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This is a snippet from a recent issue of the Gold Forecaster with

  Subscriber-only parts excluded.

In this the third part of this series we look at the fall of gold as a medium of exchange and the freeing up of gold ownership from August 15^th 1974 onwards.  

We previously stated that gold ownership was made illegal on 1^st May 1933.   What we did not tell you and we correct now, was that U.S. citizens, under Order 6102, were to own up to $100 in gold coin [+5 ounces].   Today that would be worth under $5,000 a mere token gesture to real gold owners.   It acted as a tiny ‘escape valve’ to the general body of citizens and did not detract from the fact that effective gold ownership was abolished.   So that we fully understand the attitude of governments to gold [which remains real money in times of crisis] we add this paragraph: -

Congress could easily revoke the privilege again. In fact, at no time during this century has the U.S. government recognized the right of private gold ownership. The Trading with the Enemy Act, which President Roosevelt invoked in 1933 to restrict private gold transactions, remains law.  Although private ownership of gold in the United States was legalized on August 15, 1974, the power to confiscate gold remains in the hands of the President.   The President still retains the right, under the Emergency Banking Relief Act, to "investigate, regulate or prohibit... the importing, exporting, hoarding, melting or earmarking of gold" in times of a declared national emergency.   It is highly unlikely that either the Courts or Congress would successfully argue that confiscatory powers are not implicit in the Emergency Banking Relief Act if a currency crisis or other fiscal emergency prompted the President to, once again, nationalize gold.

The ‘privilege’ not right, to own gold was restored to U.S. citizens on the 15^th August 1974 [not 1971, when Nixon ‘floated the $ against gold and stopped foreign central banks from converting U.S. dollars to gold].  It is pertinent to the thinking behind this series, to understand why these moves were made.  

The entire exercise was to move gold away from the core of the monetary system for it could not be controlled by governments and particularly the most powerful of them on this earth, the United States.   For government to have control of money they had to control its issue away from the measuring line of gold.   In the opinion of the U.S., then the I.M.F. and then accepted by all governments money had to be simply an un-backed I.O.U. drawn on governments.   Gold had to be discredited and sidelined to make this happen convincingly.   It worked!

The $ replaces Gold

1.       As the world moved out of the post-war recovery period into a global growth period, and the U.S. $ was devalued, then floated against gold, the need for a change in the system of foreign exchange arose.  This was to cope with the changing global economy and to counter, what was to be, a depreciating $ as its role burgeoned into the global reserve currency.   In the process gold was, effectively, eliminated from the system.

2.       President de Gaulle and his fellow European leaders, amazingly, complied with this, after years of exchanging the $s spent in the country for gold drawn from Fort Knox in the U.S.   They were prevented from changing their U.S. dollars into gold when U.S. gold was made unconvertible.   No doubt the huge advantages of controlling one’s own money systems, nationally, appealed to all governments.  Bankers, to this day, salivate over the thought -  money unchained from gold.   So for the first time in modern history gold left the system as a medium of exchange and currencies were issued with no backing whatsoever.  

Gold is money no more.

How could this have happened?   Well, the $ had to be put into a position where it was indispensible!   The U.S. had dominance over oil supplies through the Arab oil suppliers.   The world was stunned to see the oil price rise from $8 a barrel to $35 a barrel alongside the running price of gold.   Oil was priced only in the U.S. $.   The ‘cold war’ was still on, so Russian oil supplies were not as important then as now.   It was O.P.E.C. that dominated the oil price and these governments had to rely on the U.S. for their security.   Their oil interests became the vital interests of the U.S.   The concept of oil priced in any other currency was removed by the U.S. as the Persian Gulf came under the protection of the U.S.   Had Russia tried to take any from the U.S. it would have brought the world to the brink of nuclear war.   Anybody who used oil needed to buy U.S. $s first.   Thus the $ met the requirements of a medium of exchange and spread the world over.   Who needed gold after that?  

It is only now, nearly 40 years later, that a tiny number of buyers pay the € for their oil, not enough to topple the $.   Certainly O.P.E.C. will only do so when they can feel secure away from the protection of the U.S.   And they will only change that pricing if they can dominate demand more fully.   This can only happen once China is next to the States as a global economic force and insists on using the Yuan to pay for their oil.   Until then they will continue to have sufficient of the U.S. $ to pay for their oil in dollars.

 The need for gold was eliminated by its exclusion from international finance and as a direct alternative to the $.   So what, if the gold price went from $42.35 to $850 over the next decade.   Gold was relegated to a private investment medium from its money role.   The effect of the rising gold price was emasculated in the system as the $ became an absolutely necessary medium of exchange.   Gold was money no more, but it was still considered to constitute a danger to the $.   Hence gold sales from the U.S. first, followed by gold sales from the I.M.F., as they used these gold sales to elevate the $ [and the SDR - unsuccessfully] over gold, as money.   They were successful, but the running gold price still reflected the falling value of currencies.  

As no government really wanted gold out of the system completely [so continued to hold onto their reserves of gold] but still wanted the gold price to drop back into insignificance they followed a path of accelerating gold supplies through loaning bullion to gold miners in a process that allowed miners to make money as the gold price was falling [accelerated sales].   So the gold price fell from $850 to $295 through these accelerated sales and the threat of central bank sales, until 1999 and the “Washington Agreement”.

But, at the turn of the century, through these central bank gold sales agreements, it became clear that gold was not down and out.   The cap on the central bank sales of gold reassured the market that there would be no more than a containable amount of gold sales each year.   Bear in mind that to the central banks, the price of gold will only be really relevant in the extreme days that may lie ahead, not before then.

When those extreme days come the price of gold will be secondary to the amount each central bank holds!  Then the prospect of confiscating its citizen’s gold will become very attractive again. 

The fact that it has happened before makes it possible that it can happen again!  It is wise to make sure that you are not vulnerable to such an act.   We will look at this in more detail in a later part of the series. Make sure you follow this and other fundamental gold matters in the : Gold Forecaster - www.GoldForecaster.com

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. 

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.  Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

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I think everyone can agree the latest stock market rally has been an amazing – nearly unprecedented – run for stocks.

Where it seems no one can agree is whether the rally is over.

Here’s how to tell when it will come to an end and how to keep your investment portfolio safe.

Let’s start at the beginning.

Why Investors Need to See the Light and Slow Down:

The Dow Jones Industrial Average is up 46% since March 9, when the world itself seemed to be coming to an end. In the entire 113-year history of the Dow, only six rebounds have been bigger and faster. But the swiftness and magnitude of this bounce-back aren't reasons to be cheerful; they are reasons to be cautious.

In March, stocks traded as low as 11.7 times their average earnings over the previous 10 years, adjusted for inflation, according to finance professor Robert Shiller of Yale University. That put the market at its lowest valuation since January 1986. Today, however, stocks are selling at 18.4 times Prof. Shiller's measure of earnings. That isn't only up hugely from March but is above the long-term average of 16.3 times earnings.

It is at times like these, when a rising market sweeps our spirits up with it, that investors need to evaluate their emotions and consider whether their beliefs and actions are justified.

Sounds like the outlook for stocks isn’t so good, right?

Well, it doesn’t stop there.

The Wall Street Journal goes onto add:

In August, corporate insiders -- officers and directors of public companies -- sold nearly 31 times as much stock as they bought. From last September through this past March, in the depths of the bear market, that ratio was just 2 to 1, according to TrimTabs Investment Research of Sausalito, Calif. The long-term average is about 7 to 1.

It’s easy to make a bearish case in this market. But most of the bear cases can be easily trumped.

This Will Mark the End of the Rally:

Since the March lows, the Dow has rallied more than 45% in just 170 days. Throughout it all, there have been countless comparisons to the 1929-30 rally. A few months after the 1929 crash, the Dow put in a temporary bottom too. The index went on to rally 46% in 148 days. This has some bears saying the rally is living on borrowed time.

True - the rally has been strong and it is showing signs of slowing down, but it’s hardly unprecedented. The greatest stock market rally in history makes the current run-up look quite tame. In 1932 the Dow soared 111% in just 98 days.

That’s what is keeping the bearish sentiment so high. September is only a few days away. September, on average, is the worst month for stocks over the past 50 years.

Of course, monthly averages are hardly good at predicting the future. If they were, we’d all simply short the market in September and buy in December and January (two of the best-performing months) and retire.

The likely real reason for the average returns being so low is coincidence. Dragging September down has been the 1987 crash, Russian debt default in 1998, September 11 terrorist attacks, and last year’s meltdown.

Here’s what I’m getting ready for the end of the rally – whether it’s already over or it will be over in six months, a year, or last much longer.

As for the market as a whole, it reminds me of the late 90s stock market bubble.

If you recall, the Russia debt default blew up the infamously overleveraged hedge fund, Long Term Capital Management. The scare sent the markets tumbling. In response, the Fed chairman opened up the money spigots to limit the damage of a single hedge fund so closely interwoven into the financial markets it caused systemic risk. Sound familiar?

What followed, with the help of a great story in the form of Y2K, was the dot-com bubble. That bubble bled over into biotech stocks and, to a lesser extent, into large-cap stocks.

Everyone kind of knew it was overvalued, but everyone went along for the ride anyways. And for those who had discipline and who were armed with tools like trailing stop-losses, walked away with most of their gains in hand.

The stock market rally is something we have covered at length throughout all of Q1 Publishing’s investment newsletters. And it’s something we are going to continue to watch in the Prosperity Dispatch, our free investment newsletter.