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Message: GOLDEN THOUGHT FROM DAN DENNING..
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GOLDEN THOUGHT FROM DAN DENNING..

posted on Apr 01, 2010 09:58PM

We cooked it up this morning over coffee.

--It was clear by 1974 that a global fiat dollar standard was going to be inflationary. The markets priced relatively scarce tangible goods appropriately as the supply of dollars grew. This recent move in gold has been more gradual, probably because what's happening in the world of fiat money is less clear. But things are clearing up now, which is why we'd expect to see a higher gold price.

--What's more clear? That paper money of any vintage is increasingly garbage.

--In the first five years of the last decade, it looked like the euro was becoming a serious and respectable contender as a world reserve currency to complement, or even replace, the U.S. dollar. Central banks and investors began diversifying their foreign exchange reserves to reflect the power shift in the fiat money world.

--But in the last two years, it's dawned on more and more institutional investors that the super cycle in paper money itself - kicked off in the early 1970s - may be reaching its final self-destructive peak. This is, of course, an extreme position and many people would argue against it. To accept that paper money backed by nothing is a con game is to accept that much of the prosperity of the last twenty years is phoney and that the policy makers who fix the price of money are con artists.

--You don't say that sort of thing in polite company. But it doesn't mean you shouldn't wonder whether or not it's true, and what it would mean for your net worth if it was. Obviously we believe it is true. And we think the gold price is beginning to show that other investors agree. It is possible, however, that a genuine euro crisis would send the U.S. dollar higher and gold lower in the short-term.

--After all, gold made a short-term high and nearly busted through US$200 at the exact time that the the Dow was making a 1974 bear market low at 577. Over the next two years the Dow nearly doubled and gold fell. By the end of 1976 the Dow was at 1,004 and gold had fallen back to just above $100.

--It's interesting to note that the gold price bottomed in 1999 about six months before the Dow made its tech boom high (in January of 2000). And today, the notable difference in the behaviour of the gold price is that it has not made lower lows as the Dow has bounced off its lows last year. Gold looks stronger and more resilient now than it did in the early 1970s when it was harder for retail investors and institutions to buy it through a vehicle like an exchange traded fund.

--Fortunately, people know more about gold today and understand its investment benefits. If the Dow makes a new high, it's of course possible gold could correct below $1,000. But either way, we expect the next down move in U.S. stocks to be bullish for the gold price.

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