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Gold Climbs Again - Eight Years in a Row

The commentary below is for the benefit of our readers from opinion makers and writers not associated with Euro Pacific. We do not guarantee the accuracy and completeness of third-party authored content. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific, or its CEO, Peter Schiff.
James Turk
February 9, 2010

The numbers for 2008 are in. Gold has done it again. Gold is up for the eighth year in a row against the US dollar. Here are gold's rates of appreciation in terms of several major currencies.

The appreciation gold has achieved over the past eight years is remarkable. Without any doubt, gold's 16.3% average annual change against the US dollar has made it one of the world's best performing asset classes this decade, but oddly, gold continues to be ignored by many. I expect this inattention to change in the year ahead.

The outlook for the US dollar continues to worsen as the Federal Reserve balloons its balance sheet. What's more, the Fed's zero interest rate policy removes any incentive to hold dollars in an environment where counterparty risk remains an intractable problem and where rapid money growth portends a surge in inflation in the weeks and months ahead.

M3, which measures the total quantity of dollars in circulation, grew by about 10% in 2008, near record highs. Two of its components, M2 and M1, increased over the past year by about 10% and 17% respectively. These rates of growth in the quantity of dollar currency are highly inflationary.

Credit continues to contract, and as a consequence is destroying a large amount of wealth as overvalued assets that were buoyed by easy credit are now being marked down in price to realistic levels that more accurately reflects their actual worth. It is important to note, however, that we are measuring the price decline in these overvalued assets with a currency that is being ever-inflated. Though the Consumer Price Index has dropped a little over the past couple of months principally because of the lower crude oil price, the CPI continues to rise on an annualized basis, even by the federal government's own calculations, which understate the true rate of dollar debasement.

More inflation and more dollar debasement can be expected. The Federal Reserve has thrown away the rule book. It is ignoring three hundred years of central bank practices and putting the dollar on an untried path in an attempt to avoid the consequences of the inevitable bust that always follows the boom created by easy credit. The Federal Reserve's grandiose experiment will I expect eventually destroy the dollar, and I don't hold out much hope for any other national currency. To explain why, take a close look again at the above table.

We can see that gold is rising against every national currency. The reason for this phenomenon is that the dollar is the world's reserve currency, and because of this role, it is held as a reserve by central banks around the world. The dollar provides part of the base upon which other currencies are created. Therefore, as the dollar is debased, other national currencies are also being debased along with it. In other words, the US dollar is now going down a 'black-hole', and its gravitational pull is dragging every other currency down with it as evidenced by the rising gold price this decade in all currencies.

There is one other unique aspect apparent in the above table. The average annual rates of appreciation that gold has achieved against the nine currencies in this table is remarkably consistent. Gold appreciated 13.3% to 13.6% on average for eight years in terms of four of the currencies. Gold gained from 10.6% and 10.8% against the two best currencies, the euro and Swiss franc. The euro and the Swiss franc are the 'best' in the sense that less of their purchasing power has been inflated away compared to the other seven currencies. Against the three worst currencies that have lost the most purchasing power from inflation, the US dollar, Indian rupee and British pound, gold appreciated from 16.3% to 17.1%. Then contrast this consistency in gold's average annual rates of change to gold's annual change against these currencies in any year.

Gold's worst annual performance was the -14.9% it lost this past year against the Japanese yen. It's best annual performance was also achieved this year with gold's 44.3% appreciation in terms of the British pound. Here's my point.

Gold shows remarkable consistency when viewed over the long-term. Thus, it is national currencies that are volatile, not gold. Annual changes in gold are a result of currency fluctuations, not anything inherent to gold itself, and this point is proven by the consistency of gold's average annual appreciation this decade, which smoothes out the annual volatility.

We are in a world of freely floating exchange rates where currencies bob up and down relative to one another. But in reality these currencies are not 'floating'. They are actually sinking when compared to gold. The purchasing power of every national currency is being eroded, but this erosion is sometimes difficult to see when currencies are viewed only against each other. But the true picture clearly emerges when all of the world's currencies are compared to gold.

In an environment where the purchasing power of national currencies is being constantly eroded by bad central bank policies, which has been the case throughout this decade, own gold. Importantly, ignore the month-to-month and even the year-to-year fluctuations in the gold price. These fluctuations are not important from a long-term point of view, and in any case occur from factors that cannot be predicted.

For example, who forecast a year ago the extraordinary strength in the yen this year from the unwinding of the carry trade? It nevertheless happened, and consequently, gold declined -14.9% in terms of yen this year even while gold soared against the British pound. But for the past eight years, gold remarkably is up 13.6% on average in yen and 17.3% in British pounds, which is the important point.

Therefore, continue to follow the same strategy that I have been recommending this entire decade. Continue to accumulate gold using a dollar-cost averaging plan. Some months and even some years you will be accumulating gold at a higher price, and at other times a lower price. But over the long-term your consistent accumulation of gold will be averaged in at a good price.

When you accumulate gold this way, you are saving sound money, which is the prudent thing to do in a world where the purchasing power of all national currencies is being eroded by bad central bank policy. The same conclusion is also true for silver, if you are inclined to take the additional risk that comes with silver because it is more volatile than gold.

The following table presents silver's annual rates of appreciation for the same nine major currencies.

Silver too has appreciated in terms of each of the above currencies, but its annual changes show much greater volatility than gold. These changes range from -38.8% to 49.3%.

To conclude, gold and silver will probably appreciate in 2009. There is no reason to think otherwise, given the path chosen by central banks in general and the Federal Reserve in particular. After all, who wants to own any national currency when the interest income one can receive is less than the inflation rate? Who wants to own any national currency when counterparty risk makes repayment uncertain? In short, the interest income available today on any national currency does not fully compensate for the risks one takes when holding that currency.

So why lose sleep from worrying about holding national currency and what the Federal Reserve or some other central bank will do to that currency? Own the precious metals instead. But as I repeatedly emphasize, own physical gold and physical silver. Own the real thing, and do not accept paper substitutes.


James Turk - Founder & Chairman, GoldMoney Management
James Turk has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics. His business career began at The Chase Manhattan Bank (now JP Morgan Chase Bank), which included assignments in Thailand, the Philippines and Hong Kong. He subsequently joined the investment and trading company of a prominent precious metals trader based in Greenwich, Connecticut. He moved to the United Arab Emirates in December 1983 to be appointed Manager of the Commodity Department of the Abu Dhabi Investment Authority, a position he held until resigning in 1987.

Since 1987 James Turk has written The Freemarket Gold & Money Report, an investment newsletter that publishes twenty issues annually. He is the author of two books and several monographs and articles on money and banking. He is the co-author of The Coming Collapse of the Dollar (Doubleday, December 2004), which has been updated for a newly released paperback version, now entitled The Collapse of the Dollar (www.dollarcollapse.com).