The Defacto Gold Standard, Commodities Vigilantes, and Meaningless All-Time Highs

As the DIJ prepares to revisit the stratisphere we shall hear proclamations of victory and glorious boasts. Hyperbole will run amock.

A word of caution.

Since its 1999 peak of 42.5 ounces, the DIJ has lost 60% of its value to gold. The apple's been cut into a 11,000 slices, and if you took all the remaining pieces and put them back together, you'd find the apple was less than half the size it was before. See where I'm going with this?

The apple metaphor is way of explaining what happens when bankers print more and more and more money. Which is happening, and has always happened. The trouble is, over the last six years asian central bankers, european central bankers and the US central bankers have been printing money faster than they ever have before, and all at the same time.

The Euro zone's M3 money supply is 8.6% higher from a year ago, and the UK's M4 is 12.2% higher. China's M2 money measure is 18.8% higher. The US M3 is off the charts. Greenspan inflated the M3 money supply by 72% or, $4.3 trillion over six years to a record $10.27 trillion, then, out of sheer shame, decided to stop publishing the M3 measure on March 24th, 2006.

With everyone printing money lunatics just loosed from the asylum, commodities traders have had to look somewhere else to find an accurate measure of worth. Dollars and Euros are just to unstable. Gold works nicely.

Increasingly we find commodities traders using gold as the measuring stick. Any time the central banks try to pump up equity or housing markets they are confronted by higher gold prices. What we're seeing is gold becoming more and more accepted among global traders as the preferred measure for valuing exchange traded assets.

At some point, this becomes a de-facto gold standard, where commodities vigilantes can jackup long term bond yields on short notice... almost at will... maybe as much as .5%. Basicly taking the central bankers over thier knee and giving them a well deserved whippin'. There is awesome power in the hands of the traders if they choose to excercize it. They could eventually force the central bankers to decrease the money supply in real terms.

Can't happen you say?

Already has happened says I. It happened throughout the 1980's and early 1990's.

Gold broke $720 today. If nothing else made any sense. If this whole post went over your head... just take this from it... Just a few years ago gold was $210 bucks per ounce. $1000 in gold back then (approximately 5oz) would be over $3,600 today.

That's called investing.