THE NEW GLOBAL CURRENCY: GOLD -Russell

Jan 15, 2004

Now here's an irony. Americans have grown up thinking in terms of dollars. They express their wealth in dollars. Everything we buy today is denominated in dollars. We're a "dollar nation," and even when the dollar loses 40 percent of its value against the peak euro price, we hardly notice it.

But gold is the new global world, and there's only one global currency. That currency is gold. Gold is the "center" around which all paper currencies (admittedly or not) revolve.

But here's the irony. Americans feel confident in holding dollars, but they view gold as a speculative and highly volatile commodity. In other words, they trust paper dollars -- but they distrust gold. That's tantamount to saying, "I feel safe when I'm swimming far out in the ocean, but I always feel shaky when I'm standing on dry land."

In other words, after twenty years of a gold bear market and after 20 years of government anti-gold propaganda, Americans trust irredeemable printed paper, while the distrust real money. Incredible but true. As Hitler's Minister of Propaganda, Joseph Goebels, put it -- make the lie big enough, and tell it often enough, and people will believe it.

Every once in a while, people seem to stop thinking. This is one of those times.

The following is from John Hathaway's "Year End Gold Review (he's the head of the Tocqueville Gold Fund). "Since the gold bull market commenced in August, 1999, gold has increased 66% while the euro has increased 19% against the US dollar. However, over the past years they have increased by roughly the same amount, leading many to think that gold is just another play on the weak dollar."

"Once the weak dollar creates sufficient stress among our trading partners in Europe and Asia, central bankers will figure out ways to reverse the trend, at least temporarily. Investors will then begin to realize that there is little to differentiate among paper currencies, and that gold represents the only real alternative to the dollar-based system of international credit. At this stage, we expect gold's rate of appreciation against all paper currencies to accelerate."

As I write this morning, March silver is up 12.3 to a new high of 6.62. I'm not going to go into all the arguments in favor of silver, let's just say that silver has been chronically underprices, the US government is now out of its silver inventory, and there's a giant short position in silver.

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[Ed. Note: Jan. 15, 2003 ... Bill Bonner on the relationship between Gold/Dow Ratio and public sentiment ...

In markets as in politics, the masses' sentiments are given shape and focus by the mass media. Thus do millions of people come to think just about the same thing at just about the same time.

We can judge the mood of the public - or what Gustave Le Bon called their "general belief" - by looking at the a few broad measures. In 1974, the average investor would buy a stock if, each year, it earned about 15% of what he paid for it. A quarter of a century later, he was willing to buy the same stock even though it only earned about 3% per year of his purchase price.

Another way of measuring popular sentiment is to compare the price of gold to the price of Dow stocks. There is no particular reason why the average lumpenvoter should prefer gold to stocks some times and not others... except that his general sentiment has changed. Sometimes he is hopeful, positive, optimistic, expansive, activist... and sometimes he is not. When he is feeling good about the future... he prefers stocks, for they represent growth, technology, business, profits and all the good things he sees coming his way. When he is feeling fearful, on the other hand, he sells the stocks and buys gold. "Just in case," he tells himself. The stocks might be worth nothing tomorrow. The gold will still be there.

According to Ian McAvity, the ratio of gold to the Dow has been about 5 to one since 1900. That is, it took 5 ounces of gold to buy the 30 Dow stocks. Gold trading was halted in the U.S. by Franklin Roosevelt, but resumed in 1968. Since then, the ratio has been about 8 to 1, says McAvity. But today it is nearly 25 to 1.

Mass sentiment can also be calibrated in terms of debt. When people feel expansive and positive, they are willing to go into debt to realize their project, confident that things will work out somehow. When they are feeling pessimistic, they pay off their debts, trim expenses, and wait until conditions improve.

How are Americans feeling today? The ratio of debt to GDP averages - over the first 8 decades of the century - only about 1.6 to 1. Currently, it is more than twice as high... a new record.

Never before have Americans been so confident... so optimistic... so expansive... so activist - so mad! They borrow more than ever before and go bankrupt at the fastest rate in history. They spend more... even as they earn less. They buy stocks, hoping they will go up... even though they have already gone up to levels that are about as high as they ever get. And their president has given them the biggest government deficits in history... and the most ambitious foreign policy. Not content to plant the flag in Babylon, today's paper tells us he is aiming for Mars! We can hardly wait...FULL STORY