Historians have found lots of reasons to revile Richard M. Nixon.
[img]482|left|||no_popup[/img] The list is long; Watergate, dirty tricks and the Whispering Campaign he used to gain his first congressional seat.
Most agree that Nixon was brilliant but troubled. His paranoia ran so deep that when he saw football players huddling to call their next play, he believed they were talking about him.
But of all the things Dick Nixon did, good and bad, including opening the doors to China, none has had a more lasting impact than his decision to abandon the gold standard.
In fairness, the decoupling of the U.S. dollar from its direct link to gold happened in two stages over a span of nearly 40 years. In 1933, President Franklin Roosevelt ended Americans’ right to surrender paper dollars for gold and even to own gold bullion. Step two came in 1971 when Nixon closed the gold window and denied foreign governments the right to redeem paper dollars for gold.
Checking Recent History
During times of economic displacement, when currencies have been devalued or failed, gold literally has become the coin of the realm. Since the termination of the gold standard, investors and speculators have accumulated the yellow metal as a hedge or a means to diversify their portfolios.
Never has this phenomena and trend been more active than in the past eight years. In November of 2001, after trading well below its intrinsic value for nearly 20 years, gold broke above $300 per ounce, and has not looked back since.
The steep increase in physical gold purchases has lead to a multifold upswing in the trading of gold futures contracts and activity on the global spot market. This renewed interest in gold has spilled over into other precious metals such as silver, platinum and even palladium.
As the economy has deteriorated, gold, silver and platinum transactions have risen to a fever pitch. Even though gold has pulled back from its all-time high, above $1,030 per ounce, it’s still holding in a trading range well above $800.
Institutional investors like HSBC have added to the luster of the precious metal. London’s Financial Times recently reported that HSBC’s Absolute Return fund has more than tripled its gold holdings, and added platinum in a quest to seek assets that are not correlated to equities.
[img]483|left|||no_popup[/img]
According to disclosures filed by the fund, its physical gold investments climbed to 10 percent in January from 3 percent in December. Platinum now accounts for 3 percent of the fund, with another 2 percent invested in companies mining precious metals. Fund managers at HSBC have concluded that precious metals are diversifying. They have determined that by comparison, crude oil and other commodities are too highly correlated to equities to provide the same function.
Gold and silver futures rose today after data showed a big increase in claims for U.S. unemployment benefits. Despite an upswing in earnings throughout the banking sector, rising economic worries have burnished the value of precious metals as a safe-haven asset.
Today, the Labor Dept. reported that first-time claims for state unemployment benefits rose a seasonally adjusted 27,000 to 640,000 in the week ended April 18. The number of people collecting state unemployment benefits reached another new record of 6.14 million.
Predictions released earlier this week by the International Monetary Fund project the global economy to decline by 1.3 percent in 2009. The IMF forecast sees the U.K. economy shrinking by 4.1 percent, with Japan expected to slip 6.2 percent and an overall decline of 2.8 percent in the U.S.
All of these factors have combined to drive demand for precious metals.
After selling off over the past few weeks, gold pushed above $900 an ounce today in both the futures and spot markets. From the standpoint point of traders that watch technical indicators, the key now is whether gold can clear and close above $900 an ounce. If that happens, it would break the current downtrend and open the way to re-test the recent highs near $940.
No matter how you play it, unless and until greater economic certainty returns to the financial marketplace, gold and its companion precious metals will remain an attractive diversifying hedge to equities.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
