The Day the World Changed
The Impact 14 March 1968 had on Money,
Gold & Mining Shares
1 March 2006
Part 1 of this article will examine the significance of the London Gold Pool and the global monetary regime from the Bretton Wood's Accords, to the present time. It also examines the shallowness of the digital financial archives. In the age of information, investors, economists and makers of "policy," may not have the necessary information to properly examine our current age of inflation.
Part 2 of this article will examine the effects of monetary inflation on the seven decades of recorded price history found in the Barron's Gold Mining Index (BGMI). Gold mining shares have proven to be a powerful indicator of future financial trends that everyone with money in the markets should be aware of.
Part 3 A & B of this article will further examine the seven decades of the Barron's Gold Mining Index using a charting technique I call The Bear's Eye View (BEV Chart). Using this technique I will prove my thesis that since 1938, US monetary inflation alone has driven gold mining shares to their price extremes, both up and down.
Part 3 A
In this last part of this article, I will be examining the effects of monetary inflation on the BGMI. I have found that monetary inflation not only caused the past bull markets in the BGMI but have also caused the BGMI to crash as much as minus 82% in value. All other factors are moot.
These wild volatile swings in the value of the BGMI are a source of constant frustration to mining share investors. But if one steps back, and views the BGMI as a single part of the whole, we can see that the BGMI is also a barometer predicting where the inflationary flows of Federal Reserve liquidity are going to: financial assets or real assets.
But first I must explain my below "Bear's Eye View" or "BEV chart." With the BEV Chart, I will make my case that for 67 years, both bullish and bearish primary trends in the BGMI were solely the results of US created monetary inflation, and nothing else matters.
In the BEV chart below, I have marked the three gold share bull markets by placing them between the orange, green and blue vertical lines. The bear markets are found in between the different color vertical lines.
Here is the unaltered BGMI chart from the published values for a comparison. Note the details given in the above BEV chart for the 1939-63 period of the BGMI
Both the above charts used the identical BGMI data. However, the BEV chart allowed us to strip way the distortions on market valuations caused by decades of inflation. I have a lengthy explanation on this technique in another article I wrote called: "119 Years of Dow Jones Bear Markets." A Google search will make it available to you, but it is simple enough to explain it in the few paragraphs below.
In a nutshell, I passed each of my 3,503 weekly BGMI data points (67 years of data) through a screen using the following formula:
(BGMI / Last BGMI All Time High) - 1
Here are the actual Excel formulas used in my spread sheet for the first data point (26 December 1938) and the last (13 February 2006) used to construct the above BEV chart.
I first wrote the first formula, and then note how I placed a "$" between the "cz" and the "1009" in the =MAX() formula. This makes the first week in the range an absolute reference that does not change as I copy this formula down the next 3502 rows on my spread sheet. I can now copy the formula down from 26 December 1938 to 13 February 2006 in a few seconds.
The BEV formula converts each numeric value in a data series into percentages within a strict range. No percentage will result in more than zero% or less than minus 100%.
Each new all time high is converted into a zero percentage value. Any number that is not a new all time high is converted into the negative percentage from the last new all-time high of the given range.
Let's break down the BEV formula used on the 13 February 2006 BGMI value to its particular components.
1). [cz4512] = BGMI of 973.12 recorded in Barron's 13 February 2006 issue
2). [max(cz$1009:cz4512)] = the range of values, (3503 weekly published values of the BGMI from 23 December 1938 to 13 February 2006) used in locating the BGMI's latest all time high. For 13 February 2006's BEV charted value, the latest all time high is the BGMI value of 1,285.16 from the 13 October 1980 issue of Barron's. That was 1,322 weeks, or over 25 years ago.
Anytime the BGMI produces a new all time high, this formula divides this new all-time high by itself, and when any number is divided by itself, a positive value of 1.00 results. This step removes the distortion produced by monetary inflation.
Think of the value of 10 as our last all time high. This formula would divide this latest all time high (10) by itself. 10/10 = 1.00 or in percentage terms 100%.
Any number that is not a new all-time high (less than 10) is made to divide itself by the last all-time high (10) in the given range. This produces a positive percentage * of * this number from the last all-time high. Think of our last all-time high of 10 and our new value of 7. Dividing 7/10 = .7, or in percentage terms 70% of 100% as that is what 7 is, 70% * of * 10. We continue with our numbers 7 & 10 below in #3).
3). [-1] = Subtracting -1 from every data point converts each new all-time highs from 1 to zero, or in percentage term 100% becomes 0.00%. This step prevents any number in the given range to exceed zero or 0.00% in percentage terms. It also renders all other values that are not a new all-time high, into a negative percentage value * from * its latest all-time high.
Using our numbers of 7 & 10 we found that 7/10 = .7. We then subtract -1 from .7, or (.7 - 1.00 = -.3). In percentage terms, -.3 = -30%. So, if our last all-time high was 10, but this week we have only 7, we know that the market fell -30%. * from * the last all time high.
The logic behind the BEV chart is to convert all new all-time high values into zero percentage values and all other values into a negative percentage value from their last all-time high.
It is very important to know that except when values become new all-time highs, manipulating data with this formula does not alter the chart appearance or percentage moves seen on a BEV chart.
A comparison of the BEV chart and the usual chart of the BGMI shows that the chart plot from 20 October 1980 (the week after the last all-time high) to 13 February 2006 are identical to each other. Importantly, the same is true with the period of time from 26 December 1938 to 21 Aug 1961. However in my first chart, this period of time is the area I identified as the "persistent vegetative state" and appears as a straight line. The BEV chart reveals all the details in this very important period of time, and on a scale that can be compared to any other period on the BEV chart.
Over the decades, this formula would treat an inflated series of data's 100,000 exactly the same as it treated the original 10. So with a Bear's Eye View or BEV chart, we can now see the extremes in valuations, from decade to decade charted together in a manner that provides the insight of the market between the all-time highs. Or in other words, we can see the bear markets side by side. That is why I named this chart, the "Bear's Eye View" because that is what your looking at - the bear market drops and the bullish reversals off the bear market lows between the new all-time highs.
The two charts do complement each other. Together they allow us to the price action during the entire 67 years history of the gold mining shares. But the BEV chart actually provides the most detailed account of the 67 year history of the BGMI.
Now back to the BGMI using the BEV chart. With amazing detail, we see two significant bull markets in the BGMI (1958-68 & 1970-80) each lasting ten years.
The 1958-68 BGMI bull was a lamb from a petting zoo. Here was a bull market in gold shares where money was easily made. Thanks to the BEV charts unique characteristics, we can see that the biggest correction in the 1960-68 market was about minus 30%. The BGMI also made reasonable sized moves, both up and down and went to its new all time highs with baby steps. Nothing extreme, just slow, sure and profitable trending price action in the BGMI for ten years that returned 1,292% from start to finish.
The 1970-80 BGMI bull was named "el Diablo" and el Diablo hated all the world, gold bugs especially. Rarely did el Diablo make new all time highs, but went ballistic when he did and then crashed down on people's positions by -40%, -50% even -68% before going ballistic, (again) into a new all-time high.
After el Diablo's final all-time high in October 1980, how could you tell that it was over? By 1980, gold stock investors were conditioned to expect over -50% crashes in valuations as normal market corrections. What a horrible market to have money in. the 1970 - 80 bull market was a market that killed off many believers in gold before it peaked, and then kept all too many people hanging on for the next decade or more.
From start to finish the 1970-80 BGMI returned 1,336%, if you had the guts to go toe to toe with el Diablo, and knew when to get the hell out of Dodge City. Most people didn't. Heaven help the fools who bought gold stocks on margin with this bull running around.
Now consider the differences between these two bull markets in the BGMI. Most likely many of the same companies included in the BGMI in 1960 were still present in 1980. The ending of the 1960's bull market was only two years distance from the start of the 1970-80 bull market. How had the world changed between 1968 and 1970?
The logical dividing point in the BGMI series is the termination of the London Gold Pool on 14 March 1968, which as you remember marked the top in the 1958 to 1968 BGMI bull market. Below is another BEV chart of the BGMI that marks the termination of the London Gold Pool. Without doubt, something happened to the gold mining share market after the termination of the London Gold Pool. Where there was once peace and quiet, there was now extreme volatility of a psychotic nature.
I believe this increase in volatility in the BGMI is due to the world's concern of the stability of the US dollar after 14 March 1968. From 1950 to the closing of the gold pool, The Federal Reserve, US Congress, President and US Treasury have proven their ability to brush aside any fiduciary responsibility in their management of the world's reserve currency.
After the gold pool broke up, people with real wealth, who truly understood the implications of having their fortunes defined in terms of an unconvertible reserve currency, must have always kept an eye on the dollar exit.
For the first time since 1789, no one, including the US Government knew what an American dollar meant anymore, or if the United States would really get away with decoupling the paper US dollar with its gold reserves. I think that is what we are seeing with the BGMI after 14 March 1968 - the international fear of what might happen to the world's reserve currency.
The "policy makers" denied the world a stable reserve
currency. Why would the increase in volatility of a leveraged gold derivative not be something to be expected?
Remember this; gold for thousands of years has always been either money or a money substitute. This makes gold mining a perpetual put option on the full faith and credit backing the paper US dollar.
After the ending of the Gold Pool, there were times when the world fell in love with the US dollar. Double digit annual gains can do that, for awhile. But the post London Gold Pool extremes in volatility we see in the BGMI tells me that there was never a marriage contract, or even a good faith understanding between great wealth and the US dollar after 14 March 1968.
The world was a happier place when a non-inflated 4% return from a savings account in a bank was the reasonable expectation on a paper US dollar investment. For the general peace and quiet of the world, it is best if the "policy makers" do nothing to create the conditions where gold stocks become an attractive investment. It is very disconcerting to see the strong appreciation in the BGMI since its lows in November of 2000.
With this in mind, I believe that the BGMI is much more than just an index of actively traded gold shares. It is also the continuous weekly report card on the management of the paper US dollar for the past 67 years from 1939 to 2006. After 14 March 1968, the paper US dollar, all too often found getting a gentleman's "C" a difficult thing to achieve.
The post London Gold Pool dollar is backed by debt, and debt can be understood either as an asset or a liability. Looking at our present period, previous to November 2000, (the bottom in the 1980 - 2000 BGMI bear market) Wealth chose to view the US dollar as a desirable asset to be held. It was dollars, not gold which one needed to buy semiconductor and software stocks during the 1990s.
After November 2000, almost a year before 9/11, wealth's opinion of the dollar shifted to view it as an increasingly questionable liability to be sold in due course. Why hold on to inflating dollars when double digit dollar gains on the NASDAQ are no longer to be found. No one is running from the dollar, but the extreme strength in the post November 2000 BGMI is strongly suggesting that knowledgeable people are walking briskly from it.
The following comparison between the Dow Jones Industrial Averages (DJIA) and the BGMI BEV charts are interesting.
- The fall of the BGMI from 1980 to 2000 was as deep as the fall in the Dow Jones Industrial Average (DJIA) from 1929 to 1932.
- The DJIA had a gap of 25 years between its new all time highs (1929 to 1954). It appears likely that the BGMI will make a new all time high in 2006. That would make a gap of 26 years between the BGMI new all time highs from 1980 to 2006.
- The DJIA took 3 years to fall to its bottom (1929 to 1932) and 22 years, from that bottom to reach a new all time high (1932 to 1954). The BGMI took 20 years to reach its bottom (1980 to 2000) and 6 years to reach a new all time high, (2000 to 2006). This assumes that it does in fact reach a new all time high sometime in 2006. That is why I placed a "?" in the table, because as of February 2006 it has not done so yet, but I am hopeful!
Looking at the BEV charts of the DJIA and the BGMI, it seems that the BGMI from 1980-2006 is replaying, in reverse, the DJIA 1929-1954 BEV chart. That seems very positive for gold mining stocks, but very bad for the dollar.
Here is a table for the bull and bear markets of 67 years for BGMI current to the 13 February 2006 issue of Barron's (*).
So what are we to make of all this? The BGMI seems to be indifferent to war and social unrest at all times. There are frequent incidences when the BGMI has * decreased * significantly during long periods of massive monetary inflation. Remember, the BGMI went down 65% during its 1939-42 bear market when CinC inflation was at its most intense in the 20th century and while a world war waged on! The BGMI performed in very similar manner after the post London Gold Pool era from 1968 to 1971. In the Age of Greenspan we saw CinC increase by a whopping 538% while the BGMI crashed -82%!
Is this confusing? Then step back and consider the following explanation found in Part 3 B.
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