The Day the World Changed
The Impact 14 March 1968 had on Money,
Gold & Mining Shares
21 February 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 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.
The Barron's Gold Mining Index (BGMI) is a weekly data series that spans seven decades from 1939 to the present date. Upon careful examination of this record, the reaction of gold mining shares to war, political chaos, and currency inflation is quite different from what current expectations would have us believe.
This should not be surprising. Currently the widely followed XAU data set is the source data for most professional opinion on the gold mining industry. However, the XAU was first traded on 19 December 1983. This was three years after the October 1980 bull market top in the gold mining shares. So it is fair to say that the XAU is primarily a partial record of the post 1980 - 2001 gold share bear market.
The XAU is a modern index of gold mining shares that includes volume and open interest data. But like so much of today's digital data, it is confined within the digital data bubble I noted in Part 1 of this article. To my knowledge, only the BGMI records seven decades of history for the gold mining shares.
An interesting point to know about the Barron's Gold Stock Index is that it is the sole survivor, an antique remnant of the now long forgotten Barron's Stock Averages. Barron's published for 50 years (1939 to 1988), stock averages for over 20 industrial sectors. They provide a unique piece of history of the American stock market from a time when vacuum tubes were high tech to the era of computer microprocessors.
Except for their Barron's Gold Stock Average, now called The Barron's Gold Mining Index (BGMI), Barron's discontinued their Barron's Stock Averages in October 1988. The BGMI has been continuously published since before Hitler invaded Poland in 1939. The 67 years of data contained in the BGMI data set is the definitive source of information on gold mining shares price action under all economic circumstances.
Sorry to say that Barron's allowed five decades of their publication's recorded history for oil, textiles, steel, auto manufacturing and many other industries to fade into oblivion. Likewise, Dow Jones discontinued their excellent 20 Bond Average data just a few years ago. The DJ 20 Bond Average was an important historical bond data series for utility and industrial bonds that spanned 64 years from 1938 to 2002.
I believe these venerable, decades old market metrics based upon arithmetic averages were casualties of the digital information revolution. They must have seemed quaint to the vast majority of market watchers. These old "averages" were based upon a 19th century method of using a simple average on share or bond prices to compute market measurements. Indexing market capitalization is the modern digital method, and I think a superior method. The new indexed measurements also come with open interest and volume figures, none of the antique averages did.
Most likely, the Barron's Stock Averages and the Dow Jones 20 Bond Averages lost their following long before Barron's and Dow Jones pulled the plug on Grandpa. But pull the plug they did and 50 years of market history was cast aside and forgotten.
The survival of the old Barron's Gold Stock Average, the current Barron's Gold Mining Index, says something of the attachment gold once had on people, such as the past editors of Barron's. The demise of the Barron's Stock Averages and the Dow Jones 20 Bond Averages also says something about Barron's and Dow Jones too. Both publications are authoritative publications of record for financial statistics. I wish they would be more respectful of their decades long, and quaintly antiquated historic data series.
I would not be surprised to learn that currently only a hand full of people have been seriously tracking the BGMI for the past few years. I may be the first person to have made the effort in compiling the BGMI into a digital format. I hope this article attracts the serious attention that the BGMI rightfully deserves. To do this, the BGMI needs to be passed around.
As a service to the readers of this article, I am providing a link to Mr. Nick Laird's Sharelynx webpage. Mr. Laird has many of the historical data series I have compiled, including the BGMI. People interested in gaining access to this body of historical weekly closing price data should go to the below webpage. For a very reasonable fee, MR. Laird will sell you data.
Sharelynx's data page
Along with the above data on your computer, you will also need a reasonably priced subscription to Barron's. Investing is like following a soap opera; you need to watch each episode or the ever changing plot will leave you behind. Barron's will provide you with current weekly data needed to maintain your weekly data set. With all this, you can follow the markets like a serious student.
The amazing statistical tables published each week in Barron's have been a wonderful resource of hard statistical data for serious investors since 1921. Barron's will mail its publication overseas to Asia, Europe and anywhere else. It is also available online on a subscription basis. Personally, I could not function without it.
I want to say that I have not in the past, do not now, or have any expectations that in the future I will be receiving financial payments from Mr. Laird, or Barron's for any reason. Maintaining historical financial data is my hobby - providing a webpage for data hounds is a hobby for MR. Laird. Barron's doesn't even know I exist. No one is getting rich making this offer, except maybe you.
Now back to the Barron's Gold Mining Index.
The next chart is a comparison between the BGMI and XAU. This is a chart containing every data point Barron's has published on these two series from their first weekly published figures to the present. For your information, the XAU traded for about a year before being included as a statistic published in Barron's. So the XAU as seen below is actually four years from the BGMI top of October 1980. As a record of the gold mining industry over time, we can see that the BGMI is far superior to the XAU.
The BGMI appears to have been in a persistent vegetative state from 1939 to 1963. As we will see below, hidden within this period (1939 - 63) is a record of great importance for insight on the US Dollar, gold and gold mining shares.
Why does this chart take on this appearance? It is solely due to the effects of monetary inflation on the paper US dollar's value. Most market measurements valued in dollars, that spans this same period, have this appearance. The Dow Jones Industrial Average looks very similar. This annoying effect of inflation, makes analyzing one decade of a market to another very difficult. Inflation's distortion to price valuations is another reason why historical data is not fully appreciated. As we can see in charting the 67 years of the BGMI, the first three decades contain no information in this chart. We really only see half of the whole picture.
The Federal Reserve's chronic increases in the total volume of the reserve currency it manages, creates a base line shift in the fundamental values of the American market's measurements over the decades. This gradual increase in the basic stock of money (CinC), has over time created distortions in relative price values from one decade to the next.
The first value listed for the BGMI was 48.75 in the 26-December-1938 issue of Barron's. I will assume 750 as an average value for the BGMI from 1978 to present.
A 10% swing in the 1939 value of 48.75 produces a 4.87 point change. A 10% swing in my assumed 1978 to 2006 average of 750 produces a 75 point change. Both numbers are based upon a 10% swing in the BGMI. But the results of my assumed value is almost twice that of the total value of the 1939 listing of the BGMI.
Monetary inflation is why these decade long charts have assumed this appearance over time, just as monetary inflation has caused a huge loss in value of the paper US dollar over time.
Let us look at the BGMI from 1939 to the end of 1968, a span of time that includes the operation of the London Gold Pool (1960 to 14-March-1968). I have also included the plot for US Currency in Circulation (CinC), indexed to 1.00 = 26-Dec-1938. We can now easily see how many times the volume of paper US dollars in circulation increased over this same period.
Remember this chart the next time a financial expert expresses his opinion that gold mining shares are sensitive to massive inflation, wars and political upheaval.
Consider the following facts.
The darkest hours of World War II, for Britain and the United States (where these shares were traded), occurred from the very start of this chart until 24 June 1942. This period corresponds with Hitler's obvious preparations to invade Poland to his actual invasion of the Soviet Union, 3.5 years later in June 1942.
In this 3.5 year period, the world's political structure and economy was torn apart, while the US CinC doubled. Here is actual global chaos and massive inflation - yet the BGMI declined in value by more than -60%! This is not my opinion but an indisputable fact recorded in the BGMI.
After June 1942, the issue of war turned favorable for the Allies, but CinC inflation roared ahead. Still, the BGMI would not return to its December 1938 high until 1961. That was over twenty years after 1938.
We don't see the BGMI doing anything significant after World War II until 1961. During the 1950s, some Americans were building bomb shelters to prepare for the coming Soviet "atomic" attacks, and air raid sirens were installed in every major US city. The BGMI did not respond to this fear; however the Dow Jones Industrials were having a very nice bull market all during the 1950s. Current market logic expressed in the financial media would have these trends of the 1950s reversed.
CinC fell slightly between the inter-war period of December 1945 to June 1950. After the start of the Korean War in June 1950, CinC slowly started to pick up again. Let's blame this slight inflation on the Korean War. Here is a second shooting war with more inflationary acceleration of CinC. Again, here was another shooting war that had no discernable effect on the BGMI in the above chart.
Everything changes with the Kennedy / Johnson presidencies. After the start of President Kennedy's term of office, two things happened that the BGMI was very sensitive to.
- CinC continued to noticeably increased, however now the US gold reserves noticeably decreased.
- The London Gold Pool was formed.
The BGMI started to increase in value as the paper US dollars increased in numbers, and gold US dollar left the United States.
The world saw the creation of the London Gold Pool as the US Government's rejection of the Bretton Woods Monetary Accords (BWA). Printing more paper US dollars than there were US gold dollars to back them would, by the laws of supply and demand cause the price of gold to rise upwards in price from the official BWA's price of $35 an ounce.
The London Gold Pool's purpose was to pool the resources of US friendly central banks. Any time more buyers came into the London Gold Market than there were sellers, the pool would punish anyone who dared to purchase gold at a price above the official $35 dollars an ounce. Such purchasers would soon find that they would be met with massive selling of central bank gold. The London Gold Pool intended that over $35 an ounce gold purchases would be a losing proposition.
From the first day of The Pool's operations, the world of money knew that the United States no longer intended to honor the Bretton Wood's Accords. For reasons good or bad, printing paper US dollars in excess of its gold reserves was now the monetary policy of the United States. The world of money being realistic about such things, understood that the US would never again return to a limited paper currency.
The paper US dollar became a wasting asset. To see the truth of this, one only has to go to a library that offers news papers of the 1950-60s and compare the advertised prices then and what we pay for similar items today.
No doubt this increase in the BGMI was primarily from US investor demand. This was a time when American citizens needed a license to hold gold or face imprisonment, stiff financial penalties, or both. From 1933 to 1974, the shares in gold mining companies proved to be an effective American proxy for gold itself.
Note on the table below. I chose not to use the highest prices for gold and the BGMI of 1980. As 1980 was a period of extreme volatility in both gold and the gold stocks, it is pointless to pick a typical price. From the first week in January 1980, (the basis date for the values I used in my below table) gold was to rise $220 dollars in the next two weeks, and then fall $180 in the week after that. As $800 gold was but a fleeting moment in 1980, I thought it appropriate to use a 20 year period from the first week in 1960 to the first week in 1980 in the table below.
The BGMI record clearly shows that as long as the US could inflate CinC without having a corresponding decrease in the US Gold Reserves (1945-58), the BGMI was indifferent to CinC inflation. However, when the inflation in CinC finally resulted in calls from foreign central banks upon the US gold reserves (1958 to 1968), the BGMI entered a significant bull market.
It is most important to know that this 1968 BGMI bull market's top occurred less than a week before the Bank of England's announcement of its withdrawal from the London Gold Pool on 14 March 1968. The day the Bank of England withdrew from the London Gold Pool, was the day world changed. The following two charts are important in understanding the bullish price action of the gold shares in the 1960s.
Who today is aware that the 1960s was a golden decade for the gold mining shares? Gold stock investors from 1960 to 1968 saw gains of over 1,200% in eight years while gold itself was kept at $35 an ounce for the entire period!
Another important point for gold shares in the 1960's, is that after the closing of the London Gold Pool, gold was allowed to be traded freely for prices over $35 dollars an ounce. The increase in gold prices triggered a BGMI crash of minus 60% over the next two years.
This seems confusing, but there is logic to it. I promise, by the end of this article all will be explained and understood.
The next chart is a side by side comparison of the US gold reserves with the BGMI from December 1938 to January 1970. The two vertical dashed lines mark the start of the run on US gold and the withdrawal of the Bank of England from the London Gold Pool. There can be no doubt why the 1958-68 BGMI bull market occurred. It was the gold share's reaction to the run on US gold and the existence of the London Gold Pool.
Please note that the Vietnam War was concurrent with, but not a factor of this bull market in the BGMI. As in the case with World War II, the Korean War, and the Cold War that created constant US domestic fears of Soviet atomic attack upon the civilian population of the United States, the Vietnam War was an incidental non-factor to the BGMI price action from 1960 to 1973. (See the below chart)
As you can see above, the 1960's BGMI bull market coincided with the London Gold Pool, * not * the Vietnam War. Without a doubt, for the first three decades in the history of the BGMI, (1939-68) a period that involved the US in World War II, The Korean War, the Cold War and The Vietnam War, the BGMI's primary trend was completely indifferent to American's involvement in armed conflict.
If foreign armed conflicts produced no reaction to the BGMI, what about American domestic upheavals? The 1960's racial problems occurred during the 1958 to March 1968 BGMI bull market, however Martin Luther King was assassinated on 04-April-1968, three weeks after the closing of the London Gold Pool. The BGMI was to crash by -60% in the next two years as the radical "Black Power" movement grew in influence.
The anti-war riots and political upheavals peaked in the United States, and elsewhere, after the closing of the Gold Pool and the market top in the BGMI. The BGMI collapsed 60% during the anti-war chaos of the next two years. In light of this data, on what basis can anyone claim that the gold mining shares are sensitive to war, social unrest, or persistent American public fears of sudden death from domestic or international terror?
The XAU is silent upon these years. One must wait some time before the digital XAU will be traded.
Considering the gold mining shares market of today, and seeing that the start of the current bull run of the BGMI closely matches that of the September 11, 2001 (9/11) World Trade Center Terror Attack, can we assume that the US's involvement in Iraq is somehow buttressing the BGMI extremely strong performance since 9/11? Many experts' considered opinion may say that this is so, but to assume this one must be unaware of the 67 years of BGMI history.
The Iraqi conflict is into its third year of combat operations. Of the four major wars the US has been involved in since 1939, the Iraqi conflict has seen the fewest human causalities to US troops abroad. To date, there have been negligible consequences on the home front when compared to the other three major wars. World War II and Vietnam were traumatic events to the American public. The Iraqi War, up to this point in time, has not been.
By the end of the current bull market in the BGMI, it will be very clear that the factor supporting its bullish primary trend will be monetary inflation and nothing else.
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