Happy Birthday, Free-Floating U.S. Dollar

Of all the landmark round-number birthdays, none inspired as comprehensive a nostalgic retrospective of my life as did the arrival of my 40th. The fiat U.S. dollar celebrates its 40th birthday today, and under the circumstances I doubt the currency is feeling as chipper as it once did.

On Aug. 15, 1971, President Nixon's emergency measure to sever the U.S. dollar's convertibility to gold took effect. Presented to the American people as a "temporary" emergency measure to defend the U.S. dollar against currency speculators, the move officially terminated the Bretton Woods monetary system and reconfigured the very structure of global currency markets around the nucleus of a free-floating "fiat" U.S. dollar. Given what has transpired over the ensuing 40 years, I found it fascinating to go back and review how the idea was packaged from the point of inception. I believe the following four-minute video clip is well worth a Fool's time:

I particularly took note of Nixon's attempt to "lay to rest the bugaboo of what is called devaluation" by promising the American people that "your dollar will be worth just as much tomorrow as it is today." Chalk it up to yet another broken promise out of Washington, because by one important measure your dollar is currently worth 50 times less than it was when Nixon announced the measure!

That's right: At $1,750 per ounce, gold today costs 50 times more in U.S.-dollar terms than it did at $35 in 1971.

That "bugaboo" called devaluation has also contributed to a 3,600% increase in the dollar-denominated price of oil over the past 40 years, from $2.30 per barrel to about $85 today. Meanwhile, an ounce of gold that purchased 15 barrels of oil in 1971 would suffice today for more than 20 barrels! That's a pretty tough record to defend for the depreciating paper dollar, which leads me to wonder whether the greenback might be headed toward a powerful mid-life crisis as the end results of this 40-year monetary experiment come into sharp focus. Credit-rating agency S&P sure appears to think so.

For investors of all ages, the overwhelming outlook for continued devaluation of the U.S. dollar relative to the currency anchor that is gold creates a powerful incentive to seek some exposure to the metal within a well-crafted investment portfolio. While the crowd seems to prefer popular bullion proxy SPDR Gold Shares (NYSE: GLD  ) , long-term investors may prefer some of the emerging dividend payers among the miners of gold. Yamana Gold (NYSE: AUY  ) recently became 50% more interesting to gold investors, while Newmont Mining (NYSE: NEM  ) has tied its dividend to the gold price and currently yields more than 2%. Goldcorp (NYSE: GG  ) , Eldorado Gold (NYSE: EGO  ) , and Agnico-Eagle Mines (NYSE: AEM  ) each offer more modest yields, which seems entirely appropriate given their aggressive production-growth outlooks.

Just remember, those dividends are paid in U.S. dollars, so you may not wish to hang on to the proceeds for long!

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He also owns shares of Agnico-Eagle Mines, Eldorado Gold, Goldcorp, and Yamana Gold. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 15, 2011, at 5:32 PM, Charbroil121 wrote:

    Are you sure gold (which has notably massively appreciated in price over the last couple of years) is the best metric for evaluating devaluation? There are plenty of commodities against which the dollar hasn't depreciated anywhere near 50 times in the last forty years.

  • Report this Comment On August 15, 2011, at 5:39 PM, XMFSinchiruna wrote:

    Charbroil121,

    Because gold is a currency, yes, I am quite sure it is an extremely fitting metric by which to measure dollar devaluation.

    http://www.fool.com/investing/general/2011/08/09/gold-shines...

    Federal Reserve Chairman Alan Greenspan, in 2009: "gold still holds reign over the financial system as the ultimate source of payment."

  • Report this Comment On August 15, 2011, at 6:00 PM, BillyTG wrote:

    <iframe width="425" height="349" src="http://www.youtube.com/embed/i-g2iGskFPE" frameborder="0" allowfullscreen></iframe>

  • Report this Comment On August 15, 2011, at 6:07 PM, XMFSinchiruna wrote:
  • Report this Comment On August 15, 2011, at 6:08 PM, BillyTG wrote:

    The embedding didn't work so well. Try this instead...Check out this video: http://youtu.be/i-g2iGskFPE

    French President CHARLES DE GAULLE predicting the US monetary crisis in 1965.

    Not long after this speech, but prior to Nixon's 1971 speech, De Gaulle cashed in France's dollars for TONS of gold in US possession, at the $35/oz rate.

    Just found this little TIME Magazine piece from 1965 talking about it: http://www.time.com/time/magazine/article/0,9171,840572,00.h...

  • Report this Comment On August 15, 2011, at 11:46 PM, HarryCaraysGhost wrote:

    Thanks Sinch and BillyTG, good stuff.

  • Report this Comment On August 16, 2011, at 10:15 AM, decbutt wrote:

    Gold is not a currency.

    Gold is "the precious" that GBs cannot get enough of when the prices are rising, but when it tanks back into the unlovable zone (due to it producing no real income) and stays there for a few years.

    The spell is broken. Suddenly no-one is deluded as to gold's powers any more. No one calls it a currency (which it surely would still be, regardless of its value relative to other currencies).

    Are we at the top of this upswing yet? Nope.

    But history tells us that the "great store of wealth" has trouble holding on to that title at all times.

    It doesn't just crash, like shares do, it becomes obsolete and unlovable. And it is only ever a matter of time from upswing to obscurity.

  • Report this Comment On August 16, 2011, at 11:23 AM, rfaramir wrote:

    Those "international speculators" that Nixon was decrying for causing the monetary crisis were just free market actors doing what the free market does: keeping banks and governments honest.

    When you suspect that your bank is issuing more notes than they have specie in reserve (gold or silver), you can try to remedy the situation in one of two ways (or ignore it and just let them rob you blind). You can call in the government goons (regulators) who might, if they're not too cozy with the bankers (note that most regulators are from the banking industry), do an audit and discover the truth and penalize them for their fraudulent over-printing. Or you can use the free market remedy: turn in your bank notes, redeeming them for specie, i.e., a bank run. If all the notes are redeemed and the bank is still solvent, you were wrong and no harm done. If the gold runs out before everyone gets the bank notes redeemed the bank goes bankrupt as the fitting penalty for their fraud.

    Those "international speculators" were calling our bluff, redeeming FRNs for gold, and Nixon knew that his central bank had fraudulently over-printed to cover his (and previous administrations') spending. Breaking the promise of convertibility into gold was the only way to save face.

    What's more valuable, your word or your pride? What do you want more of, Spending or Integrity? Nixon did not choose wisely.

  • Report this Comment On August 16, 2011, at 11:41 AM, XMFSinchiruna wrote:

    debutt,

    Sorry, but the past 40 years of history tell an entirely different story from the one you project.

  • Report this Comment On August 16, 2011, at 2:01 PM, jesusfreakinco wrote:

    decbutt

    I guess that is why central banks keep it as a reserve and are buying it hand over fist right now, eh?

  • Report this Comment On August 16, 2011, at 6:52 PM, xetn wrote:

    decbutt:

    Gold only has a 5000 + year reign as a medium of exchange (money). How long has fiat been around?

    Your comment shows a complete lack of history and no understanding of what money really is. Fiat is only as good as the government's ability to conn its users. At some point the fiat will reach its intrinsic value which equals the cost of the paper its not printed on. Historically, no fiat has stood the test of time.

  • Report this Comment On August 21, 2011, at 8:43 AM, skypilot2005 wrote:

    Sinch,

    Recently, some good news from Kinross Gold:

    It may be a "sleeper". I don't hear a lot of "noise" about them.

    http://www.kinross.com/news-articles/2011/081011-q2-2011.asp...

    http://www.kinross.com/news-articles/2011/081111-kinross-dec...

    http://www.kinross.com/

    Your Web Link Assistant

    Sky Pilot

  • Report this Comment On August 21, 2011, at 9:27 AM, skypilot2005 wrote:

    8/15/11

    August 15, 2011 Mercator Minerals Reports an Increase of 61% in Revenue

    http://www.mercatorminerals.com/docs/NR_08_15_11_02.pdf

    Sky Pilot

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