Gold (and don't forget silver, it's a lot cheaper)
Gold relies on no third party to store wealth. When people are scared of banks, stocks, bonds, treasuries - gold eliminates all such risks. Of course, the value of gold may go down, but it will still hold some value no matter what. It goes without saying that the safest gold to buy and hold is the real shiny stuff in your hand, not a paper stock with a value written on it.
An economist held some gold in his hand and said in 1925 this amount would buy you a top model car. Today, it would buy you a Porsche, meaning, its purchasing power changes little over time. The amount it has changed in dollar terms reflects nothing more than inflation. Inflation, or the printing of money, steals from people who save as prices increase faster than the interest the banks return to you. It makes sense to have a stable monetary system and backing a currency with gold is the only viable way to do this. Gold is hard to dig up and so is limited in supply. This limit to supply would mean slower growth for economies, but slower growth would be stronger and more stable growth which leads to predictable prices.
One report [Mr. Douglas; You-tube] stated that the gold market has been actively suppressed over the previous ten years. This means that the price of gold in markets is not the true price. This has been done to protect he value of the dollar and to keep interest rates low. Research shows that the price of gold and interest rates should be inverse - lower interest rates should equate to higher gold prices. That this has not happened suggests that the price has been manipulated. Worse, an overly low gold price switches off the financial fire alarm. This has resulted in a fake strong dollar through which Americans have lived beyond their means paying with overvalued treasuries. Foreigners were conned into thinking Treasuries were assets but are now finding out they are a liability.
Price gap portends gold price boom, by John Browne, Senior Market Strategist, Euro Pacific Capital, Inc
Most consider the New York market ‘spot’ price for an accurate indication of the
true price. However, investors now buying physical or ‘fabricated’
paper gold, are
paying a premium of between $20 and $30 per ounce. When these gaps existed in
the past, major increases in the price of gold were imminent.
For much of the 20th Century, gold continuously defied global government efforts
to restrain its price. The premium currently in place may be evidence of the
latest round of such policies.
In 1934, President Roosevelt devalued the U.S. dollar by some 75 percent by
raising the official price of gold from $20 to $35 an ounce. This opened the
door to the first great wave of inflation of the 20th Century. Following World
War II, national governments, particularly the American Treasury, held the vast
bulk of the free world’s gold. The official $35 price was maintained, almost by
official dictate.
However, in the 1960’s, a ‘free’ market gradually developed that traded gold at
a premium to the official $35 price. In response, the London Gold Pool, a
central bankers’ gentlemen’s agreement led by the Bank of England and the New
York Fed, was established to hold the so-called ‘free’ market price of gold “to
more appropriate levels” … to “avoid unnecessary and disturbing fluctuations in
price” which could erode “public confidence in the existing international
monetary structure.” The agreement lasted until 1968. Thereafter, the price of
gold was set solely by the free market.
As the inflationary financing of the Vietnam War began to filter into the
international economy, private investors and nations with trade surpluses began
to buy gold to protect their wealth. The ‘free’ market price began to soar above
$35 an ounce. Far from reducing the demand for gold, as many esteemed Keynesian
economists had predicted, this free market price increased the demand for gold.
Surplus nations demanded gold from the American Treasury at the official price.
Experiencing a serious run on the national official gold reserves, President
Nixon broke the U.S. dollar gold exchange link in August 1971. It unleashed a
wave of competitive international currency devaluations and the second great
inflation of the 20th Century. Subsequently, the U.S. dollar was devalued
further, by some 20 percent, as gold officially was revalued to $42 an ounce.
However, led by America, the central banks then made a determined attempt,
through the IMF, to “demonetize” gold. Central banks agreed not to fix their
exchange rates against gold and agreed ‘voluntarily’ to the removal of their
obligation to conduct transactions between themselves at the official price.
In addition, the IMF was persuaded to ‘distribute’ some 153 million ounces of
gold into the market and to minor nations. This had the perverse effect of
greatly increasing the interest in owning gold.
An even stronger ‘free’ market began to operate alongside the official price. As
inflation continued to clime, so did gold. In the early 1980’s the free market
price reached $850 an ounce, while the official price remained at $42 an ounce.
In 1999, the Central Bank Gold Agreement (CBGA), also known as the Washington
Gold Agreement, led to the coordinated sales of central bank gold via the IMF.
Clearly designed to depress the free market price, it is widely believed that
the IMF sales were timed to magnify volatility in the free market price in order
to destroy gold’s perceived worth as a ‘store of value’. The CBGA was renewed on
September 27, 2004, for a further five years.
More recently, market dealers have become increasingly aware of a covert
official ‘blessing’ for large naked short positions opened by major ‘bullion’
banks. These bets are designed to force down the free market price of gold.
In the mainstream investment community, gold has been consistently scorned as an
investment. Many respected analysts have even suggested that gold’s allure is
wholly based on perception and that the metal lacks intrinsic value. And yet, in
terms of U.S. dollars, gold returned about 5.8 percent in 2008, following a 31.4
percent return in 2007. Thus far in the 21st Century, gold has delivered an
average annual return of some 16.3 percent.
Despite the powerful attempts of governments to eradicate gold’s role in
monetary affairs, the free market price has risen continuously. Today, although
the possibility of global depression act as a head wind, the existence of an
“above market” premium for fabricated gold, may foretell a major threat to the
credibility of paper currencies, a major U.S. dollar devaluation and a
consequent strong rise in the price of gold in the months ahead.
For a more in depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar denominated investments, read
Peter Schiff’s new book "Crash Proof: How to Profit from the Coming Economic
Collapse."
The following is from: http://economics.about.com/cs/money/a/gold_standard_2.htm
The Encyclopedia of Economics and Liberty defines the gold standard as "a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money (bank deposits and notes) were freely converted into gold at the fixed price." A county under the gold standard would set a price for gold, say $100 an ounce and would buy and sell gold at that price. This effectively sets a value for the currency; in our fictional example $1 would be worth 1/100th of an ounce of gold. Other precious metals could be used to set a monetary standard; silver standards were common in the 1800's. A combination of the gold and silver standard is known as bimetallism.
A Very Brief History of the Gold Standard
If you would like to learn about the history of money in detail, there is an excellent site called A Comparative Chronology of Money which details the important places and dates in monetary history. During most of the 1800s the United States was had a bimetallic system of money, however it was essentially on a gold standard as very little silver was traded. A true gold standard came to fruition in 1900 with the passage of the Gold Standard Act. The gold standard effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership (except for the purposes of jewelery). The Bretton Woods System, enacted in 1946 created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35/ounce. "The Bretton Woods system ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35/ounce. At that point for the first time in history, formal links between the major world currencies and real commodities were severed". The gold standard has not been used in any major economy since that time.
What Do We Use Today?
Almost every country, including the United States, is on a system of fiat money, which the glossary defines as "money that is intrinsically useless; is used only as a medium of exchange". We saw in the article "Why Does Money Have Value" that the value of money is set by the supply and demand for money and the supply and demand for other goods and services in the economy. The prices for those goods and services, including gold and silver, are allowed to fluctuate based on market forces. Next we'll look at how the monetary system used can change other variables in the economy.
The Benefits and Costs of a Gold Standard
The main benefit of a gold standard is that it insures a relatively low level of inflation. In articles such as "What is the Demand for Money?" we've seen that inflation is caused by a combination of four factors:
1. The supply of money goes up.
2. The supply of goods goes down.
3. Demand for money goes down.
4. Demand for goods goes up.
So long as the supply of gold does not change too quickly, then the supply of money will stay relatively stable. The gold standard prevents a country from printing too much money. If the supply of money rises too fast, then people will exchange money (which has become less scarce) for gold (which has not). If this goes on too long, then the treasury will eventually run out of gold. A gold standard restricts the Federal Reserve from enacting policies which significantly alter the growth of the money supply which in turn limits the inflation rate of a country. The gold standard also changes the face of the foreign exchange market. If Canada is on the gold standard and has set the price of gold at $100 an ounce, and Mexico is also on the gold standard and set the price of gold at 5000 pesos an ounce, then 1 Canadian Dollar must be worth 50 pesos. The extensive use of gold standards implies a system of fixed exchange rates. If all countries are on a gold standard, there is then only one real currency, gold, from which all others derive their value. The stability the gold standard cause in the foreign exchange market is often cited as one of the benefits of the system.
The stability caused by the gold standard is also the biggest drawback in having one. Exchange rates are not allowed to respond to changing circumstances in countries. A gold standard severely limits the stabilization policies the Federal Reserve can use. Because of these factors, countries with gold standards tend to have severe economic shocks. Economist Michael D. Bordo explains:
"Because economies under the gold standard were so vulnerable to real and monetary shocks, prices were highly unstable in the short run. A measure of short-term price instability is the coefficient of variation, which is the ratio of the standard deviation of annual percentage changes in the price level to the average annual percentage change. The higher the coefficient of variation, the greater the short-term instability. For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high. Between 1946 and 1990 it was only 0.8.
Moreover, because the gold standard gives government very little discretion to use monetary policy, economies on the gold standard are less able to avoid or offset either monetary or real shocks. Real output, therefore, is more variable under the gold standard. The coefficient of variation for real output was 3.5 between 1879 and 1913, and only 1.5 between 1946 and 1990. Not coincidentally, since the government could not have discretion over monetary policy, unemployment was higher during the gold standard. It averaged 6.8 percent in the United States between 1879 and 1913 versus 5.6 percent between 1946 and 1990."