average during the classical gold standard, the dollar price of an ounce of gold would have to be more than 10 times what it currently is. Of course that price calculation is based on the unrealistic assumption that there is no more money printing in the future. It also assumes that the US gold reserves are unencumbered and available for backing the dollar, and not just a forgotten and neglected “tradition” for which the American people hold only a pawnbroker’s chit.
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
