A century of transformation that lead to Gold Bubble

1900 to 1929: US had fixed amount of Dollar held can be exchanged for Gold coins. And every country allowed its individual currencies to be exchanged for gold, where every currency was fixed in reference to the amount of gold they held.
1929-1933: Great Depression
Consequence of Great Depression: US Changes its policy towards Gold.
Effect of Gold Policy Changes: Federal Reserve system should have kicked in when the systemic failure occurred during Great Depression, which did not take place. For the Fed reserve to function as expected in future for such failures, US took two steps.
1) Gold Reserve Act of 1934 brought the power for US to accumulate over large share of gold with US Treasury. As one would expect the US pegged more $ for the gold that was held by US citizens, with a 60% increase in price for gold. ($20 gold, was valued at $35). i.e. US Devalued its currency ($) against Gold.
2) Planned on Bretton Woods, NH meet by 44 nations to reach an agreement for future of stable currency standard for the world.
1930 - 1933: Gold standard collapsed under Bretton Woods Agreement
Note: Allied nations were preparing for World War II during this time.
Total Number of Nations: 44 (Allied Nations)
Bretton Woods agreement: Under this agreement , it was a setup of system of rules, institutions and procedures to regulate IMF and International Bank for Reconstruction and Development (IBRD) (Today’s World Bank)
This system started to run effectively after 1944/45.
Each Countries had an obligation: Every country will tie its currency to the US Dollar (with 1% parity) and ability of IMF to bridge temporary imbalance of payments. Where US Dollar becomes the base currency and US will link its $35 to one troy ounce.
1944 - 1969: Stability of Gold against an unstable Currency.
The gold price continued to increase beyond $35 per troy ounce due to demand, which resulted in pressure for US to print more of US$, and was forced to devalue its own currency irrespective of domestic market. To give a sense of what it looked like at that time, the price of gold rose from $35 per troy ounce in 1935 to $41.28 in 1969.
1970's US cost over Vietnam War and Increased domestic spending by Government resulted in high inflation.
US were running balance of payments deficit and trade deficit. In other words, it had to either pay gold, or pay $ to its lenders in order to meet those payment deficits. Till 1970, foreign countries held US Dollar bills and tied their currency to the US Dollar, with confidence on US market and ability to cut its budget and trade deficit.
In 1971, US printed more US Dollars, in order to pay for nation’s military spending and private investments. This was a devaluation of US Dollar by 10%. In other words, now one troy ounce of gold was $41. As per Bretton Woods agreement, countries will have to tie their currency to US Dollar. Since now US has devalued their currency, other countries that tied up to US Dollar also had to devalue their currency. West Germany (prior to 1989/90, Germany was divided as West and East) was the first country to withdraw from Bretton Woods agreement, since it did not want to devalue its currency. The move by West Germany strengthened their economy, and was value of US Dollar dropped by 7.5% against West German Currency (Deutsche Mark). Due to excess of dollars printed by US, and negative trade balance (lenders around the world), many countries started demanding US to meet their promise to pay as per Bretton woods agreement by exchanging gold for the US Paper dollars given back by those countries, they did not want the Dollars. They wanted to dump US Dollars back to US, and exchange for gold in return. Switzerland was followed by France in demanding gold in return of US Dollar Papers. Switzerland next withdrew from Bretton Woods agreement. Soon US Dollar began losing its value against European Currencies. All these events resulted in high inflation and greater spending by the US Government in domestic market, and on Vietnam War. To stop other countries from demanding gold on basis of promise to pay, US President Nixon gave a shock to the entire world by announcing the closure for gold window, where convertibility between US Dollar and Gold came to an End.
After 1971: Bubble begins to build on GOLD
After Nixon’s Shock, US Dollar was not longer tied to gold in direct proportions of closer to 1ounce / $35, but the price was declared to fluctuate based on market demand for gold. Ever since 1900 till 1971, it was mostly the Kingdoms around the world, the Central Banks & IMF which held huge reserve of gold (IMF sells gold when needed at the market price to raise fund for operational cost and other expenditures and welfare of developing / poor nations). Among the Central Banks, US Fed Reserve still holds huge amount of gold / major share of gold in its reserve. This leads to the phenomenon of linking US Economy (major stake holder of gold reserve) to gold price. In summary, market price after 1971 could go any way by supply, demand for gold and stability of global economy, since many central banks have began stacking up more of gold. In reference to the inflation between 1971 and 2011, today’s price of gold is over inflated when in reference to US economy but with globalization and taking different world economies in picture, today's price could be closer to where it is currently in ref. to adjusted global inflation in average, but its still a GOLD BUBBLE long due for burst since 1971.

Equinox vs CR-V vs RAV4 2011

1. Chevy Equinox 2011: This is a new model released by GM after restructuring in 2009-2010. It has a very good design, and looks bold from outside. Interior and performance are real big negatives for this vehicle from my tests. Plastics used on dash of Chevy Equinox has a “Tuc Tuc” sound of no padding beneath it, giving a sense of cheep plastic quality and build. Mileage is not as superior as vehicles in the same class, but the could be deviated from EPA estimates by couple of miles. Cargo space is real big positive for this vehicle.
2. Honda CR-V 2011 EX-L: The design for Honda CR-V 2011 is set to be revised in 2012. And it had a tough competition while I was selecting it in comparison with RAV4. Me and my wife did luv the style. It was not bold / expressive as Equinox, and it was not just a vehicle like RAV4 from its appearance. EX-L had the navi installed on it, with rear view camera, but it was not appealing bargain against its negative points. The navi dint have good graphics. With Honda I expect more for the price. The exterior look did suggest that there should be something inside better as well (Under the hood). That’s what one might think about this vehicle. But the truth is , I did hate its performance. Honda CRV does come with I-4 Engine in US, and only I-4 that delivers, close to 180 hp, and does not have a V6 engine for any trim level. It has a 5 speed automatic transmission that struggles to understand the torque, and switch gears smoothly. Interior is OK, but not that great until you choose EX-L. But you will need to shell more $ to get EX-L which is not worth the bucks paid for. And switching to EX will leave you with lesser options, and further trimming it down if LX was selected. Good side of Honda CRV is design, and trunk door. Negative points on Honda CRV goes around, engine performance(has a bit of drag), mileage, cargo space.

3. Toyota RAV4 2011 Limited I4: Let me get quickly to the negative points of a RAV4 2011. Tailgate trunk door with wheel mounted, is heavy. V6 has 5 speed, but overly priced when we see the performance delivered by I4 Engine. I4 Engine with 4 speed has just 1 mpg more than a V6. So if you wanted sporty ride where you can sacrifice 1 mpg, then V6 is a better option. I4 has better performance with its 4 speed auto transmission gear box. No doubt about it. All 4WD have On Demand All wheel drive (4WD). i.e the 4WD automatically engages when a slip is detected at speeds less than 25mph. So you get better fuel economy on RAV4 4WD than a CR-V 4WD. Also, while driving the 4WD is engaged but with differential torque to the 4 wheels as needed. For example, most of the torque in normal driving conditions from engine will deliver power for the Front wheels, and minimal torque distribution will be to rear wheels, and torque distribution automatically gets adjusted while you drive up a hill, slope, snow/ice etc.. Its automatically taken care, when needed without your knowledge / feel of 4WD engaging/disengaging. Also has an option for you to manually engage 4WD Lock, while you try to start in slippery conditions (<25mph). The ECU is quiet intelligent than its 2010 model. The ECU is programmed to learn from your driven method, and it will program the system to adjust the fuel injection and air intake etc.. to suite your driving habits. If you are an aggressive driver, it would program the injection system accordingly to deliver the performance you expect. But per dealers advice, it would take 1000 miles for it to fully get a useful pattern of your driving and work efficiently. There are some downsides to this system, if there are two drivers sharing the same vehicle, and where one drives different from the other. RAV4 is expected to have its 2012 model with Tesla powered EV. But due to the earthquake this release could get delayed, and its definitely going to be pricy, when compared to its 2011 models. Consumer Ratings tests have better results for RAV4 2011 model, and esply. on its mileage. It has 4 points on its Rollover, since it’s a bit taller, and its almost same as any SUV in its category. RAV4 Limited does have option for 3rd row, but it needs to come from the factory. 8 Way adjustable driver seat with Lumbar adjustments make it a good comfort for the driver. Ride on RAV4 over off-road conditions too appear soft, with all the independent suspensions working in favor of drivetrain, making it appear like a Lexus or in par with bigger SUV’s for off-road rides.

Soft but smart

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Gold Price surge over $1300 and will reach $2000 soon – how ? Lets see.

Around 1980’s the price of gold surged from $200 to $850 (Why?)

Situation in 1980’s (around) : 1) Inflation (double digit),

2) Commodities price were surging, and

3) Soviet was in War in mid east, as a result Oil was inflated too.

4) As a result of above 2, there was fear of instability. Inflation was driven by cause 2 and 3.

5) In 1971 Nixon changed that gold is not going to be standards any more for currency, and countries were getting used to new model, where in reality they had trouble working with the new system in controlling inflation (obviously it was a new system in the era of mainframes where study was all on papers)

Result :

Inflation adjusted gold price was surging.

Major factors

Fear of instability in the world (since one of major world powers were at war),  and Inflation contributed by fear at war in mid east + new currency system in place with new double digit inflation rates.

Comparing it to today's world

Current Situation: 1) Fear of systemic risk with the economies of world where real numbers appear more to be just as temporary results (short lived) because of excessive volatility in the market. (Couldn't point the actual direction of the move)

2) Commodities price are under control in Developed Nations, and out of control in developing nations. (As said in those days systems dint exist to control this, but now with that in place, banks find it as a way to give the economy to start purchasing more)

3) Inflation is triggered in Developed Nations, but system does not respond, but Developing nations have high inflation. ( Inflation is healthy if by demand, but not due to short of supply & Developed Nations are cat on the wall with this factor)

4) Developing nations have and are buying debt from Developed Nations, in other words, liquidity should reduce in developing nations and increase is in Developed nations. It appears that liquidity which is needed to be present in Developed Nations where central banks expect inflation to be triggered as a result of it, but actual investment and liquidity increases every day in Developing nations. Watch this!!! Emerging market Investment opportunities appears to be the drain hole here.

5) On the whole, basic factors for gold surge such as Inflation and fear of systemic failure of world economy is still there, but where and how its present is what that needs to be defined.

Inflation should be expected only where there is liquidity or surge of liquidity. One cannot expect water out of a dried out spring. But in which part the world inflation is currently going up? its in developing nations, but finally its there.. so nothing to worry. Its a concern that, its not there in Developed Nations, and it makes sense that it need not be present, as liquidity never appears to be present or take shape in Developed nations as its expected to be because of few drains which emerged as a result of globalization.

Fear, the next factor. Should we teach economist and media of how to propagate fear? Never. They will do better a job, and they are doing it. Actually fear does exists, because , system that's suppose to work in a world of globalization which was child of capitalism doesn't seem to obey the law of its parent. Banks in developed nations expect a spin up in economy to drive inflation, but they don't have a system to stop its child (globalization) or control it that's created some drain pipes, because if they do that, Bonds will have to be paid down finally & that's something that's not possible now, unless developed nations start producing more than what they consume. Well finally fear exist in markets where investments are triggered. Its like 10% of developed economy is happy that they are able to stay in control of funds invested in Developing nations where they pay and maintain 60% of its economy. But the rest 90% of developed economy keeps consuming the produce of 90% of developing nations. Do you get it? Yes, globalization should slow down.. Well, what's here now is what's here.. . Finally “ If a system is known, and works the way we want to, there is nothing to worry. “ But, here a System is evolving, and investors who play by probability, cannot come up with a number to play with their investments, till they system is studied well. Fear will exists for any one in a new planet till the planet is mapped. So does this, system needs to be mapped of how its going to work. Till then fear will exists.

Conclusion:

Till the time, Fear stops growing, and Inflation happens where its expected to happen, certain assets that investors count on basis of perfect probability will continue to grow. Gold does satisfy this, as its used every where in the world, and especially used as a real world commodity in places like India and China. If their banks buy those gold reserves, it does makes sense, as we expect that's where current liquidity should be.

My estimations:

By Factor of Inflation:

Just by considering an ideal system an counting on US inflation from 1980 till now, we see an inflation of 200% over 30 years, and I expect gold to be hovering around $1200-1250 if thing were same as 1980.

Globalization is a like the savior here. Thanks. Do you know why? Money / Liquidity does not matter any more as long as its any where in this world. I don't need to worry any more about Inflation just in US alone any more. Global inflation especially including China and India should be considered, and we could see by 2011 we should see gold hit a price of $1500. Cumulating the inflation hedge alone with eliminating of fear factor that's present now in this new global economy, we can be sure, that gold can hit a price of $2000 by mid of 2011 or late 2011.

By Factor of Dollar Index:

History shows that Dollar goes up, gold goes down. Inverse proportion. Since dollar is further dipping, gold hasn't surged that much.. Why? Reason, significance of Dollar Index in relation to gold is affected by other stable currencies.

By Factor of Fear:

Truly there is no number for fear factor in Index. But this is just a hype. Tomorrow if we see news flashing with good numbers , this fear could be equal to nothing. I would say, there is a slight fear factor for Investors who are not able to formulate they economy. I would say, still fear factor is near minimal at the moment or its effect on gold price might have been there when mid east unrest was due to war in Iraq, but now its no more. NATO is having control of dry lands of Afghanistan. And this country in history had minimal significance in world economy, so does it now. May be NATO lost , world still does not looses anything, but if the War is won by NATO, then its good, as one more nation will join the bandwagon of manufacturing nations to supply batteries to power car in 2020 and beyond. So no loss nor gain. Spending on War just helps the economy as well. No doubt, some one gets the money when they sell weapon, and it comes back to the system of economy, increasing liquidity. But when the current system model is identified, that's the point where Gold will start its revision / correction, if there was numbers infused by fear apart form existing global average of Inflation.

Final

Inflation is there, and you can clearly see that its going up(global average).

May be a rebalance of where Inflation will happen might change in future. But there is so much liquidity to be experienced, when the new system is mapped and hauled.

Gold follows this global inflation numbers now, and will continue to do it.

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