September 6, 2011
Canary In a Coal Mine Revisited
“It is a [disputed] question, whether the circulation of paper, rather than of specie [gold and silver
coin], is a good or an evil… I believe it to be one of those cases where mercantile clamor will bear down reason, until it is corrected by ruin.”
– Thomas Jefferson
“If ever again our nation stumbles upon unfunded paper, it shall surely be like death to our body politic. This country will crash.”
– George Washington
Days of Yore!
Ah the old days! Once upon a time, way back when, we wrote a commentary titled“Canary in a Coal Mine.” Wait a minute! It wasn’t that long ago (the date was November 24, 2008)! But it sure seems like a long time ago. Because back then, the price of gold was $800[1] an ounce. In other words, the Dollar was worth 1/800th an ounce of gold. Today gold is priced at $1,827 an ounce – i.e. the Dollar has slipped substantially in value to 1/1,827th an ounce of gold.
To put it bluntly – since November 24, 2008, the Dollar has lost 56% of its value relative to gold. Since 2000 (a mere 11 years ago), when gold was valued at $288 an ounce[2], the Dollar has lost 84% of its value relative to gold. When the Federal Reserve Bank was created in 1913, gold was worth $20.67[3] an ounce (the Dollar was worth roughly 1/20th an ounce of gold). Since 1913, the Dollar (today at 1/1,827th an ounce of gold) has lost almost 99% of its value relative to what has been considered the ultimate form of money for 6,000 years.
Thank you Federal Reserve Bank! Especially since during the time before the Fed’s creation (from 1792 when the U.S. pegged the Dollar at $19.39[4] per ounce of gold – until 1914 when the official gold price was $20.67[5]) the Dollar only lost 6% of its value relative to gold.
That’s right. During the 122 years (back to when the Dollar was first pegged to gold) prior to the existence of the Federal Reserve Bank – the Dollar only lost 6% of its value relative to gold. However, in the 98 years since the Fed’s creation – the Dollar has eroded in value by 99% compared to the ancient money of kings.
We’ve long wondered why anyone trusts the Federal Reserve Bank or any other central bank in the world. To us, they’ve consistently proven themselves to be destroyers of currencies, savings, and wealth. With important upcoming Federal Reserve and European Central Bank meetings in response to what we percieve to be central bank (and politically) created economic chaos — we see more destructive activity (money printing/currency debasement) in the cards.
In other words, as we see it, nothing has changed. To us, things have only accelerated since we wrote “Canary in a Coal Mine.”
But we digress! We believe there is a winning side to every trade and economic scenario! You just have to see the facts as objectively as possible – and act accordingly.
And for those who have not had the chance, and others who would simply like to take a trip down memory lane to create a little more perspective – here is a re-print of “Canary in a Coal Mine” for your reading pleasure.
Enjoy.
November 24, 2008
Canary In a Coal Mine
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation…The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves…Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”–Alan Greenspan “Gold and Economic Freedom” 1966
Origination of the Phrase
As recently as the 20th century, coal miners brought canaries into coal mines with them to serve as an early warning system. Canaries are very sensitive to methane and carbon monoxide. As long as the canaries in the coal mine kept singing, the miners knew the air was safe. A suddenly quiet (or dead) canary – meant that it was time to put on respirators and/or evacuate immediately. Thus the phrase “canary in a coal mine” is now synonymous with a person or thing which serves as an early warning of a coming crisis.
Golden Financial Canary
The “financial canaries” for monetary inflation (money printing) and currency debasement have long been gold and silver. When governments print money to pay for things they can’t currently afford, gold and silver often serve as the early warning system that the currency is being debased — and that prices of all things will soon likely rise. In 1792 the U.S. pegged the Dollar at $19.39[6] per ounce ounce of gold. As late as 1914 (while the U.S. was still on the Gold Standard) the Dollar official gold price was $20.67 per ounce.[7] To put it simply, for 122 years the Dollar retained almost all of its value while backed by gold. As we go to press today – gold trades at $800 per ounce. In other words, over the past 94 years (since around the time of the creation of that supposed Dollar defender – the Federal Reserve) — the non-gold backed Dollar has lost over 97% of its value relative to the price of the precious metal. More recently, in 2000, gold opened that year at $288 an ounce.[8] At today’s $800 per ounce – this means since the beginning of the decade — your Dollar has lost 64% of its value relative to that most ancient and true form of money (because it cannot be counterfeited or printed) – gold.
What’s the Fed Hiding?
The Federal Reserve continues to pile more Wall Street assets onto its balance sheet – yet refuses to divulge what they are.[9] Bloomberg News is actually suing the Federal Reserve Bank in U.S. District Court under the Freedom of Information Act to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to Wall Street banks, including Citigroup and Goldman Sachs Group.[10] The Fed is fighting disclosure.[11] We ask – what’s the Fed hiding? We think we know.
Today’s Worsening Scenario
The Fed’s balance sheet continues to expand at a rate seemingly rivaling that of the universe’s at the time of the “big bang.” Bailouts continue (with more likely sought), political promises have been made, and all the while massive debt and unfunded liabilities stare the U.S. square in the face. We have said it before, and we’ll say it again – as we study economic history, we notice that governments repudiate their debt via the inflation (money printing) mechanism.
What About That Canary?
We believe the U.S. Dollar is poised for a large depreciation relative to its current purchasing power as the government heats up the printing presses. To us, the current Dollar rally has been nothing but a mirage as investors and investment managers alike seek the ultra-low yielding U.S. Treasury as a temporary lifeboat. It’s our opinion that recent Dollar strength vs. the troubled Euro is like saying “I’m driving toward the same cliff you are – but I’m only going 80 mph. while you’re going 100!” Once the horrible Dollar fundamentals are paid attention to again – we think the Greenback will be tossed overboard.
From the London Times we learn that demand for gold smashed the previous record between July and September – with the latest statistics from the World Gold Council (WGC) showing that investment demand for gold rose 56% for the third quarter.[12]
Just like the Canary who warned miners about too much poisonous gas — we believe that Gold has, for the past 94 years been trying to warn investors that there is too much of another potentially deadly thing – an over-expanding supply of U.S. Dollars. This decade, with massive money printing hitting overdrive — the golden canary seems to be telling us to get out of the mine – and fast.
People around the world seem to be getting the message. Will Americans before it is too late?
While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another.
As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.
Sincerely,
Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com
Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.
- Kitco.com
- Ibid
- InflationData.com: http://inflationdata.com/inflation/inflation_rate/gold_inflation.asp, Sept. 20, 2007
- Ibid
- Ibid
- Ibid
- Ibid
- Kitco.com
- Bloomberg.com: “Bloomberg Sues Fed to Force Disclosure of Collateral” Nov. 7, 2008
- Ibid
- Ibid
- TimesOnline UK: “Panicked Investors Send Gold Demand Up” Nov. 20, 2008
