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Author Topic: Gold vs. the Dollar...What is Money?  (Read 1786 times)
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groovemachine
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« on: 2011 Jan 31, 11:57:26 pm »



There has been a major shift occurring over the last couple of months and tamo42 helped get my juices flowing in the chat room earlier.  Gold and the dollar have tended to move opposite of each other, but have been moving in tandem lately.  Why?  What fundamental shift has taken place in the global marketplace?

A gold standard was adopted by most world economies between the early 1800s and early 1900s.  War drove nations to find ways to inflate currencies and by 1944 we saw the signing of the Bretton Woods agreements that essentially elevated the dollar to equal status with gold for extinguishing international trade deficits and functioning as a global reserve currency.  Remember the phrase "the dollar is as good as gold"?

That system finally unraveled in 1971 with Nixon removing the gold backing from the dollar.  This resulted in the current experiment with a global fiat currency.  There were repercussions that resulted in stagflation throughout the 1970s, but eventually the dollar stabilized and has remained as the global reserve currency.  Google "dollar hegemony" and read up on all the benefits provided to the US economy.

Well, the dollar isn't dead and is still needed internationally, but the end of the global fiat experiment and the return of gold to effectual international monetary status may have just occurred over the last couple months as it has taken a seat next to the dollar once again.  Gold is now moving up and down alongside the USDX rather than in an inverse relationship.  This seems to indicate that both the dollar and gold are being used as money.  You will know that gold has knocked the dollar out of first place when we see gold rising slowly with a higher USDX and rising faster with a lower USDX.
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« Reply #1 on: 2011 Feb 01, 10:38:24 pm »

That's an interesting insight. I wasn't aware they were moving in lockstep. Are there other reasons that might be? Why the dollar, and not some other currency? I don't follow currencies, so maybe some of this would be obvious if I did.
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« Reply #2 on: 2011 Feb 01, 11:08:15 pm »

Lockstep would be an exaggeration. Roughly the same direction is more like it.

The dollar is currently the most important currency for 2 related reasons: it's the reserve currency and it's the flight to safety currency.

Being the reserve currency (other countries using dollars as reserves for backing their currencies) means, among other things, that commodities like oil are traded in dollar terms. So there is always a very large market of buying and selling dollars, which increases its popularity. This is what allows the US to export inflation to countries like China, but that's all changing (slowly).

The flight to safety has traditionally meant that when investors are afraid, they buy dollars and/or US Treasury bonds. Again, this gives the dollar an advantage over all other currencies, but again, this is changing. Over the past year or two, we've seen people alternate between viewing the US and the Eurozone as the safest place to park money. Most recently, the US has been winning.

Gold has typically played the role of inflation hedge. When traders thought the dollar was being printed too quickly, they'd sell dollars and buy gold. When dollars were being printed too slowly, they sold gold and bought dollars.

What is different now is that both dollars and gold are being used as flight to safety vehicles. This is new in the post-1971 fiat world (and yet a very old function of gold). The fact that we are seeing this kind of pricing action suggests more and more people are waking up to the fact that no fiat currency is safe - it's all a question of which one is least-worst.

It's important to remember that all fiat currencies are backed by the "faith and credit" of the issuing government. If nobody has faith in the economic power of the government, the currency becomes worthless.

Gold is resuming its normal place in human history as a money that has not subject to political winds.
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« Reply #3 on: 2011 Feb 01, 11:24:42 pm »

...and thus ended the dollar
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« Reply #4 on: 2011 Feb 01, 11:26:55 pm »

Well, eventually. I'm sure there will be many twists and turns along the way.
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« Reply #5 on: 2011 Feb 01, 11:37:32 pm »

I often think the dollar is going to survive somehow. It's definitely sick, but the world needs a currency, and trucking around gold isn't going to work.
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« Reply #6 on: 2011 Feb 03, 12:11:40 pm »

I just read an analysis of fiat currencies. Of the recent currencies, the most common lifespan before collapse is only 15 years. Most currencies that are still surviving are only around 40 years old, and due for collapse.
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« Reply #7 on: 2011 Feb 03, 12:20:51 pm »

The difference between fiats now and fiats then is that back then there was always another choice. People had something to compare ever-less-worthy paper money to sound money, and they chose the sound money.

Since 1971 there has been no official sound money anywhere in the world, so the people haven't seen the benefit of ditching paper fiat. The (easy) choices were between this government paper and that government paper. The meteoric rise of gold and silver over the last few years has started to awaken the people of the world to the idea that there might be another way. We are still a LONG way from the time when even a small fraction of people have a substantial amount of metal.
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« Reply #8 on: 2011 Feb 03, 12:29:29 pm »

If Euro doesn't hold up and dollar is failing, maybe we should try EurDollYuan?
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« Reply #9 on: 2011 Feb 03, 12:30:34 pm »

We are still a LONG way from the time when even a small fraction of people have a substantial amount of metal.

This is because we'll have incredibly wealthy fiefdoms ruled by warlords with gold and silver, and they will have peasant serfs and slaves working their land for them for practically nothing. If you don't start out with valuable assets, you're not going to be able to get any.

Men's labor will become extremely cheap to the point of being almost worthless. They'll end up being more valuable as bullet-stoppers in wars than as laborers. The beautiful young women will have even less value, since a warlord only has so much free time for disposable "entertainment", but at least they have a better chance of surviving to middle age than the men. The old people will end up in the glue factories - not as workers, but as feedstock.

Times are going to be extremely ugly as everything that's wrong now inverts and exaggerates itself into a new kind of more extreme wrong - unless a balance is achieved quickly to prevent the inversion, and instead produce stability without the wrongs. I should probably turn this into an official article/prediction, with details on how to avert it. Basically, there's no limit to how bad things can get. People don't remember that.
« Last Edit: 2011 Feb 03, 03:22:28 pm by badon » Logged

If families are a problem for the system, then we must reject the system, not the families.
Founder of the Coin Compendium (forum, blogs, calendar, images, donate, contribute).
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The Coin Compendium and the china-mint.info forum, censure, disclosure.
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