Moneyization Part Seventeen

By: Ned W. Schmidt | Fri, Sep 23, 2005
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Moneyization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money in which they have a higher store of faith.

Or, Understanding Up and Down

Direction is an essential parameter that must be understood. Gold investors have the right direction while paper asset groupies continue going off the wrong way. Perhaps the fundamental problem is the education of so many of today's professional money "managers." Being able to turn on a computer does not make one a qualified investor. Apparently though, that is perhaps the only skill required of so many of those managing other people's money. Those comments may be somewhat of a digression from our proper "direction," but that is to be expected when trying to understand the "red or black" betting that has replaced investment in today's world. Perhaps the CFA should be replaced with the CRF, Certified Roulette Forecaster. If you doubt this criticism, read some of the antics in what is called correlation trading!

Knowing what is up and what is down is part of understanding direction. The dollar value of Gold tells us something about the direction of the dollar's value. A lot of effort is expended trying to guess the direction, trend, support, resistance for many purported measures of the dollar's value. Simply looking at the dollar value of Gold gives you the answer. Gold is the only near efficient market for the pricing of national monies, and that includes the formally mighty dollar.

The dollar price of Gold also gives you the Gold price of a dollar. The meaning of that almost cute statement is important, and should not be dismissed. Understanding this fundamental, but simple, concept will help one understand the implications of the economic and monetary policies that are influencing tomorrow's value of your wealth. Gold's rising price in dollars, and a goodly number of other national monies, indicates that the purchasing power of fiat money is declining. Gold may be the only decent statistic around for assessing and evaluating the purchasing power of a national money.

With the exception of the mindless twits that calculate the consumer price index for the United States, the rest of us understand that such measures are nonsense. Those measures fail to serve their intended functions. Rather than providing a meaningful tool for understanding what is happening to the purchasing power of the U.S. dollar, they are constructed in some bizarre fashion that results in measuring nothing meaningful. The Federal Reserve then goes a step further in the game of fantasy statistics by excluding most of a consumer's needs, preferring a measure that only includes "brussels sprouts and electronics." Few of us spend most of our money on the fictional consumer basket that the Federal Reserve uses to set policy. How many of you decided not to buy gasoline last month, opting instead to buy a flat screen television?

Coming to understand that when $Gold is up the dollar is down is investment enlightenment. The dollar price of Gold also tells us the Gold price of the dollar. Such is also true for any other national money. For example, if Gold is trading at $400 per ounce that value can be converted into how much Gold is necessary to buy a single dollar. Simple take one(1) and divide it by 400. That translates into 0.0025 ounces of Gold per dollar. $500 Gold, likely this year, converts to 0.0020 ounces of Gold per dollar. When the dollar price of Gold is rising, the Gold price of the dollar is falling. The rest of the world will pay less Gold for each dollar. The value of that dollar, in Gold the eternal money, is going down. The most recent trend in the value of the dollar is portrayed in the first graph. For those of you living in other national monies, these rules likewise apply to your money and Gold.

First Graph

In that first graph is plotted the Gold price of the dollar over the past couple of weeks. The time period chosen is in particular post Katrina and pre Rita. At first the dollar's value rose as the world was relieved that New Orleans did not meet the dire fate most expected after listening to the news media's storm coverage. Slowly the reality of the situation became evident. The value of the dollar began to slip. As is readily apparent in the graph, the value of the dollar plunged to a low.

Why is the world appraising the dollar's value in this way? First, the storm's damage is no trifling matter. A $200+ billion hole is a big hole, even for an economy as large as the U.S. Wall Street gurus, afraid that people might wisely take their money out of paper assets, have put a positive stroke on Katrina. Many have concluded that Katrina is actually good for the U.S. economy. No doubt some will be raving bulls over Rita. Matter similar to that wisdom can also be found amongst the litter in the cat box.

Second , the U.S. government clearly is determined to raise the city of New Orleans above sea level by filling in the hole with dollar bills. That approach might actually be cheaper than whatever will really happen. We all know the U.S. government does not have a spare $200 billion, or that needed for post Rita. In the past year the U.S. deficit was about $600 billion. So, the U.S. deficit will jump more than a third.

The problem is where they get the money. Foreign investors already have more than $2 trillion of U.S. government debt. Their appetite may be waning as we will see later. If enough gullible foreign investors cannot be found, the Federal Reserve will buy it. For some time the Federal Reserve has avoided monetizing a significant portion of the U.S. government deficit as foreign investors did it for them. That time may be passing, and the markets realize that the Fed Res monetizing debt means the value of the dollar should go down. Markets like to discount the future ahead of time so the dollar went down now. $Gold went to a new cycle high.

Global financial markets are appraising the likely response of the Federal Reserve to the events of the future. This appraisal is decidedly negative. Given the historical performance of the Federal Reserve that response is quite rational. The world may have been fooled with the first bubble in stocks. People, though, adapt and learn from their mistakes. The world is not being fooled by either the U.S. Mortgage Bubble or the massive deficit looming at the federal level. Given the near total politically oriented policies of the past on the part of the Federal Reserve, holding dollars is not judged to be a good idea. If the rest of the world realizes that, why are you still holding so many?

Second Graph

The second graph portrays the Gold value of the U.S. dollar over the last ten years. For those relatively new to Gold, the peak in that value came in 1999. That was the year when several European central banks realized that selling Gold and buying U.S. debt was a really dumb idea. They could see the bubble at work in the U.S. stock market even if the Federal Reserve could not. Those banks may have continued to buy U.S. debt, but they did not do so with money from selling Gold. That event marked the top in the value for the U.S. dollar.

$Gold is at a new cycle high because the value of the U.S. dollar is at a new cycle low. That understanding is fundamental to your wealth's well being. If you still own dollar denominated equities the purchasing power of that wealth has gone down. Ok, so your portfolio is up some in the past year. What it will buy though has declined. The value of the dollars it represents is less. You are not making "money," you are losing purchasing power. Do not be deluded by the illusion of wealth in paper!

Many investors are now developing an interest in Gold, and that is good. This response though must include more than buying Gold with idle dollars. While that action does improve your overall financial defenses, the paper assets you retain are still vulnerable. 10% of your portfolio in Gold is certainly better than no Gold in your portfolio. However if that means that 90% of your wealth is still in dollars, little has been done to alter your risk portfolio. A now popular concept is Value At Risk(VAR). With 90% of your wealth in dollar assets, your VAR is still in the wrong direction. You need to reduce your holdings of dollar assets and buy $Gold.

Third Graph

As mentioned earlier, for some time the Federal Reserve has not had to materially monetize the deficit of the U.S. government by buying that debt. Foreign investors have been quite willing to do so. That appetite continues to wane, as shown in the third graph. Plotted is the year-to-year change in the holdings at the Federal Reserve of U.S. debt by foreign official institutions, which comes from the Fed's weekly report. The trend in that buying is fairly obvious. Foreign central banks are buying less U.S. government debt. That leaves only two buyers to fill the gap, the Federal Reserve and the Social Security System.

Imagine the discussions in the central banks around the world. Their economists and other wise staffers have been recommending selling Gold and buying dollar denominated debt. Being wrong is not hard to do. Being that wrong really takes some special skills! How will the boards of these institutions response? If you were one of the directors of a central bank, how would you respond to a recommendation to sell Gold and buy more U.S. dollar debt?


We are witnessing in the dramatic rally of dollar Gold the moneyization phenomenon. Investors, institutions, and consumers around the world are turning away from the dollar, and other national monies. They are seeking security in the single form of money which history as shown as more reliable than all governments, Gold. Those that have over the years remained loyal to Gold have been referred to in rather disparaging manners, often called Gold Bugs. Well, the Gold Bugs have been right as shown in the fourth chart. The Paper Asset Nuts are the ones that have been wrong, and need a serious reality check. This graph might be a good one to send to your investment advisor if they still have your portfolio mired in stock mutual fund goo while you are being charged exorbitant fees.

Fourth Graph

Source: The Value View Gold

That all said and while the long-term case for dollar Gold is solid, every day does not necessarily present the best time to buy. As the last chart shows, good times to buy Gold do develop. Times also exist when holding and watching are wisest action. Dollar Gold is seriously over bought as a result of the storm surges, and a correction can be expected. What is not known is whether the correction will come from $475 or $500. Gold belongs in your portfolio, and you should be preparing cash to invest in Gold at the next buy signal. $1,300 Gold is in our future, and you should have part of that gain in your portfolio.

Last Graph

Source: The Value View Gold

A final comment for those readers involved in defined benefit plans at your place of employment. If your plan does not include a Gold "bucket," the time has arrived to start complaining to your human resource department. No longer is it necessary, given all the alternatives for buying Gold and Silver, to restrict the investment options to paper assets. The principal reason for such restrictions are tradition and those massive fees and commissions paid to consultants, managers and mutual fund companies. It is YOUR retirement, and you may want it to have some purchasing power when you retire. Otherwise, enjoy whatever your social security check will buy. Recommend e-mailing this article to all of your human resource staff.


Author: Ned W. Schmidt

Ned W. Schmidt,CFA,CEBS
The Value View Gold Report

Ned W. Schmidt,CFA,CEBS is publisher of THE VALUE VIEW GOLD REPORT and author of "$1,265 GOLD", published in 2003. A weekly message, TRADING THOUGHTS, is also available to electronic subscribers. You can obtain a copy of the last issue of THE VALUE VIEW GOLD REPORT at The Value View Gold Report. Ned welcomes your comments and questions, and tries to answer most all. His mission in life is to rescue investors from the abyss of financial assets and the coming collapse of the U.S. dollar. He can be contacted at

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