The Fear Index continues its relentless rise

2011-NOV-28

October was in the end a flat month for the price of gold, which oscillated between its major resistance level above $1,800 per troy ounce and strong support around $1,650. Nevertheless the Fear Index rose this month to 3.16% because of the small monthly increase in the gold price, while US M3 was almost flat.

Since the end of QE2, M3 has remained close to 14.5 trillion dollars. The absence of M3 growth is certainly not due to any restraint by the Federal Reserve (M1 and M2 have been growing). Rather, it is a result of credit destruction (M3 includes large time deposits, institutional money market funds and other large liquid assets, which reportedly are not growing).

When seen from an historical perspective, the takeaway from the Fear Index chart is not how high the index has risen, but rather, how far it has yet to go. The level of fear around the globe continues to rise as most stock markets and many European bonds continue to tumble.

In our fiat money system, the amount of debt will always by definition exceed the amount of money. Credit creation under fractional reserve banking had market-imposed limits, until central bankers acting as a lender of last resort began eroding those prudential limits. Still, under a gold standard even the central bank was limited in the amount of liquidity that it could provide to illiquid and/or insolvent banks. This final barrier to exponential credit creation was removed by abandoning the gold anchor and the subsequent acceptance of a completely unbacked fiat currency. This point is illustrated clearly by the increasing number, amplitude and duration of business cycles since the creation of the Federal Reserve in 1913, which marks a paradigm shift, while the complete abandonment of gold in 1971 stands out as a point of acceleration.

Thankfully, gold is still a safety net, a floor beyond which we cannot fall in a bust, and more generally in the form of real wealth and capital. Tangible assets will still exist even if all the artificial credit evaporates. However, because of almost 100 years of monetary exuberance, gold’s safety net is not yet well recognized or understood.

Academic opponents of gold still parrot their worn arguments that gold is too rigid, that it would not be compatible with growth, while simultaneously claiming that gold could not prevent booms and busts (which of course are made worse by fractional reserve banking and have nothing to do with gold). Their claims are wrong. A mere glance at a chart of economic growth and inflation in the USA over the past 200 years proves it. Stable prices and growth lived side-by-side under the gold standard. Booms and busts were milder in the absence of a central bank attempting to “smooth out the cycle” through central planning.

The USA has had 3 central banks: 1791-1811, 1816-1836 and 1913-present. Just compare and contrast these periods with those when central planners were not intervening in the US economy.

In his wonderful new book “Currency Wars” (reviewed by James Turk here), James G. Rickards sums up the record of the Federal Reserve with precision and clarity:

“Since its formation in 1913 it has failed to maintain price stability, failed as a lender of last resort, failed to maintain full employment, failed as a bank regulator and failed to preserve the integrity of its balance sheet.”

What about the other recurring argument of detractors of gold, that there is “not enough gold”? The answer is simple: just raise the price at which dollars could be redeemed for gold. At $54,869 per troy ounce, the USA’s official gold reserves (261.5 million ounces) would back 100% of M3. A milligram of gold would be worth $1.76.

James Turk has been writing about the Fear Index for years, as you can see in James Turk’s Free Gold Money Report.

_{gold price – goldmoney.com, M3 – shadowstats.com, US Gold reserve – US Treasury Bulletin}