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Buy Gold Before the Ides of March – if You Can
Beware the Ides of March – March 15 – this year more than ever. On Wednesday, March 15, voters in the Netherlands will select their next leader. The People’s Party for Freedom and Democracy (VVD in Dutch) is currently leading the polls by a narrow margin. This year, several Euro-zone nations, including France and Germany, are poised to stage the same kind of anti-EU vote that Britain made last June. If Holland votes to exit the EU, followed by the French in April or May, that could spell the end of the EU.
The Dutch election results will be made known about the time the U.S. Federal Reserve announces the vote of their next Federal Open Market Committee (FOMC) meeting on whether or not to raise short-term interest rates. That same morning, March 15, two of the most important statistical indicators on the U.S. economy will also be released – February’s retail sales and the Consumer Price Index (CPI). All in all, Wednesday, March 15, 2017, could be a red-letter day for gold – as it has been several times in history
America’s Central Bank Shenanigans Inadvertently Help Gold
Mid-March in American history tends to stir the blood of central bankers. Let’s just take a quick look at four snapshots in history, taken at about 50-year intervals (1816, 1862, 1917 and 1968), all in mid-March.
On March 14, 1816, Congress voted to establish The Second Bank of the United States, with a 20-year charter and $35 million in funding. It didn’t last beyond the 20-year term of its charter. When it came up for renewal in 1836, President Andrew Jackson led the drive to abolish the bank and its network branches.
On March 17, 1862, the U.S. Treasury abandoned the gold standard by sanctioning paper Greenbacks, which were not tied to any promise of redemption in gold. As America entered its second year of a suddenly-long and costly Civil War, governments of both North and South found it necessary to replace their scarce gold with cheap paper money. By war’s end, the Union had printed $450 million greenbacks. The natural result was runaway inflation by war’s end. This was true during the War of 1812, too:
It took over a decade after the Civil War to normalize the price of the gold-backed dollar. From 1879 to 1933, gold was pegged at $20.67 per Troy ounce, and then $35 from 1934 to 1971, but along the way the U.S. installed the Federal Reserve in 1913. In the same year, the 16th Amendment authorized income taxes. These two institutions gained power when the U.S. entered World War I a century ago this month.
The events of early March 1917 amount to the birth of a Brave New World, in both America and Europe:
- On March 1, 1917, the U.S. government released the Zimmerman Telegram to the public, in which the German foreign minister secretly asked the Mexican government to declare war on America in exchange for certain favors. This led directly to America’s entry into World War I by early April.
- March 3: The U.S. Congress passed the first “excess profits tax” on corporations, and raised the top personal income tax rate from 15% at the start of the year to 67% by year’s end, to “pay for the war.”
- March 7: The Russian Revolution broke out, resulting in the formation of the Soviet Union by year’s end, but in America Victor released the first jazz record, made by the Original Dixieland Jass Band!
- March 12: Stalin and his henchmen arrived in Petrograd (St. Petersburg), on the same day a German submarine sank an unarmed U.S. merchant ship, the Algonquin, leading to more calls for all-out war.
The birth of jazz is good news, but the launch of the Soviet Union and high taxes is not such good news.
On March 15, 1968, during the escalation of another war, this time in Vietnam, the U.S. Mint stopped buying and selling gold. Two days later, a two-tiered gold price system was negotiated in Washington, DC at the first-ever G-7 meeting. The first G-7 meeting was a gold consortium, consisting of the United States and the six European nations taking part in the London Gold Pool. Gold’s two tiers were (1) gold continuing to trade at $35 between nations, while (2) a private market would be allowed to bid the price of gold higher. Soon thereafter, on March 20, President Johnson signed a bill removing gold backing from the dollar. This was the first step toward an abandonment of gold and the free-floating of currencies.
Americans were not allowed to own gold until the end of 1974, so Americans were denied gold’s rise from $35 to over $180 from 1968 to 1974, a gain of 418% in a time when stocks were declining.
Since the birth of the Federal Reserve, gold is up 60-fold. Since the removal of all gold-backing of the dollar, gold is up 35-fold, so it’s safe to say that gold wins whenever central banks grow in power.
Wear Some Gold on St. Patrick’s Day….
To recap: The Greenback was born on March 17, 1862. The two-tier gold trading system was born on March 17, 1968. In more recent times, the first day that gold broke the $1,000 barrier was on Monday, March 17, 2008, yet another St. Patrick’s Day benchmark. That was also the day the U.S. Dollar Index hit its all-time low of 70.7 after the weekend demise of the Wall Street investment banking firm, Bear Stearns, launching the financial crisis of 2008. The London gold fixing reached $1,011.25 that day, while New York’s nearby futures contract closed at $1,001.40 on St. Patrick’s Day of 2008, nine years ago.
The fate of the dollar is a major wild card when projecting the future price of gold in the U.S. Gold’s largest gains came when the dollar war falling: 1968-1980, the late 1980s and 2001-2011 (see chart):
The fundamentals (rising demand, limited supply) favor gold, but the rise and fall of currencies is the way we measure gold in terms of our government-printed paper. In the nine years since the dollar bull market began on March 17, 2008, the dollar price of gold us up just 24.8%, but gold is up 87.8% in euro terms:
We don’t know if gold will stage another big move on the Ides of March – after the Netherlands vote and the Fed decision. This year, St. Patrick’s Day falls again this year on a Friday, so it would be the mark of a prudent investor to anticipate tomorrow’s market-making moves before they appear in the headlines.
Then, on St. Patrick’s Day, you can wear a little gold with your green.