The Barbarous Relic takes a Beating

Fantasies, failings, fraud, and folderol.  These are the elusive straws we grasp for when contemplating the marvels of modern day money.  There’s little hope we’ll ever come up with a solid handful we can pull ourselves up by.

Still, we continue to mull things over like a freshman math major mulling over Fermat’s Last Theorem.  With a little luck we may eventually have a breakthrough.  Where to begin?

President Nixon’s dirty deed in 1971 is as good an entry point into the review as any.  Recall that seizing the unique opportunity of the breakdown of Bretton Woods, Tricky Dick severed the last vestiges of gold backed money and stiffed the world unconditionally.

No longer could foreign governments redeem the dollars they acquired through trade for gold.  The world’s currencies became wholly the fiat – paper money – of governments. Since then currencies have floated like anchorless buoys, rising and falling on a sea of surging currents.

Without restraint the darnedest things were made possible.  International inflows and outflows were now practically without limits.  Subsequently, the international trade imbalances that have resulted are astounding.

Remarkable and Unexpected

Public and private debts have also gone parabolic.  So, too, stocks, bonds, real estate, medical care, and humungous Balloon Dogs have become farcically expensive.  Conversely, a million bucks is no longer worth a million bucks, if you know what we mean.

Naturally, in the decades following Nixon’s breach of contract there could be only one final outcome.  In fact, what was supposed to happen next was practically written in stone.  Connecting the hip bone to the leg bone it was near guaranteed the world’s monetary system would blow up in a giant A-bomb like fission reaction.

At first things unfolded according to script.  Inflation jumped through the 1970s.  Gold ran up from about $42 an ounce in 1971 to over $850 in 1980.  Yields on the 10-year Treasury note exploded above 15 percent in 1981.  The paper money experiment was reaching its quick demise.

But then something remarkable happened.  The dollar didn’t conflagrate.  It sustained.  Treasury yields slowly receded and gold prices slid down for the next 20 years.

At the turn of the new millennium gold finally regained some shine while the dollar lost its luster.  Gold rallied off the 2001 low of around $255 an ounce to over $1,900 in August 2011.  Once again it appeared the world’s paper money system was coming undone.

Yet then, just when it seemed gold could only go up, something unexpected happened.  It went down.  First it was slammed down to about $1,200 an ounce, where it then stumbled along for the last several years.  Certainly, a new bottom was forming…or was it?

The Barbarous Relic takes a Beating

On Monday, reported Reuters, gold “took its deepest dive in years and hit five-year lows, with many dealers bracing for more losses on expectations for a rise in U.S. interest rates and subdued demand from India.  In what traders called a ‘bear raid,’ sellers on Monday dumped an estimated 33 tonnes of gold in just two minutes on exchanges in Shanghai and New York, sending prices on a nearly $50 downward spiral from which they never fully recovered.

“After sliding on Monday by more than 3 percent, the biggest one-day loss since September 2013, bullion is trading around the critical $1,100 an ounce support level.  Another breach of that could lead to a further selloff, some analysts said.

“The slide has helped to wipe out half the gains from the last decade’s historic bull run, taking prices back to the key chart level and threatening a break toward $1,000 an ounce.  But the price is unlikely to fall sharply again in the immediate short term, as it did when it fell 13 percent over two consecutive trading days in April 2013, analysts said.”

What to make of it?

Maybe we’ve had it all wrong.  Perhaps gold really is just a barbarous relic.  The sort of thing grunting Neanderthals with whale bones pierced through their nasal septum traded for pigeon feathers.

But we also know from the history book that all paper money is eventually reduced to its two final intrinsic values: fire kindling or toilet paper.

Through the ages gold has persisted…this latest beating will hardly phase it.

Sincerely,

MN Gordon
for Economic Prism

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