Friday, November 26, 2004


Richard Russell's Lesson

I subscribe to Richard Russell's Dow Theory Letters Inc. and today he wrote about the Constitution and our currency. I noted Section 8 - Powers of Congress, The Congress shall have the power
5. To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures:

6. To provide for the punishment of counterfeiting the securities and current coin of the United States:
and this
Section 10 - States prohibited from the exercise of certain powers.
1. No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make any thing but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.
The Founding Fathers knew the history of paper money (fiat) and specifically prohibited paper money that was not backed by Gold and Silver. Russell writes about our history with paper: Congress printed Continentals during Washington's time and they became worthless; "not worth a continental". During the Civil war the South printed Confederate Paper, which is worthless, except for it being collectible, but you certainly can't buy anything with it. The North printed Greebacks which became worthless. So now we have the USD!

I was looking at Kitco and there is an interesting chart of exchange rates. One of the things I noticed is that Gold is different prices depending on the currency. For example, in USD Gold is $451.70 an ounce, in Euros Gold is 339.70, in Pounds Gold is 238.40, and in Yen it is 46337.64. How could Gold be 46337.64 in Yen? In 2001 the USD was 120 and Gold was $250, today the USD went to a new low of 81.53 and Gold was $451.70. Clearly, it seems if the USD goes down, then Gold goes up. But, how could Gold be 46337.64 in a currency?

I would guess with the Continentals, Greenbacks and Confederates that gold went up and up and the currencies went down and down to the point that you did not have enough currencies to buy an ounce of Gold. If the USD declined another 50%, I would guess that Gold would go up 50%; if the USD went down 90% that Gold would be up at least 90%; if the USD went to zero and that is our history with fiat currencies, then no amount of USD would buy an ounce of Gold.

Imagine you own a general store. Canadian touists come into your store and buy from you. Their currency is going lower against the USD. First, you mark up your goods to Canadians, because you take their paper to the bank and the bank doesn't credit your account with as much as fFace value. At some point you can't keep track of the decline and you refuse altogether to accept Canadian currency. No amount of Canadian currency would you take to pay for an item in your store. I saw this happen in the 50's and 60's. The Canadian dollar would buy more here than a USD. In the 80's and 90's only 65 Canadian dollars would equal a 100 USD, and stores refused to take Canadian dollars, anymore.
Richard Russell's lesson:

Lesson -- Gold is money, I know it, Greenspan knows it, the Fed knows it, and the US government knows it. But the lie that gold is a commodity lives on. Ultimately every lie is exposed and every truth comes to life. As for gold, it's only a matter of time before the central banks of the world are forced to admit that GOLD IS MONEY.

Why will the truth be forced upon them? Because as the price of gold in terms of central bank paper rises, the desire for central bank paper will decline. Even an idiot will draw correct conclusion from that action.
Mover Mike

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