U.S. Dollar and Gold: An Anniversary

Forty years ago today, U.S. President Richard Nixon appeared on television to tell the world that the U.S. was severing the relationship between gold bullion and the U.S. dollar. Michael discusses how this event has affected our economy today.Forty years ago today, U.S. President Richard Nixon appeared on television to tell the world that the U.S.was severing the relationship between gold bullion and the U.S. dollar.

Back in 1944, in a historic agreement reached in Bretton Woods, New Hampshire, the U.S. government agreed to redeem U.S. dollars for gold bullion at the rate of $35.00 U.S. for one ounce of gold for the central banks of foreign countries.

The relationship established between the U.S. dollar and gold bullion at Bretton Woods was often referred to as the “gold standard.” Based upon the relationship between the greenback and gold, at Bretton Woods, the central bankers of foreign countries agreed to adopt the U.S. dollar as their official reserve currency. In a nut shell, the U.S. backed its fiat money with gold bullion and foreign central banks backed their currency with U.S. dollars. All the currencies had a link to gold.

Thirty-three years after the Bretton Woods agreement, on August 15, 1977, Nixon took to the airways to tell the world and in specific to tell the central banks of the foreign countries that the U.S.was reneging on the gold standard deal established at Bretton Woods.


We all know what happened once the tie between the U.S. dollar and gold was eliminated: The U.S. government was free to print money as needed, as it no longer had to worry if it had enough gold in its vault to back all the money being printed. Since the abandonment of the gold standard, the value of the U.S. dollar has lost considerable ground…a process called “inflation.” It takes a lot more U.S. pennies to buy a cup of coffee today than it did in 1971.

There have been very stark critics of America’s action in abandoning the concept that fiat money should be backed by gold. Some say lack of the gold standard has caused global economic instability since 1977.

But since 2002, another phenomenon has occurred. The price of gold bullion has boomed. Gold has risen in price from $300.00 U.S. per ounce in 2002 to almost $1,800 today—a gain of 500%. And some economists, like me, are calling for gold to hit $3,000 per ounce.

There are many reasons why the price of gold bullion is skyrocketing. (I have written about those reasons in PROFIT CONFIDENTIAL countless times and will continue to write about why I believe the price of gold will rise.) Ultimately, I would not be surprised to one day see the value of the U.S. dollar somehow tied back to gold bullion.

Michael’s Personal Notes:

I love the weekends, as they give me time to catch up on my much-needed reading. All week long, I’m inundated with research reports. Sunday afternoons is my time to open up a bottle of Brunello and spend a solid four to five hours just reading financial reports on everything from the market, the economy, and precious metals, to individual stock sectors and other forms of investment.

What I’m finding quite fascinating is the number of analysts who are deeply bearish on America. I’ve never quite seen anything like this before…so many people calling for the demise of America.

On the one hand, these are smart analysts who bring up very good facts to back up their solidly bearish views. On the other hand, I’m wondering if all this bearishness is getting overblown. After all, when does the market or economy do what is expected of it?

Here are just two reports from the weekend:

Elliot Wave expert Robert Prechter believes that the U.S. is in the early stages of a depression right now.

Well-known investor Jim Rogers, who is highly critical of specific people in Washington, predicts that the U.S. will eventually default on its debt obligations. Rogers believes that the U.S. economy never left the recession that started in 2008 and that we are still in a recession.

Yes, I’ve been very bearish on the economy as well. But, as a contrarian, one really has to wonder: will the stock market and economy really roll over and perform as the majority of analysts predict?

Where the Market Stands; Where it’s Headed:

I continue to hold the belief that a bear market rally that started in March of 2009 presides. According to a report from EPFR Global, a Massachusetts-based research firms, investors pulled more money out from global stock funds last week than any other week since 2008. And we all know what happened after 2008; stocks rallied big time.

I’m going against the popular opinion, as usual, on this one. While many stock advisors are saying that stocks are dead, the rally is over, I’m sticking with my belief that the bear market rally, in spite of it being “long in the tooth,” is still alive and well.

The Dow Jones Industrial Average opens this week down 2.5% for 2011.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Back in January 2002, I personally started buying gold shares.” Michael Lombardi, PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Michael has remained steadfastly bullish on gold since 2002.