Dollar Up Equals Gold Slightly Off

The American dollar is up and if you’ve been following along, you know what that means: the long ascending path of gold has stalled for a bit.

For the last several weeks, there has been a media campaign by the new administration of U.S. President Barack Obama to bring hope to American consumers.   He’s done several interviews, had a news conference, and talked about it at every step.  His Treasury Secretary, Timothy Geithner as well as the Chairman of the Federal Reserve, Ben Bernanke, have both been up to Capitol Hill to answer questions, trying to restore faith in the economy.   Consumer confidence is, of course, one of the key factors in any economic recovery.  Others being unemployment, the stock market, and a strong dollar abroad.   And there’s a tough road ahead on the way to recovery.

Unemployment is still soaring.  Government experts have commented that those figures may continue to spike upwards through the rest of this year and into 2010.  But if you talk to the average unemployed person on the street, you can hear varied answers from “oh, it’ll all be fine, once these government programs get underway and they start hiring,” to the sheer panic caused by unemployment that has gone on too long.

But we will recover.  And how do we know this?  Because of consumer confidence, as indicated by personal spending, which rose a modest 0.2% in February, according to the Commerce Department.   This followed a revised 1.0% increase in January, which had to be revised to reflect that growth after earlier estimates went astray.  These tiny little increases were all predicted by government economists.

At the same time, personal income edged downward by o.2%, which is re-couping the same amount that it gained in January.  So the see-saw action continues in American wallets.

Also in gold prices.  The price went soaring upwards in the midweek, but then spiraled downward again on Friday.  And where gold had been selling for $1000 per ounce earlier this year (and well in advance of earlier predictions that it would hit that range around October to November) it is now trending downward around the $940 range.

We’re going to expect this for some months to come.   The government’s top money talkers haven’t said to expect anything other than a difficult year ahead.   President Obama has not suggested that smoothing out the economic numbers will be easy.  Or soon.  But it will get there.

Gold Standard – Part II

Last week we talked about the Gold Standard, which was when the United States government guaranteed each gold-backed American dollar in circulation.

With the current economic contraction that is underway, some people are positing the notion that returning to the gold standard would help.  But the reality is that the gold standard contributed to the Great Depression.

A currency is only as good as the government’s credibility that backs it up.  Sticking with the gold standard?   If a government goes on, then off, then on again,well, you can see that credibility is quickly lost.  And historically, that is what countries have done.

In the years after World War I, many countries had suspended convertibility of gold during the war, and then stayed of gold.  They experienced fiscal chaos as speculators moved in and wildly fluctuating monetary policies robbed citizens of stability needed to rebuild.

But counting on a gold standard, in a fiscally unstable market, when investors, speculators and citizenry doubt governments’ ability to keep to that standard was edging too close to the cliff.

International capital flows became more erratic, not less, as doubts were raised about whether first the pound, then the dollar.

Britain lost ground under these speculative attacks and released its gold standard in 1931.  The U.S. toughed it deliberately raising interest rates in the same year, when the economy was already in near free fall.  The resulting damage to the economy is well known.

The longer a country stuck to the gold standard, the more overall deflation it experienced. Many experts are persuaded that this deflation greatly added to the economic difficulties of those countries that insisted on sticking with a fixed value of their currency in terms of gold.  It got worse, not better.

The bottom line is if buying gold is your standard for maintaining economic stability, then let it continue to be your standard.  As for a return to the gold standard, that is unlikely and probably ill advised.