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The official gold reserves in the United States steadily increased during the first half of the 20th century. Accumulation was particularly rapid following the Gold Reserve Act of 1934 which officially raised the price of gold from US$20.67 to US$35 per troy ounce. Large shipments of gold bullion went west across the Atlantic as the European central banks sold off their gold reserves for American currency. This flow of gold reversed its course beginning in the late '50s until the gold window was closed on August 15th 1971. From that date onward, aside from some sales in 1975 and 1978, the U.S. official gold reserve has remained steady. 
A recent report from Société Générale shows a chart comparing the value of the U.S. gold reserve against the U.S. monetary base from 1968 to 2008. The chart reveals a compelling argument that gold is presently undervalued. As of December 2nd 2009, the U.S. gold reserves of 8,133.5 metric tonnes are valued at US$316.4 billion, against a monetary base of US$2,081 billion. The monetary base includes both cash in circulation and that held in bank reserves. The following chart shows data going back to 1918. 
Two peak periods can be observed in the above chart when the value of the gold reserves exceeded that of the U.S. monetary base. The first peak was a result of the gold hoard accumulated by the United States resulting from the Gold Reserve Act of 1934. By the end of 1948, the U.S. held 21.7 thousand tonnes - an astonishing 75% of all the gold held by central banks! The second peak in the ratio of values in gold reserves to monetary base was caused from the price escalation of bullion during the late 1970s. On January 21st 1980 the peak price of gold hit a high of $850 per troy ounce - a record that would stand until January 2nd 2008, nearly 28 years later.1 Gold has been in a ten year bull market beginning at a low of $251.70 per ounce in August of 1999 to over $1200 an ounce in December 2009. What is of great interest is that this near five-fold increase in the price of gold has failed to significantly change the ratio of values between the U.S. monetary base and the gold reserves! The reason is that the U.S. monetary base has exploded as part of the extraordinary monetary policies adopted by the Federal Reserve in response to the global financial crisis beginning on December 12th 2007 with the announcement of a temporary Term Auction facility (TAF).2 
As of November 2009, the ratio of the U.S. monetary base to the valuation of the gold reserve is nearly 7 to 1. The monetary base is now greater than that measured by M1 as the value of bank reserves has now exceeded that held by the public's checking accounts and other demand deposits. The following chart shows a comparison of the valuation of the gold reserves against M1. 
Historical data for both the pricing of gold and the amount held as reserves can be found going back further than 1929, but unfortunately not for M1. Again we see the two peaks as before. However, at no time did the value of the gold held in reserves equal M1. The current ratio of M1 to gold reserve is 5.7 to 1. It would never happen, but it is interesting to consider that if everyone cashed in their checking accounts and went to purchase gold directly from the U.S. reserve at the current market rate, all of the gold would be gone after only 17.5% of the cash was redeemed. If the citizens decided to also cash in their savings accounts, then that figure drops to 3.5%! In other words, the ratio of cash in circulation plus the value of all publically held checking/savings accounts to the official gold reserve is 28.5 to 1. Though it would be unwise to simply project these ratios onto the current price of gold in order to determine what the price ought to be, they do suggest that gold is indeed undervalued. At only two times in recent history was gold significantly over-valued in terms of the U.S. dollar. In both of these instances there was a clear result. In 1934 the new price of US$35 offered by the U.S. monetary authorities resulted in a multi-year inflow of gold to the United States from the rest of the world. The second time was the final run-up at the end of the 1970s culminating in the famous US$850 per troy ounce price that was followed with a near two-decade bear market. The mild gold fever at present time does not compare to the long lineups of gold buyers seen in 1980. On the contrary, there is still a large level of public disinterest in accumulating gold in preference to U.S. dollars. As the 30-second Cash4Gold ad during Super Bowl XLIII revealed, the largest advertising campaigns are still aimed at getting people to sell their gold, not buy it.
Notes1 The average price of gold in 1980 was just under US$615 per troy ounce. 2 The TAF is still with in existence nearly two years later - its most recent action being a US$25 billion auction of 42-day credit on November 30th 2009 for which $16.7 billion was sold.
_____ ABOUT THE AUTHOR
Disclaimer:
The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.
Bettertrade offers a wide range of useful and interesting information to those who want to advance their trading skills. Track and analyze your trades with Extreme charts. This article has received 0 comments | View comments | Leave a comment Posted in Monetary Commentary, History, Gold, Mike Hewitt
The following charts are made from data compiled at the London Metal Exchange. 
_____ ABOUT THE AUTHOR
Disclaimer:
The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.
This article has received 0 comments | View comments | Leave a comment Posted in Metals & Mining, Mike Hewitt
Since achieving a peak collective holding of just over 37 thousand metric tonnes in 1963, central banks around the world have been dishoarding their gold. The following additive chart shows the gold reserves of central banks dating back to the start of the 20th century. 
Source: Green (1999) and World Gold Council Recent events have indicated that this trend of central banks being net sellers of gold is now reversing. Gold has been hitting new highs in recent weeks, with the U.S. dollar weakening under loose monetary policy, eliminating the gains it made in late 2008. Investors are betting that Asia's emerging economic powers will buy more of the precious metal to diversify their foreign-exchange reserves against a weakening U.S. dollar. Earlier this month, the Reserve Bank of India (RBI) announced that it had purchased 200 tonnes of gold from the International Monetary Fund (IMF). This US$6.7 billion transaction is the largest purchase of gold made by a central bank in 30 years. Several days later, the Central Bank of Sri Lanka (CBSR) announced that it had increased its gold reserves over the past five to six months by an undisclosed amount, speculated by analysts to be around five tonnes. Later that same month, on November 25, the IMF announced that Sri Lanka had purchased an additional ten tonnes of gold for US$375 million. On November 16, the IMF issued a statement that it had sold two tonnes of gold to the central bank of Mauritius for US$71.7 million. The central banks of India, Sri Lanka, and Mauritius have joined those of China and Russia as being net accumulators of gold. Russia Continues Increasing Gold ReservesOn 16 November 2005, at the London Bullion Market Association Precious Metals Conference in Johannesburg, Russia's head of external reserves announced that the Central Bank of Russia (CBR) intended to double the amount of gold in its reserves portfolio from five percent to ten percent. Throughout 2009 the CBR has been steadily purchasing gold, increasing its holding of 519 tonnes in January to 607 tonnes by October (an increase of nearly seventeen percent). Additionally, Russia's Finance Minister Alexei Kudrin stated that the Gokhran repository will sell 30 tonnes of gold to the central bank in 2009. Gokhran, which was established by Tsar Peter the Great in 1719, is the Russian state's reserve of precious metals including gold and palladium as well as gems such as diamonds. The size of Gokhran's stocks is a state secret, disclosure of which is punishable by imprisonment. This deal would be the first major gold sale by Gokhran since the fall of the Soviet Union in 1991, which kept a veil of secrecy over its sometimes significant foreign sales of precious metals and gems. China Adds to Gold Reserves from Domestic SourcesLast year China ranked as the largest producer of gold at 288 metric tonnes, equivalent to 12.2% of global output. China is also quickly gaining on India in becoming the world's largest consumer of gold. Hu Xiaolian, China's head of the State Administration of Foreign Exchange announced in April this year that the People's Bank of China had increased its gold reserves by 454 metric tonnes since 2003 and that the total was being reported to the IMF per the organization's rules. Although Hu did not elaborate on where China had sourced the additional bullion, her comments were interpreted as implying they came from domestic sources and likely included the refining of scrap metal. This increase makes China the world's fifth-largest holder of gold, just ahead of Switzerland, and places it among the six nations plus the IMF that have reserves exceeding 1,000 metric tonnes. When asked during a Reuters interview to comment on RBI's recent purchase, Xia Bin, the chief of China's Financial Department of the Development and Research Centre stated, "India's okay with it, why shouldn't we be? What's the use for so many dollars, whose purchasing power is weakening anyway? With so many foreign reserves in hand, I think China should buy [gold], without doubt." Changing AttitudesCentral banks began holding massive gold sales beginning in the early 1980s. Prices collapsed from an intraday high of US$878 per ounce on 21 January 1980 to US$252 per ounce on 25 August 1999. The last significant downward pressure on gold was the official announcement made by the United Kingdom to begin selling off a large portion of its gold reserve on 7 May 1999. That summer gold reached its lowest point in twenty years. The UK sold approximately 395 tonnes of gold over seventeen auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion.1 Central banks then agreed to limit the quantity of gold sold through the Washington Agreement on Gold. This agreement, a sui generis among central bankers, was signed on 26 September 1999. "Under the agreement, the European Central Bank (ECB), the 11 national central banks of nations then participating in the new European currency, plus those of Sweden, Switzerland and the United Kingdom, agreed that gold should remain an important element of global monetary reserves and to limit their sales to no more than 400 tonnes (12.9 million oz) annually over the five years September 1999 to September 2004, being 2,000 tonnes (64.5 million oz) in all." (Washington Agreement, 1999) Two similar versions of this agreement were signed for five-year periods on 8 March 2004 and 19 August 2009. This year is witnessing the world's central banks as being net buyers of gold following almost two decades of selling. Gold is still widely regarded as a safe store of value both among private individuals and governments. Notes1 This period is affectionately referred to as the "Brown Bottom" named after the then Chancellor of the Exchequer, Gordon Brown, who made the decision to sell off more than half of Britain's gold at the lowest point in its 20-year bear market.
_____ ABOUT THE AUTHOR
Disclaimer:
The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.
This article has received 0 comments | View comments | Leave a comment Posted in Current Events, Gold, Mike Hewitt
"No legal tender law is ever needed to make men take good money; its only use is to make them take bad money." (Stephen T. Byington) The U.S. dollar has changed from being a paper certificate for a tangible asset to a fiat currency - a paper note declared legal tender. By looking at the history of American paper money one can clearly see the distinction. The following image shows two one-dollar bills from different years (click to enlarge). 
At a glance, the two bills appear similar, but look closely. The wording on the first bill, a 1957 Silver Certificate, reads: THIS CERTIFIES THAT THERE IS ON DEPOSIT IN THE TREASURY OF THE UNITED STATES OF AMERICA ONE DOLLAR IN SILVER PAYABLE TO THE BEARER ON DEMAND This statement is completely missing on the second bill, a 2003 Federal Reserve Note. The U.S. dollar is defined by the 1792 Coinage Act as being equivalent to 371.25 grains of pure silver. One troy ounce is equal to 480 troy grains. The market value for this amount of silver today is US$13.6125. So while they both read as being ONE DOLLAR, the second bill represents a devaluation of 93% in real terms from the 1957 bill! These Silver Certificates began to disappear from circulation during the 1940s and 1950s because they were immediately shredded once redeemed for silver due to a diminishing store of silver bullion in the treasury vaults. Silver Certificates were officially abolished by Congress on June 4, 1963 and all redemption in silver ceased on June 24, 1968. Up until the late-1920s, higher denominations of issued U.S. currency were gold certificates. 
The bearer could redeem their dollars for "twenty-five and eight-tenths grains of gold nine-tenths fine," as per the Gold Standard Act of 1900. Constitutional LegalityThere is some question as to the constitutional legality of the Federal Reserve Notes we use today. "No state shall...make anything but gold and silver coin a tender in payment of debts." (U.S. Constitution, Article I, Section 10) The justification is done through a loophole whereby it is the Federal Reserve that produces the currency, not the individual States.1 The changing of the dollar from being a silver certificate to a Federal Reserve Note has enabled the production of additional money, that is, in the words of former Federal Reserve Chairman Alan Greenspan, without limit.2 Inflating the money supply causes a transfer of wealth from existing holders of money to the first recipients of the newly created money through the process of devaluation. It is, in essence, a form of theft. "...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." (Governor Ben S. Bernanke, Deflation: Making Sure "It" Doesn't Happen Here) What we today regard as U.S. legal tender notes are not legitimate dollar bills. There is no longer any paper currency or fixed concept of value known as a "dollar bill". We carry and transact business with Federal Reserve Notes, and they merely represent the concept of a dollar bill. Notes1 The Federal Reserve was established through the Federal Reserve Act signed into law by President Woodrow Wilson a few hours after being passed by the Senate two days before Christmas on December 23, 1913. 2 "And in the case of a central bank of a fiat currency regime, such reserves can be created without limit." Taken from a speech given by Alan Greenspan before the World Bank Conference on April 29, 1999.
_____ ABOUT THE AUTHOR
Disclaimer:
The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.
Get payday loans from the only online lender that has 24/7 customer service, for answers day or night. Get cash advance the next business day. This article has received 1 comment | View comment | Leave a comment Posted in Monetary Commentary, Mike Hewitt
"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens." (John Maynard Keynes, chief architect of our present-day fiat money system) The Mission Statement of the Federal Reserve, as stated on their website, is "...to provide the nation with a safer, more flexible, and more stable monetary and financial system." Below is a graphical representation of the fall in value of the U.S. dollar since the Federal Reserve took control of the monetary system. 
Sources: Consumer Price Index from the U.S. Bureau of Labor Statistics and U.S. Currency in Circulation from the U.S. Federal Reserve I would like to ask the U.S. Federal Reserve what their definition of the word "stable" is. In the first seven years of providing the nation with a "more stable monetary system", the U.S. dollar lost one-half of its value. Today, the U.S. dollar is worth less than a nickel was in 1913! The Federal Reserve was created on December 23, 1913 with the signing of the Federal Reserve Act by President Woodrow Wilson. According to the Federal Reserve website "...it is an independent entity within government, having both public purposes and private aspects." Congress has authorized the Federal Reserve to manage the nation's money supply. There has been a great deal of controversy regarding the establishment of the Federal Reserve on the grounds that it is unconstitutional. Under Article 1, Section 8, it is stated that only "...the Congress shall have power...to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures." "The Central Bank is an institution of the most deadly hostility existing against the principles and form of our Constitution." (Thomas Jefferson) Although there is a growing awareness of what government has done to the dollar, the vast majority of Americans seem blissfully unconcerned that this unbacked piece of paper can be printed without limit. The Federal Reserve Note used today is not the dollar envisioned by the Founding Fathers. The U.S. dollar was defined in the Coinage Act of 1792 as being 371.25 grains of pure silver. Today we treat this paper note as if it were actual money. This is a mistake. A "note", according to The Dictionary of Banking Terms, 4th Ed., by Thomas P. Fitch, is "legal evidence of a debt or obligation." What we think of as money today is not an asset as it was during the time when it was backed by something tangible such as gold or silver. Instead it is a representation of debt, an "I.O.U. nothing" as John Exeter once said. Central banks around the world have been creating trillions in face value of unbacked paper notes. 
When central banks create more unbacked money "out of thin air" they do not create wealth. What this newly created money does is redistribute wealth to those who receive it first. Those lucky enough to receive the dollars first are able to spend them at face value. Those who receive them later do not benefit as prices have already risen in response to the increased supply of money. Those who receive very little of the newly created money only feel the effects of an increased cost of living. "The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value..." (Alan Greenspan, former Chairman of the Federal Reserve) Click here for a related video on this topic.
_____ ABOUT THE AUTHOR
Disclaimer:
The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.
This article has received 0 comments | View comments | Leave a comment Posted in Monetary Commentary, Mike Hewitt
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