When they debased Gold

For 99% of recorded history, emperors, kings, and parliaments "struggled" with the limitations of gold. If Henry VIII, for instance, wanted to spend money to stimulate the English economy, he had a few choices as to where to get the gold: tax his citizenry, borrow from the bankers in Holland, dig for gold in his own realm, or seek to plunder gold from foreign sources through war or blackmail. All of these options involved significant costs and pitfalls. Henry's easiest means to expand his money supply was to debase his gold by secretly mixing in base-metal alloys. However, such a ruse was easily detected by sophisticated market participants, who would subsequently shun Henry's coinage. The result was that the governments of the world could only spend what they had.
Despite these "limitations", the global economy expanded significantly over the centuries. The march from ancient, to medieval, to renaissance, and ultimately to industrial economies occurred without the ability to easily or rapidly expand money supplies. This is because the key to economic growth is not to push up aggregate demand, as the Keynesians would argue, but to increase the efficiency and amount of goods produced. As a result, despite wars, pestilence, natural disasters, and famines, the general march of economics had always been upward. During that time, money generally increased in value as greater efficiency expanded the number of goods that a given weight of gold could buy.
But modern economists tend to ignore the period of history before the Great Depression - which is, in fact, most of history - and instead focus solely on the period since the supply of non-gold "fiat" money has been expanded at will. Although the drift began before the Second World War (with the devaluations of the Roosevelt Administration), the end did not come until 1971, when President Nixon officially dissolved the linkage between the U.S. dollar (the world's reserve currency) and gold. Since that time, the supply of U.S. dollars has expanded exponentially and has resulted in the currency losing more than 80% of its value.
Peter D. Schiff

GOLD - The Daily Reckoning

The word "unprecedented" seems too weak to convey just how much money is being printed and/or borrowed to buy off the recession. So, when will all this money start showing up as higher prices at the supermarket and shopping mall? And when will gold react to this bumper crop of paper?The historical record indicates that a surge in money growth has its peak effect on economic activity about 9 to 18 months later. Add another 12 months or so for the peak effect on consumer price inflation. In other words, the Federal Reserve is always driving with a loose steering wheel. Most of the experience behind those numbers is with relatively tame ups and downs in the business cycle - not the kind of financial violence we've been seeing lately - which adds another variable. And on top of that, the numbers are about peak effect, not initial effect.So the timing remains uncertain. But what we do know is that there are clear and unavoidable consequences to wildly energetic money creation, including, sooner or later, rampant price inflation.
"The word 'unprecedented' seems too weak to convey just how much money is being printed and/or borrowed to buy off the recession. So, when will all this money start showing up as higher prices at the supermarket and shopping mall? And when will gold react to this bumper crop of paper?"We're beginning to see interest in gold from the mainstream, which is encouraging. And enthusiasm from the general investing public will be what ultimately sends gold to the moon. Here's what we've observed over the past 30 days: 1. A number of mainstream economists and fund managers are openly expressing interest in gold. "The government can print endless money, but they cannot increase the supply of gold," said Michael Pento, chief economist at Delta Global Advisors Inc. "Anything the government cannot replicate by decree, I want to own." The firm, with $1.5 billion in assets, is doubling its gold holdings to 8%. We saw very little of this six months ago. 2. The mining industry has recovered its ability to raise capital. Take a look at the recent financings for some gold companies:
Newmont $1.2 billion
Newcrest $476 million
Kinross Gold $414 million
Agnico-Eagle $290 million
Red Back Mining $150 millionCompare this to the financial woes we hear continually about banks, brokerages, and government agencies. The only capital they can attract is government handouts. 3. While there are much better ways to turn gold into cash, Cash4Gold (who advertised during the Super Bowl) and similar businesses bombarding the airwaves with their pitches have sensitized the public to the topic of gold. Expect the interest in the yellow metal - and its price - to increase in a serious way. 4. January's Cambridge House Investment Conference in Vancouver was well attended, with the second day setting a record. Every session was packed, standing-room-only for most speakers, including Casey Research's Louis James and Marin Katusa.While no one was emphatic about the timing, most speakers agreed that at some point gold will be sought as a safe haven by the masses, who will catapult the price to new highs. Here is a quote from John Embry, chief investment strategist, Sprott Asset Management:"The average retail investor has little or no investment in gold and no understanding of how important it will be. The year 2009 will be volatile, but volatility is a small price to pay for where gold is headed. An explosion in gold and silver is inevitable in the years to come." The overriding theme was clear: Gold is going up. Period. It may or may not happen as quickly as you want, but the recent range trading hasn't defused its explosive potential.So when will gold take off? The signal won't be inflows to ETFs (although they are indicators), or jewelry sales (the '70s bull market had nothing to do with bracelets), or even sales of physical bullion (we had that in '08 and gold was up 5.5%, hardly meteoric). No, the payday rise in gold will occur when there is a significant shift in the psychology of the general public. And whether the glory days are just months from now or a year or two away, it's clear that the oasis is real and lies ahead. Is your cup ready?Regards,Jeff Clarkfor The Daily Reckoning