By 1554, The Netherlands had become the world's first "modern economy" and a leader in technology, trade and banking. That year, some Dutch entrepreneurs imported tulip seeds from Turkey. The hardy, beautiful flower became popular and by 1637 horticultural innovators produced a rare strain that fetched ten times the annual income of a craftsman, four oxen, eight swine or 1,000 pounds of cheese.
But that year, the tulip mania crashed when the Dutch succumbed to another panic due to the outbreak of bubonic plague and investors failed to show up at tulip auctions.
Bubbles occur all the time, along with financial inventions. The most recent, and controversial, launched in 2009: A virtual currency called Bitcoin that enabled holders to trade directly and to hide their assets from governments.
By 2013, Bitcoins had gone from zero to $266 but this week bounced around until they crashed at $60, causing one of its exchanges to halt trading to cool down for a few hours. The online phenomenon has been plagued by digital manipulators and volatility in pricing but these problems may eventually be ironed out.
If that happens, a virtual currency like Bitcoin -- free of hackers -- will attract millions around the world who have become worried about the fact that governments continue to ruin their currencies by racking up debts, printing money and taking draconian action against taxpayers.
In the past, the fearful have bought gold and driven up bullion prices to nearly $2,000 an ounce in recent history.
What's curious is that gold prices have ebbed, the Bitcoin is not a viable alternative and yet fears remain. Even worse is that the debt and currency contagion has spread and the world's four biggest economic entities -- the U.S., EU, China and Japan -- are printing and piling on debts with frightening speed.
So why isn't gold at $4,000 an ounce?
One bearish factor this week was Goldman Sachs's downgrade of its gold price forecast for the second time in weeks. Commenting that "conviction in holding gold is quickly waning," Goldman's forecast is an average of $1,545 an ounce in 2013 and $1,350 in 2014.
Gold bugs claim that a conspiracy exists to dampen gold's values. One of the theorists is Reaganomics guru Paul Craig Roberts, former Assistant Treasury Secretary.
This week he wrote: "Financial and economic Armageddon might be close at hand. The evidence for this conclusion is the concerted effort by the Federal Reserve and its dependent financial institutions to scare people away from gold and silver by driving down their prices. When gold hit $1,900, the Federal Reserve panicked because they realized with the dollar deteriorating so rapidly, compared to bullion prices, that soon it would also deteriorate its exchange value with other currencies. The Fed had to cap the price of gold and stop the rise."
It's certainly one explanation as to why gold is down given Eurozone, Japanese, American and now Chinese woes. But another is that speculators have been dumping gold ETFs and flooding into the US dollar, US equities and the US-dollar denominated bonds.
The yankee dollar has become a safe haven again.
As New York bond expert, Jeffrey Gundlach, said this week anyone predicting a bond market collapse is "dead wrong", according to website Business Insider. He also in a presentation in New York provided interesting facts and recommended that investors should buy natural gas and short Apple.
His information showed how the habits of American investors are unique and are driving market results: Of total financial assets in the U.S., 42% were in equities (more than double other countries); 16% in cash and deposits; 10% in bonds and 32% in insurance assets. (Insurance companies invest in treasuries and equities in safe jurisdictions).
To compare, in Japan the asset mix was 11% equities; 53% cash; 3% bonds; 28% insurance and 4% other, presumably gold. In Germany, the mix was 20% equities; 38% cash; 6% bonds; 33% insurance; 4% other, presumably gold.
He did not have Canada's holdings but they have traditionally been some where between the U.S. and Germany in terms of financial asset classes, as are Australia's.
So what this means is that there is lots of cash in the developed world outside the U.S. that is socked away in banks or in mattresses or gold or with insurance entities, that invest a lot in treasuries and S&P500 companies.
He also presented a slideshow that demonstrated the dependency of the stock market on The Fed's printing press. The S&P500 has moved directly in tandem with quantitative easing since 2009 and goes flat when it's absent. Likewise, the Nikkei has soared since the Bank of Japan copied The Fed.
Additionally, figures just published by the IMF show that emerging economies are dumping the Euro. Since 2011, some $90 billion has been placed elsewhere (presumably the US dollar) and their reserves collectively are 25% Euro versus 31% in 2009.
Those who have switched the U.S. dollar are staying and since 2008 the dollars in circulation have jumped 42% and stayed level. Most of this hoarding is by Europeans who buy US dollar bills and stash them in their mattresses or safety deposit boxes.
Cyprus, with its EU banking confiscation, accelerated this process. Europeans are staying in cash, but switching out of their currencies and buying some gold. Some have dabbled in the Bitcoin, mostly Russian, but the virtual currency is still immature.
It's all perplexing but the only certainty is that governments won't change. This means the best bet is to ride the market wave with everyone else but cash out for profits as soon as possible. Nothing continues forever, anymore than did capital gains in tulips, but at least you enjoy your Fed-driven gains by purchasing experiences, comforts or pleasures.
*This article previously appeared in the Financial Post
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