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We have established golds critical role as the backbone of monetary systems. Hopefully there is an understanding at this point that your personal assets should likewise be backed by something real. The logical question remains, how should one acquire this misunderstood asset?

In order to properly own gold an allocation of physical bullion, exchange-traded bullion, large, medium and small mining companies and exploration stocks must be achieved.

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Sandwiched between mercury and platinum on the periodic table, gold is just another element occurring naturally in the earth’s crust.   This shiny yellow metal differs from its peers in that it has a powerful effect on human beings.  The search for gold has consumed untold resources and countless lives.  Often dubbed the currency of kings, entire nations have been sent to war over this treasure.  Once acquired, protection from theft becomes an owner’s main concern.  While gold might be seen as many things, it is most simply money.

The next logical question may be: what is money?  In order for something to function as money it must be all of the following:

• A medium of exchange
• A unit of account
• A store of value

Throughout recorded history many things have been used as money.  At times raw commodities served the purpose.  In colonial America cotton and tobacco were periodically treated as currency.  The biggest problem with these alternative sources is that they are subject to spoiling or rotting and can easily be tainted causing them to unexpectedly lose value.  Modern money, still made of cotton, is subject to a different set of perils.

If you are to survey ten random citizens asking each “What is money?” you will likely find that nearly 100% of them reach for their wallet to display a paper copy of their national currency.  Whether it is Yen, Euro, Dollar or any other modern note, this is where their understanding of the subject ends.

The dollar for example is issued by The Federal Reserve and is acceptable tender for tax liabilities.  This creates the basis for trade and valuation.  The Fed was created in 1913 and most citizens have no idea that this private institution is owned by a group of private banks.  The Fed was given the power to create and issue currency on behalf of the nation.  The nation was told that this authority would carefully govern the money supply through its network of reserve banks eliminating bank runs and economic volatility.  The nation had just experienced the San Francisco earthquake of 1906 and the financial crisis of 1907.

The earthquake and massive fires that followed caused a great amount of destruction in San Francisco.  Much of this destruction was indemnified by British insurers causing a tremendous amount of capital to flow across the Atlantic.  In 1907 The Bank of England, another private institution, raised rates fiercely in response to these capital flows.  This action lured capital away pushing the United States into recession.  In the wake of these events congress formed The National Monetary Commission who recommended the creation of a central bank.

Initially the Fed created an amount of currency that was worth 1/20^th of an ounce of gold.  In 1933 president Franklin D Roosevelt issued executive order number 6102 demanding that all citizens turn their privately held gold over to the government.  Failure to comply with this order carried the threat of up to a $10,000 fine and imprisonment.  In the weeks preceding the order many wealthy, well-connected citizens moved their gold overseas.  The average citizen followed the order and turned in their gold.

Once the gold of the citizens had been confiscated by the government it was revalued to reflect a conversion rate of $35 to each ounce.  Now the government had more ounces and could create more currency denominated by those ounces.  This newly-minted money could be used to accomplish the goals of the government including redistributing some of the money to secure votes before elections.

After World War II the US claimed to have more than 22,200 tons of gold.  Since the beginning of recorded history there have been approximately 160,000 tons of gold mined and most of that gold still exists above ground in some form.  To put things into perspective, all of that gold would fill roughly two Olympic swimming pools.  One nation controlling nearly 15% of the world supply creates a superpower that can only be defeated from the inside.

As World War II drew to a close leaders from all 44 allied nations met at The Mount Washington Hotel in Bretton Woods, NH.  The purpose of this meeting was to form a monetary system that would govern the post-war world.  This system established many entities that we still know today including The World Bank and the IMF.  Due to its dominance in the war effort and vast gold reserves the US dollar would be chosen to anchor this new system.  Member nations would be required to maintain an exchange rate with the dollar which in turn would always be convertible into gold at a rate of $35 to one ounce.

The security created by the combination of post-war peace and a stable monetary system would somehow not be enough for the United States.  Eventually the true nature of politicians and their insatiable quest for power would put pressure on the most important part of this system.  John F.

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First the University of Texas takes delivery of $1 billion worth of gold. Now the Bank of Mexico, the country’s central bank, has purchased 100 tons of gold. Full post…

In our webinar yesterday, we showed a chart comparing gold and the US dollar index, as you can see below:

We said what is interesting about this chart is the fact gold and the US dollar have moved in a positive correlation lately. We’ve highlighted the area on the chart roughly where you can see the two price series started moving together. This isn’t usually the case as you well know.

In fact, we usually see a very tight negative correlation, i.e.

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