Are we still in a depression? Gold says, “Yes”.

Cross-posted from Re: The People

Gold prices have averaged $1218.57 for the year 2010, as of yesterday. For the whole of 2009, the average price of gold was $972.35. This was a change of some $246.22 year over year — a rise of 25.3% in the average price of gold.

We can assume, based on these figures, that the, so far, ten years long depression beginning in 2001 is still under way with a vengeance. The price of gold in 2001 averaged $277.99 per ounce. It has now risen to 426% of its 2001 price.

Between 1970 and 1980, during the depression of the 1970s — the so-called Great Stagflation — gold prices (once they were allowed to float by the Nixon administration) rose by more than 1700%, from an average for the year 1970 of $35.94 to the then unimaginable 1980 year average of $613.95.

Why does the price of gold rise during a depression?

It did not always do this. In 1932, the dollar was fixed at about 1/22 of an ounce of gold, which meant it took approximately 22 dollars to buy an ounce of gold. Because the price was fixed by Washington the price of gold did not vary as widely as it does now; during depressions money merely became scarce.

The gold standard was a form of government price fixing. (We know this is a silly way of looking at the problem, since the intention wasn’t to control the price of gold, but to anchor paper dollars to some real good having a definite value, however it serves our purpose for the moment.) During depressions, as the volume of transactions fell, less gold was needed in circulation. Thus significant quantities of gold fell out of circulation and into private hoards.

As gold was withdrawn from circulation during depressions, paper dollars followed, because buyers and sellers found the purchasing power of these dollars were dropping in comparison to the same good priced in gold.

The result would be fewer dollars available — creating a credit crunch, like the one we experienced in 2008 and since.

As you can imagine, gold-hoarding was a big problem for those who had accumulated debts during the expansion that they needed to service even though the economy was depressed. Think of our homeowners in today’s crisis: as fewer people are employed, fewer wages are paid out, and fewer people are able to meet their mortgage debt service burden. What appears as a credit crisis is simply the downstream effects of unemployment.

The response of the Roosevelt administration to this credit crunch was to devalue dollars against gold by 70%, — from 22 dollars an ounce to 35 dollars an ounce — and this devaluation allowed the economy to stabilize. However, this “stabilization”, like today’s bankster bailout — was purchased by a massive reduction in living standards of working families — it amounted to a 70% across the board cut in wages.

Yes. Despite FDR’s reputation as the hero of the working class, he “stabilized” the economy by ruthlessly slashing workers’ wages.

If we fast forward to 1970, when the Nixon administration ran into difficulties by printing dollars to stabilize the economy as it was contracting, the massive flood of worthless dollars tipped his administration into another devaluation — but this time, instead of simply fixing the dollar to a an even smaller quantity of gold, Nixon allowed the dollar to float against it.

The depression continued unabated, but dollars, no longer fixed to gold, simply lost their purchasing power. In turn, those with the means to do so sold their dollars and bought gold. They were still hoarding gold, but this hoarding was expressed not as the shortage of money, but in the depreciating purchasing power of now worthless dollars.

Since Nixon’s Roosevelt-style assault on society, gold hoarding is now expressed in the rise of its price; while the purchasing power of dollars evaporates. Today, the rising price of gold is one of the surest indicators that we are still in a depression.