Despite the recent pullback in the price of gold, the metal will have a strong future.
Following the repeal of the Glass-Steagall Act and the passage of derivative deregulation during the Clinton administration, the financial cognoscenti were aware that these conditions would enable excess credit and debt formation. This would permit the financial community to profit nicely based on high sales and strong trading volume, albeit at the expense of many investors and society at large.
This environment permitted short-term financial gains for the financial elite at the expense of long-term losses for their clients, stagnant economic growth for the masses and fiat currency instability. Hence, the price of gold per ounce skyrocketed from $300 in 2000 to $1,900 in 2011.
During this ride there have been severe corrections along the way. Following the failure of Bear Stearns on March 17, 2008, extreme global economic uncertainty caused the U.S. dollar to appreciate relative to most currencies, since the United States represented an economic and political safe haven with massive monetary liquidity, financial guarantees and low-interest loans. Consequently, the price of gold fell nearly 30 percent over a seven-month period, from $1,000 to $700 per ounce.
Despite this correction, the price of gold rose 157 percent in the following three years, from $700 per ounce in October 2008 to $1,900 in September 2011. Since then, global uncertainty has taken hold again, as monetary liquidity has not proven to have long-term sustainability. As a result, the U.S. dollar has appreciated based on the trade-weighted exchange rate for a broad array of currencies, according to The St. Louis Federal Reserve Bank. Accordingly, the price of gold fell more than 25 percent, from $1,900 to $1,400 per ounce.
This appears to be a temporary correction of a strong bull market. Gold will continue to rise over the next few decades, as the value of real, tangible assets begins to more closely approximate the global monetary stock. The monetary stock is comprised of currency in circulation and excess and loanable bank reserves, but excludes credit extended based on these reserves.
The global monetary stock represents approximately 20 percent of the total global money supply. Therefore, a strong economic and financial equilibrium will result when currency reserve assets are valued at nearly 20 percent of the total money supply.
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