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Original post by Mallaby on Oze - hope you don't mind Mallaby but I found this interesting and wanted to share http://www.asxboard.com/html/emoticons/smile.gif


Gold Bulls ....... Pull the Trigger

Richard Russell

Dow Theory Letters

Nov 17, 2003


Extracted from the Nov 15, 2003 issue of Richard's Remarks


Gold --There are a few times in an investor's life when the opportunity for huge profits lies ahead. Such periods in the stock market occurred in 1932, 1942, 1949, 1974 and 1980-82. People who loaded up with common stocks at those times and held those stocks made fortunes.


I believe another such a time is now. And I'm referring to the current young bull market in gold. Subscribers who have been with me during recent years were urged to buy gold stocks back in 1999. Those who did buy the suggested gold stocks and held those stocks now have substantial profits.


I believe that fortunes will be made in the years ahead by those who are now establishing major positions in gold and gold shares. I've said this a number times before, but I want to repeat it --


These primary moves last longer than anyone believes possible -- and they take the items higher than anyone thinks possible. We're now in a primary bull market in gold.


I believe gold (and very probably silver) will make fortunes for those who now take major positions in the precious metals.


I want to repeat something that a prominent Wall Street millionaire told me half a century ago -- tough words that I never forgot. "Russell, my boy" this gentleman offered, "Do you know why stock brokers never make big money in a bull market?"


I confessed that I didn't know."


He answered, "They don't make big money in a bull market, because they never believe their own bull ****."


In other words, the brokers tell their clients "what a great market this is," but they're just blabbing. If they really believed that it was a great market they'd be loading up on stocks themselves, which if course, they never do.


So this is my position -- I believe gold below and even somewhat above 400 dollars an ounce is dirt cheap. In view of the amount of Fed-generated fiat paper that will have to be churned out in coming years (it will be in the multi-trillions of dollars), gold is the cheapest thing around. The US government, states, cities, corporations and individuals are currently loaded with $32 trillion in debt. On top of that, the US government has additional unfunded liabilities of around $44 trillion, all of which will have to financed.


For these reasons, it's my thesis that gold at $400 an ounce is ridiculously cheap. As a comparison, gold today is less than half the price it was at its 1980 high.


I believe three or four or five years from now we'll look back at today's price of $400 dollar gold and ask ourselves, "Where the devil were we? What were we thinking about? Gold at $400 was cheaper than dirt. Why didn't we recognize this back in the year 2003?"


As I see it, this is one of those rare times in an investor's life when he can buy an undervalued asset at a bargain price. This is a time when you can buy real money with fiat paper. At this time you can buy real money, gold, with "junk" fiat paper which is created "out of thin air" by the Federal Reserve.


Big profits have already been made by those who bought gold and gold shares two or three years ago. But that is nothing compared with what I see ahead -- as the bull market in gold moves on. We are now in the accumulation phase of the gold bull market, This is the phase where seasoned, knowledgeable investors build their positions -- even while the public and most neophyte "investors" are either ignorant of what's happening or at a time when the public actually dislikes the very product which could make them a future fortune.


But the secret to all this is the necessity to ACT. Knowledge is wonderful, but in this business, knowledge isn't worth a damn unless you have the courage to "pull the trigger" -- to ACT.


I've listed gold stocks and gold and gold funds until I'm dizzy, until some subscribers have written to tell me that I should "get off gold," that they're tired of hearing about it. So, dear subscribers, it's now up to you. Bull markets are great, knowledge is great -- but there's no substitute for acting. Act, act, act.

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Thanks for the post! http://www.asxboard.com/html/emoticons/smile.gif I think its great if you copy over any posts from people that you find are very valuable in to asxboard.com.


I think we need to aim for this forum to be a quality forum or valuable research, opinions, charts, analysis etc etc. I dont think anyone likes reading 1 line ramping posts which just waste time and make it harder to find the valuable info.


With a team of dedicated moderators I think we can achieve it? Would anyone out there like to help out sorting posts in to categories and taking out pointless ramping posts as things grow? PM me or reply.



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http://www.asxboard.com/html/emoticons/ph34r.gif In my opinion it would be a good time to top up before gold breaks $400.00.

As mentioned by others the way gold is building a nice base around $390 it will push through $400 easily and continue on.



Cheers Tag

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I'm confused, now that the most recent messages are on top.


You all seem to be very positive about GOLD, but the last 4 days are like a nightmare for me. I just bought KCN (Kingsgate: Gold mining) and it is continuously falling and falling.


In fact, I planned to sell with 6% loss, but you all seem to be so positive about gold that I may hold a bit more.


Is there someone here who is less optimistic about gold?


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Thanks for the post Katwomyn, not sure if weÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢ll see all that boom though. As the fed prints that paper money the $US devalues and gold rises by default. But will our dollar do the same? Of course as more people load up on gold then there is a shift in supply and demand, which we will benefit from. But perhaps our gold plays may not be as good or strong as those who hold US dollars?

Im no expert on the subject (far from it), but curious to peoples opinion how all this effects us with oz dollars.


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I'm also no expert, but read a good discusion on HC about it all.


Make your own mind up, but I'm for one think over the next 5/7 years, gold could be the one, if you choose your investments wisely. If you keep your investments in Auzzie $ and aren't planning to move to US anytime soon, I think it may well be a winner.


And as we know Winners are Grinners.





Let me start this off by saying that I'm genuinely asking this question in order to get the full range of views out there in HC land. I don't know the answer and my head is starting to hurt from the effort of trying to get it clear in my mind.

Recently, my thoughts have wandered along a path that goes something like this:

The mechanism for determining the benchmark price of gold is the US$.

Many of the supporters of gold (and I count myself as a believer) seem to be basing their predictions of the rise in gold price on the premise that it will become the haven for investors who are seeking to insulate themselves from the worsening world economic situation, particularly the US. This is characterised by an expected plummetting in the value of the US$ as a result of it being fully recognised as a fiat currency (this is my simplistic interpretation of much of Richard Russels comments).

In a simplistic sense, if I did everything in US$ and everything that I purchased and consumed was fully produced and costed in US$, then a rising gold price would be good for me as a gold investor.

When I add the complexity of doing everything in a different currency, I start to wonder about the true effects of a changing gold price.

About 6 weeks ago, I recorded some info about the A$ and the POG. The A$ was at US66c and the POG was US$381-70 an ounce. This means that I would have paid A$571.33 to buy one ounce. This morning, POG was US$398.70 and the A$ was buying US72c, so while the price of gold had gone up some 5%, my ounce of gold was now worth A$554-72, or more than 4% less.

It was at this point that I started to wonder if the rising price of gold was a good thing or a bad thing. If the POG goes up because the metal is more valuable than it was, then as an Australian buyer, I will be better off, but if the price of gold is appreciating simply on the basis that the US$ is devaluing, then as an Oz investor, I'm no better off than I was.

Taking the extreme, if the POG hits US$800 but the A$ is buying US$1-40 (because the US$ has succumbed to bad economics and a belated recognition that it is just worthless paper) then my ounce of gold will be worth no more than I when I bought it at US$381.

One point I do think need emphasis is that for someone who lives and operates in A$ terms, the POG in US$ is almost irrelevant. A rise of 10% does not mean anything if the A$ has also risen against the US$ by 10%. Getting excited about the "magic US$400 mark" is silly if the the POG in A$ terms has actually fallen (which is the case over the last couple of months). The only meaningful measure of the value of gold to me as an Oz investor, is the POG in A$ terms. If and when the POG goes through the A$1000 mark, then I will have seen an increase in the value of my investments in real terms.

This stuff is all very theoretical of course, as the US$/POG relationship is not a straight line correlation. Many other factors can influence the POG but my research shows that those predicting the largest rises are generally strong supporters of the collapsing US$ theory (and they all have a US bias to their positions). The reality for US investors is not as rosy as the isolationist position I discussed above. If the POG goes to US$800 as a result of the devaluing US$, then US consumers will be paying much more for their goods and services (as the majority of them are imported) and in effect there "profit" from investing in gold will have been fully offset by the devaluation in the buying power of their currency.

Now do you see why my head is hurting? I know some of the responses I get to this post will say it's all very simple and that "such-and-such's economic theorem clearly illustrates the relationship between left handed widgets, flux capacitors and the POG". My point is it's not a simple concept and the number of variables makes it a very complex issue. I'm starting to believe that those pundits that get it right will do so on the basis of pure ar*se (I would tend to call this the Goblin method of analysis and prediction - say it every day, even on those days when it's clearly wrong, and crow very loudly on the rare days where it actually happens like you predicted. Ignore all evidence and comment that does not agree with what you say and just carry on regardless).

What I'm looking for is reasoning to show that the price of gold is set to rise at a rate that exceeds the decreasing value of the US$ and therefore at a rate faster than is being eroded by the appreciating A$. If that can be demonstrated then I will have greater confidence in making a profit from gold investments and not just participating in the illusion of calling the rises and falls in the POG.

There may be a whole body of research and comment out there that I have not yet seen but some assistance wading through the volumes would be helpful.

Thoughts, comments (corrections to my simple minded delusions) all welcomed.



my two cents worth is that I reckon the Aussie economy faces the same challenges as the US, being:
increasing trade deficit
Reserve Bank has been printing dollars, increasing liquidity, and keeping interest rates artifically low.
asset price bubbles, esp residential real estate.
see SMH article on Sat, explaining that virtually all job growth has happened in the construction sector..ouch.
etc etc
so I believe that the increase in POG will far outweigh any longterm increase in the value of the Aussie dollar.



How can you flog off aussie gold shares by quoting a falling Oz gold price; you can't so the powers that be always quote it in US$ which is ok if you are planning on moving to the US or are already there. If the Aussie dollar falls, that is good for Oz golds but foreign investors may pull out of OZ stocks on masse, golds and all. So it is not simple as the gold bull mkt gets older. When the rise began it was much simpler, cheap gold stocks, low dollar, and gold price beginning to come out of hibernation. What we need now is a sharp pull back and I'm sure we will get one. One reason is that there have been few discoveries that are mineable, and the gold price will run out of steam due to profit taking. The US$ is held in so many countries that it will not be dumped wholesale but there will be a controlled retreat. I can point to sites that have the gold turndown marked in on their graphs.



Your comments regarding the Aus economy suffering the same sort of problems as the US are valid, but they don't resolve my dilemma.

Let's say that failing economies see the US$ and A$ both decrease (at the same rate) in value against other global currencies and the POG rises proportionally on that decreasing US$. It will also of course rise in A$ terms. So I invest in gold and double my wealth on a rising gold price.

The problem I then see is that everything (well almost everything) I need to buy to survive has tripled in price because of the devaluation of the A$ (we are also large net consumers of imported products) and the severly weakened Aus economy.

Don't get me wrong, I'm not putting down gold. I would rather double my wealth by investing in gold than halve it by investing in the banks with Goblin.

The situation is almost one of cutting off your nose to spite your face. To support the great boom in gold prices, we have to almost completely destroy the entire western economies. Is it really worth it? Is it a matter of being in the sector that will lose you the least amount of money in the coming disaster (kind of like superannuation over the last 4 years).

For my part, I'm not certain that my world view is that negative.



Okay - I've stopped thinking and the pain is starting to fade - lol.

If I simplify the whole situation (to the extent possible disregard currency fluctuations) and look at it from the point of view of an Aus gold producer it all looks pretty rosy.

If I am currently selling gold for US$400 an ounce and my production costs and overheads are US$250 an ounce, then I'm making US$150 an ounce profit. If the POG rises to US$800 an ounce and my overheads are still US$250 an ounce then I will be making a greater profit and therefore increasing my share price. This is assuming that my overheads are insulated from the reason that the POG is rising (ie my production costs and overheads are not increasing faster than the POG is rising).

If this is the case then the decision is easy - buy gold stocks.

I'm going to have an LLD now (little lie down). I look forward to trying to get my head around all of the responses tomorrow.


by buying gold, its a store of value, so you are really only protecting what you have.
(unless the POG really shoots for the moon)
for your dollars to have more value, the country must produce goods and services more efficiently than other countries, and then trade like hell to import what it can't (produce efficiently). when a central bank increases money supply without a corresponding increase in the value supporting those extra dollars, it penalises all people who have saved their hard-earned thru being efficient and profitable. its a gigantic fraud, fiat currency.
Badfish, I'm only rehashing a whole lot of essays that you can read at www.goldeagle.com.
just remember, big banks can and do go broke...just look to Japan for that. and real estate values can and do re-trace by up to 90%, eg Hong Kong.
The thing that summarises it best for me is this table that I have copied from Hommel at goldeagle:
In the table below, I'm dividing M3 into the gold price at the time, to see how much gold the money supply is worth in "gold value" at each point in time. Read the lines below like this: In June 1998, M3 was 5,711 billion dollars. If you divide that by the gold price at the time of $296/oz., then M3 has a "gold value," or measure, of 19.3 billion ounces.

June 1998: M3 5,711 billion / gold price $296/oz. = 19.3 (billion oz. gold value)
June 1999: M3 6,221 billion / gold price $260/oz. = 23.9 (billion oz. gold value)
June 2000: M3 6,809 billion / gold price $288/oz. = 23.6 (billion oz. gold value)
June 2001: M3 7,628 billion / gold price $270/oz. = 28.2 (billion oz. gold value)
June 2002: M3 8,178 billion / gold price $318/oz. = 25.7 (billion oz. gold value)
June 2003: M3 8,761 billion / gold price $345/oz. = 25.4 (billion oz. gold value)
Sept. 2003: M3 8,909 billion / gold price $390/oz. = 22.8 (billion oz. gold value)

The last number on the far right of the equation is the number of ounces of gold that M3 can "buy in theory". It's a measure of the value of the money.

heres the link:



this table shows the destruction of value even better:

Jan. 1960: M3 300 billion / gold price $35/oz. = 8.6 (billion oz. gold value)
Jan. 1970: M3 616 billion / gold price $35/oz. = 17.6 (billion oz. gold value)
Jan. 1980: M3 1,822 billion / gold price $850/oz. = 2.1 (billion oz. gold value)
Jan. 1990: M3 4,088 billion/gold price $420/oz. = 9.73 (billion oz. gold value)
June 2000: M3 6,809 billion/gold price $288/oz.=23.6 (billion oz. Gold value)

theres just not that much gold in the world!!



It is my strong belief that the relationship between the US dollar and the US dollar price of gold will significantly weaken once gold clears the US dollar 500-530 price level. However this is just a wild theory of mine without any factual basis.

What if it doesn’t? We need to focus on such a scenario…

What if the Australian dollar in US dollar terms appreciates just as much as the US dollar gold price? ie What if the Australian dollar gold price remains relatively constant? Australian gold producer’s revenues (and thus their income) would not increase in such as environment, so how exactly (if at all) would Australian producers benefit?

The answer lies in the globalization of capital markets. North American gold producers would be making significantly greater sums of money in a rising US dollar gold price environment. The North American capital market in gold stocks would thus gain increasing interest. North American investors would be willing to pay more and more per a dollar of earnings produced by gold stocks. In summary, the average North American gold stock would be grossly over priced relative to its equivalent Australian peer.

This is where arbitrage comes into play. A listed American gold stock trading at 30/40 times earnings would be very attracted by the proposition of buying an Australian gold stock trading at 10/15 times expected earnings. It would be extremely earnings per share accretive from day one. In time Australian gold stocks would get repriced to reflect this opportunity.

Without one giving it much though, one may argue that this arbitrage will be largely offset by the fact that the American dollar will have matched the price rise in American gold stocks, thus presenting no arbitrage opportunity. This is incorrect because gold stocks are leveraged to the gold price. The rise in American gold stocks would far outpace any depreciation in the US dollar relative to the Aussie because of their inherent leverage to the price of gold. It is important to remember that the relationship between the appreciation of the price of gold, and the depreciation of the US dollar is not linear.

I may be wrong. Please correct me if you think I am…


Lots of Food for thought here, I have been struggling with the performance in gold in other currencies like Badfish, I would like to see gold break out in Euro terms then I will be totally convinced that we are indeed in a genuine gold bull market. As far as the $A price goes gold performed an exact 50% fibonacci retracement of it's run from its $A lows to it's $640 high earlier in the year, is this considered bullish? (would like to have the opinion of a fib expert such as AlphaCentaurian). For Chuck you seemed disheartened that gold had peaked at A$590 in 1980 well it reached $640 earlier in the year sounds like we are in an Australian dollar gold bull market. My feeling is that the run to A$640 earlier in the year was the first phase of the $A dollar gold bull market and that we are currently in a consolidation period before the next wave up.



Hey, Badfish,
Firstly congrats on an original post of more than two sentences.
The strong correlation between resources [gold is merely one] and the Oz$ is well documented. Bin so for decades.
However I would not get hungup about POG in local currency. All paper trading is done in US$ so the "melt-up" which Russell speaks of will happen [if he is correct] at a price which has nothing to do with the price as stated in A$. I can envisage parity with the Yanks but not soon. US$1000/oz will come far sooner.
Whity is correct when he states that we have the same probs as the yanks; we just don't disect our economy the way they do. eg Our private [credit card] debt is worse than theirs and our RE bubble may also be.
BYW I don't have 1c in the top 50!
"We'll all be rooned", said Hanrahan.

"Before the year is out".

Hello All,

Firstly fantastic posts by all concerned in this thread and great original question posted by Badfish...

There are two points of view to consider here. Price of Gold and effect on Aussie Gold shares. This will decide in which instrument you will invest in.

I agree Gold is in an uptrend, in both $USD and $AUD terms, therefore it is a sector to be involved in. There are three main players in the analysis of the Gold price. Investors, Miners and Speculators.

Investors have been in Gold for many years. They have therefore had relatively little influence over the market price of gold. They gradually buy at the bottoms of the markets and hold.

Within much of the discussions that have been on Internet web sites has been regarding the negative effect of the large US based miners on the price of gold through Hedging. This has probably been the greatest resistance to the price of gold over the last 20 years.

Finally we have the Speculators. Now that we have gold moving from a sideways movement to an upward movement, this group of people have joined the fray causing the volatility that we sometimes observe. They are out to make and take profits such as the drop in early October that dropped the price from over $380 to under $370 per ounce. Conversly it must be considered that the price of Gold is being artificially held up due to their buying patterns. We have all seen this occur on various shares.

So what is therefore considered a fair and reasonable price of gold and how do you work it out. Money supply seems to be the major factor. whiteyg pinted this out before. A good explanation of the $USD movement has been explained on these two web sites (posted by someone on HC in last few days. Thankyou for address whoever it was): -


Read these sites. They were very interesting. First relates to the $USD fall and second relates to CPI.

Going back to the Miners and their hedge book, I have read that here is where the major influence of a massive rise in Gold price will come from. If the short positions are ever exercised Gold will explode upwards in price. It was quoted a potential $1000 an ounce in $USD terms due to the major miners needing to buy back their short positions.

To sum up Gold price, Speculators will have an effect on the short term price movements either up or down, but overall this will continue up. The Miners and their hedge positions will influence the long term price of Gold.

From an Aussie perspective, the US govt continues to produce money out of thin air, therefore the $USD will continue to fall relative to other currencies. I would suggest that this will probably be in line with the rise in Gold price. For us in Australia, there is probably little benefit being in direct Gold, unless there is a major exercise of the Hedge position driving the price up in a major spike.

The second consideration as I initially discussed relates to the effect on Aussie Gold shares. Here we must consider production level, costs of production, and reserves. As I mentioned, a fairly similar rise in $USD gold price and $AUD exchange rates will have a negligible effect on the profitability of company earnings.

You must therefore consider the other factors. Now it comes down to just a normal evaluation of any stock. An increase of Production level, decrease in costs, and an increase in reserves will be beneficial for any Gold Producer. These will be the main factors on future profitability and this will determine the share price direction. This can be seen with NCM, and OXR. I believe both are increasing production, reducing costs, and increasing reserves. Conversly LHG has been fairly constant over the with two quick periods of share price jumps. Late 2002 (due to the rise in gold price), and late Aug 03 (this was due to better profits from factors discussed above).

I have considered the same situation in relation to other commodities. Since May, Copper has about a 18% rise in its $USD price with a similar rise in the Aussie Dollar over the same period. People focussed on the $USD per tonne of the product and have purchased BHP and similar stocks when in all reality their earnings in $AUD terms have not risen. This was shown in BHPs last quarterly production report when they had a big writedown due to currency fluctuations.

As with any investment decision, evaluate all the criteria. Do not invest in Gold for the sake of Gold. Look to companies that are progressing.

As to NCM being too dear I disagree. $1000 put into it 28 Mar would have risen by 111% over original investment. $1000 in OXR bought at the same time would have risen 110% until today also. It is still $1000 whichever way you look at it and the growth has been the same. NCM though would probably be considered a safer share due to it larger operations and a setback would possibly only be minor. I am not recommending to buy one or the other, but the initial value is still the same in both cases.

Stop considering shares as to being $0.01, $1.00, or $10.00. Look at risk factor, and potential growth based upon the risk level. A 1c share is cheap for a reason.

Sorry for the long delay in writing this. Have been writing it for around 2 hours while looking at previous posts...


Well I hope that helps, one of the best threads I've ever read on HC.


Look for the title "re: is gold price an illusion?????" for the whole thread.


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Get your head around this ?????????????????????????



Exchange Rates and Gold

Gary North

Back in the 1960's, an academic debate began over currency exchange rates. Milton Friedman championed the idea of floating exchange rates, i.e., the abolition of government-imposed price controls on currencies.

This was an intellectual assault on the Bretton Woods (a New Hampshire hotel) agreement of 1944, which established the International Monetary Fund. Member nations of the IMF were supposed to maintain fixed exchange rates with other member nations. Nations would hold dollars as well as gold as their monetary reserves. Dollar-denominated U.S. Treasury securities paid interest. Gold didn't. The Americans who negotiated the IMF expected the agreement to increase demand for U.S. Treasury securities. It did.

The IMF also promised to lend dollars to any member nation that was experiencing a run on its dollar reserves, but only if that nation met certain IMF requirements. The IMF's loan was to give the besieged nation's central bankers some breathing room until they could reduce the rate of monetary expansion and thereby create a recession. This recession would ideally lead to lower domestic prices - waves of bankruptcies produce that effect, after all - which would make the nation's goods attractive to foreign buyers, who would cease bringing in the nation's currency and demanding dollars. Thus, the nation's central bank would not have to float its currency, i.e., cease providing dollars on demand at the older fixed rate.

No member nation was supposed to float its currency in the international currency markets. Fixed exchange rates were sacrosanct. This really meant that the various currencies' fixed exchange rates with the dollar were sacrosanct.

But why are fixed rates ever sacrosanct? The prices of most goods are left free to rise or fall in terms of supply and demand. Why should currencies be different? This was Friedman's rhetorical question. It was a reasonable question.

Defenders of fixed exchange rates had no intellectually viable answers. They sometimes tried, but they always wound up sounding like apologists for the wisdom of a government bureaucracy in fixing prices. Of course, this is exactly what they were, but to be exposed publicly for what they were was embarrassing for many of them.

Fixed exchange rates with the dollar meant that the Federal Reserve System could crank up the printing press and force every other IMF member nation to crank up its printing presses. The dollar was the world's reserve currency. Thus, despite domestic monetary expansion, the dollar would maintain its value internationally, while the newly created money could keep the American economic boom going strong.

When all the world wanted dollars after World War II, nobody complained. In the late 1950's, however, a few free market economists, most notably Jacques Rueff and Wilhelm Roepke, put a name on the process: exported inflation.


On Sunday, August 15, 1971, President Nixon unilaterally announced the "closing of the gold window," i.e., the repudiation of America's promise in the Bretton Woods agreement to allow foreign governments and central banks to redeem dollars for gold at $35/oz. This promise was the heart of the original agreement. It made the dollar a substitute for gold. It made the dollar "as good as gold." It encouraged foreign central banks to buy dollar-denominated Treasury debt certificates instead of holding gold.

The IMF was an extension of the Genoa Conference of 1922, where European nations formally abandoned the pre-World War I gold standard, substituting British pounds or dollars for gold. This was a major step in freeing central banks from runs on their gold by other central banks. Each of the national central banks had stolen the gold from its nation's commercial banks after World War I broke out. The commercial banks had been granted the right to break contract and not redeem gold on demand by depositors. The central banks did to the commercial banks what the commercial banks had done to their depositors.

Nixon then did to the central banks what they had done to their commercial banks. The Federal Reserve System wound up with the largest hoard of gold on earth, which it holds on deposit for the U.S. government, or so the official explanation goes.

Nixon that same day also floated the dollar. Simultaneously, he froze most wages and prices. That is, he abandoned price controls over money and imposed them on everything else. This was economic schizophrenia. The National Association of Manufacturers and the U.S. Chamber of Commerce immediately applauded Nixon's decision. A Democrat-run Congress did not oppose him, either.

Nixon in 1971 was presiding over a recession. For each of the two years, fiscal 1970 and 1971 (which ended on September 30), his administration ran a deficit of $25 billion, which was considered huge in those quaint days. The Federal Reserve System was pumping in money to get the economy rolling, as usual. Prices were rising rapidly. A gold run had developed.

Nixon dealt with all of this by breaking America's contract with foreign central banks and by outlawing all new private contracts at prices higher than those that prevailed on August 15. In short, he put his World War II background as a bureaucrat with the Office of Price Administration to contract-undermining use.

According to the Inflation Calculator on the home page of the Web site of the U.S. government's Bureau of Labor Statistics, it takes $4,558 today to purchase what $1,000 purchased in 1971.


The Genoa agreement was designed to square the circle. Its goal was to re-establish the pre-War stability of currency exchange rates, but without the use of gold. Currencies were to remain stable against each other, but without the public's legal right of convertibility of currency into gold at a fixed rate of exchange.

Governments wanted the fruits of the traditional gold standard, but without the roots. They wanted stable exchange rates based on fiat currencies. The gold coin standard had provided fixed exchange rates based on a legal contract: full redeemability on demand at a fixed rate. The pre-War exchange rates among currencies were the result of fixed exchange rates between gold and each national currency. The fixed rate of exchange, gold vs. any national currency, was not officially a price control. It was a contractual agreement between the central bank and anyone holding the nation's currency.

If you hand over your dog for me to keep for you when you go on a trip, and I hand you an IOU for your dog, there is no price control. There is a legal relationship. My IOU isn't the same as your dog, but it establishes the fact that your dog is in my possession. Legally, you can get your dog back on demand when you present the IOU to me.

If the government then declares that collies are the same as basset hounds, and you have given me your collie for safekeeping, I can now legally return a basset hound to you.

A price control is not the same as a warehouse receipt. A warehouse receipt for an ounce of 24-karat gold in exchange for ten shekels will circulate at a one-to-one fixed rate with a receipt for an ounce of 24-karat gold for ten denarii. There is no price control. The free market establishes a fixed rate of exchange between shekels and denarii. The fixed exchange rate is the product of fixed rates of exchange between denarii and gold and shekels and gold. As we learned in high school geometry, and occasionally actually remember, "things equal to the same thing are equal to each other."

The Genoa agreement converted what had been a desirable outcome (stable prices among currencies) of a system of voluntary contracts (free convertibility of gold) into a system of price controls. It officially abolished internationally what had been abolished nationally in 1914 by every country involved in World War I: the redemption of currencies for gold. It substituted currencies for actual gold held in central bank vaults. Nations (central banks) henceforth would hold British pounds or the U.S. dollar instead of gold. This was agreed to even before Britain returned to gold, at the pre-War exchange rate, in 1925. Nations were expected to honor fixed exchange rates.

In fact, most nations continued to accumulate gold.

The central bankers did not trust each other.

Fast forward. The Bretton Woods agreement worked from 1946, when the 1944 agreement was implemented, to 1971 because the United States had possession of most of the West's gold. The United States had come out of World War II as the leading economy on earth. Its currency was trusted by central bankers because (1) the U.S. government promised full redeemability, and (2) the U.S. economy had so many goods for sale. Foreigners wanted dollars to buy things made in America. Only in the late 1950's did the sporadic run on U.S. gold reserves begin.

The old assumption - the desirability of stable currency exchange rates - still reigned, but the faith that sustained it had been abandoned: the right of anyone holding a nation's currency to exchange it at a fixed rate for gold. Because the world's currencies were not individually governed by fixed exchange rates with gold, the system of fixed exchange rates among currencies was not a free market phenomenon. It was a price control system. It was basset hounds = collies.

Stable exchange rates among currencies in a world without legally enforceable exchange rates between each currency and gold are like stable marriages without legally enforceable marriage covenants. Politicians want the benefits of stable currencies, while escaping runs on central bank gold reserves due to domestic monetary expansion, which they don't want to abandon. They also want their wives to show up at their campaign rallies, while they are having affairs with their 22-year-old aides, which they also don't want to abandon - this week, anyway.


Friedman was correct in identifying the inherent futility of fixed exchange rates in a world of fiat currencies. He saw that fixed exchange rates are merely a species of price control: price control on non-specie currencies.

Price controls always lead to a shortage of the good whose price is set by the government below the free market price. Friedman was hardly the first economist to observe this. Sir Thomas Gresham got there first in the late sixteenth century: "Bad money drives out good money," as his famous law has come down to us.

It is not that Friedman was a genius in spotting the obvious, namely, that fixed exchange rates are price controls. What is astounding in retrospect is that his academic opponents were utterly blind regarding price controls placed on currencies, despite their Ph.D.'s in economics. They had accepted the economic logic of free markets, but then they halted at the door of the International Monetary Fund. "All ye who enter here, abandon price theory."

What is not widely perceived is this: Friedman abandoned price theory at the door of the Federal Reserve System. He has always opposed the gold coin standard. He regards resources spent in digging gold out of the earth as wasted whenever this gold is put in central bank vaults, which are also usually below ground.

Friedman has understood the theory behind the ideal of a state-free gold coin standard. He has even admitted that it is a good system in theory. Unfortunately, he says, it is just not feasible. It has never existed. (See his 1961 book, Capitalism and Freedom, p. 41.)

The economic pragmatism of the Chicago School is too often like gold plating on lead slugs. Nowhere is this pragmatism clearer than in Friedman's theory of money. He wrote the following in 1961, and has never retracted it.

My conclusion is that an automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society. It is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because of the mythology and beliefs required to make it effective do not exist. (Ibid., p. 42.)

Yet this same two-fold argument can be brought against every other pricing system in a free market society, and has been. He rejects the gold standard because it cannot be achieved at zero price (free resources), which is the classic argument of the Marxists and utopians against free market capitalism in general. He also rejects the gold standard because people don't have faith in it, which is the classic argument of the anti-market socialists, i.e., the free market as the product of a corporate act of faith rather than the product of the right of individual ownership and contract.

The problem is not the public's lack of faith in the gold standard. The problem is the public's lack of faith in the binding nature of voluntary contracts. Voters repeatedly have allowed the state and its licensed agents to break their contracts and confiscate individuals' gold.

The gold standard was the result of voluntary contracts: warehouse receipts for gold. Any gold standard that is not the product of voluntary contracts is just one more scheme by fractional reserve bankers or government officials to confiscate gold from naÃÆâ€â„¢ÃƒÆ’ƒâ€Â ÃƒÆ’¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒ¢Ã¢â‚¬Å¾Ã‚¢ÃƒÆ’ƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚¯ve depositors.

If gold were stored in private vaults as legal reserves to back up warehouse receipts for gold, the system would place great restraints on the civil government. The state would not have a monopoly over the currency. The best situation would be where no state had any currency of its own, and could therefore not seek to manipulate its supply or its value. Under such conditions, the money spent on mining gold would be cheap insurance against expanding government control over the lives of its citizens.

A gold coin standard, coupled with 100% reserve banking and the abolition of government currencies, would place golden chains on the state. This is the reason why the state has always demanded sovereignty over money. The war against economic freedom always begins with the state's assertion of sovereignty over money. That Friedman and all of the other academic guild-certified free market economists cannot see this is testimony to the effects of government propaganda. Repeat the mantra long enough - "state sovereignty over money" - and even intelligent people will not be able to accept the truth. What is the truth? That the state can no more be trusted in monetary affairs than it can be trusted in educational affairs.

When it comes to faith in the academic guild vs. faith in gold, place me in the latter camp.


The case for fixed exchange rates is the case for voluntary pricing. Ideally, it is the case for fixed exchange rates between coins with the same weight and fineness of metal.

The case for floating exchange rates is the case for voluntary pricing. Ideally, it is the case for floating exchange rates between silver coins and gold coins.

The case against fixed exchange rates is the case against state-imposed price controls. Ideally, it is the case against government interference in the economy except in the prosecution of violence or fraud (fractional reserve banking).

Simple, isn't it? Yet economists just can't get these matters straight in their thinking.

Why should we expect politicians to understand anything this simple? They are much too busy teaching their 22-year-old aides about loopholes in covenant law.

November 24, 2003


Gary North is the author of Mises on Money. Visit http://www.freebooks.com. For a free subscription to Gary North's twice-weekly economics newsletter, click here.

Copyright ÃÆâ€â„¢ÃƒÆ’ƒÂ¢Ãƒ¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡ÃƒÆ’â€Å¡Ãƒƒâہ¡ÃƒÆ’‚© 2003 LewRockwell.com

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