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GOLD AS A FINANCIAL ANCHORGold has been common form of money due to its rarity, durability, divisibility and ease of identification for millennia. As a standard of exchange of value for the circulation of coinage or paper currency, its effect has been mixed with both success and failure during various periods of its financial history since the late 19th century. Even in the case of the Bretton Woods Agreement of July 1944, pegging gold to US$35.00 an ounce was part of the process of stabilising the world's currency markets post WWII, but as government spending increased debt, there was eventually a need to break with this fixed association. There are clear advantages of fixing the gold price to the amount of money supply - it has a tendency to stem inflation pressures and also limits the amount of paper currency being issued. A central bank could not create unlimited quantities of money at will, as there is a limited supply of gold - to date, approximately 160,000 tons of gold has ever been produced with approximately 34% of this being held as reserves by central banks around the world at a current market value of US$3.236 billion dollars. By contrast, the latest M2 money supply figures released by the Federal Reserve show circulation/depositories of US$9.3 trillion dollars - and this is just the U.S. The disadvantages are equally revealing - a return to a gold standard would inflate the price of gold exponentially whilst restrictions on the money supply would cause a severe downturn in the growth cycle of global economies. Does the historical price activity of gold provide any clues that either affirms an exponential rise to indicate a return to some form of gold standard, or alternatively refute this possibility instead validating the case to remain with a fiat currency system controlled through monetary policies but with more austerity measures attached? To answer this, we return to the methodology of price determination and pattern recognition qualities of the Elliott Wave Principle (EWP - ref. R.N.Elliott, the 'Wave Principle, 1938 & 'Nature's Law, 1946). The concept of the EWP is that every action (price trend) is followed by a re-action (counter-trend) and that trend and counter-trend phases of growth and decay can be identified through their repetition of pattern and measured using the Fibonacci ratio/proportion series (Leonardo di Fibonacci, 1170-1250). In fig #1, we can observe the progress of the bullion price of gold represented in US$ dollar terms from the 1920's onwards. In EWP terms, the definition of a 'trend' is a pattern that forms into a five distinct waves or price-swings within specific criteria of characteristics. For example, the 1st wave begins unfolding in the direction of the prevailing trend, in this case upwards when gold prices rose from the Great Depression lows of US$17.06 in 1931 to 34.87 in 1935. The 2nd wave that follows is the counter-balancing effect of the gains made in the first wave advance and so a price decline takes effect but in order to maintain the larger prevailing uptrend, never break below the starting point of the first wave. During this period, the gold standard was in place fixing gold to US$35.00. When this was abandoned in 1971, gold prices began an exponential rise depicting the natural growth and expansion phase of the 3rd wave, the longest wave of three moving in the direction of the prevailing [up]trend just as R.N.Elliott described in his treatise thirty years before. This was finally exhausted at the top of January 1980 at 850.00 with the 4th wave counter-balancing phase then pulling prices lower but ensuring its completion is modest by comparison to the gains of the 3rd wave. Almost twenty years passed before the 4th wave completed at 251.70 in 1999. The following advance has since begun the final sequence of the entire pattern that began from the 1932 lows - the 5th wave. This now brings us up-to-date on current activity. Basis Fibonacci ratio analysis, the amplitude of each of the five waves can be measured and the fifth commonly unfolds by a fib. 61.8% ratio of the net gain of waves 1-3 (super-cycle wave I - III), 17.06-850 x 61.8% = wave 5 (wave V). Applied to our log-scale chart, the 5th wave high is projected towards finalisation at a price level of US$ 2455.00. Given that gold prices are already accelerating into this upside target and visibly in the latter stages of growth/expansion, we can deduce that using gold as some form of monetary anchor or stabilisation programme would end up being useful only in the short-term. This is because the prevailing forces that govern gold's price progress during the last seventy-nine years will ultimately end this uptrend and then exert its influence that begins a period where a counter-balancing decline must unfold as a proportionate measure of the entire preceding sequence that evolved from the 1932 low of US$ 17.06. During the latter stages of this decade, gold will be expected to decline rapidly if left alone in its free-market context with Elliott's guidelines indicating an ultimate return to the price area of the preceding 4th wave at 251.70. Fibonacci price-ratios that measure the entire advance of the five wave pattern from 17.06 to the projected upside target at 2455.00 results in a comparable level of a fib. 50% retracement to 204.13 per ounce!
Cross-referencing gold's price level for the 5th and final wave to 2455.00 with silver's pattern progression together with analysis of the gold/silver ratio over the same period does qualify this upside limitation rather than something more fantastical as proffered by some. The identification of silver's Elliott Wave pattern progression measures a final upswing peaking towards the US$90.00 level around the same time gold attempts 2455.00+/-. The gold/silver ratio pattern independently projects a long-term ascending triangle pattern unfolding from the (year) 1920's with current downside projections measuring a contraction of the spread to 28.66 at the same time gold and silver are due to complete their upside target levels - see fig #2. Dividing 2455.00 by 90.00 equates to 27.27, just a fraction from the 28.66 measurement. When correlations like this occur, it significantly increases the credibility of the analysis and equally assigning a high probability of these events being realised. And so, if the Elliott Wave Principle is allowed to be our guide, then the natural effects of growth and decay will ultimately produce the very effects that governments and central bankers are looking for - a period where austerity measures take hold that in turn diffuses international debt even though the outcome will be recessionary. Peter's article features as part of a wider discussion that is currently gaining momentum within the financial community. For more details about the Gold Standard of the past and its potential as a Financial Anchor for the future, visit www.gailfosler.com END | FIN | ENDE Read Gold as a Financial Anchor? By Peter Goodburn on The GailFosler Group |
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