Is Gold High or Low?

Have you been buying gold and silver? Lots of people, businesses and countries have — yesterday gold shot to a record $1880, on concerns about just about everything. Buyers clearly think they must be getting a good deal — but so did that those who bought at the apex of the dot com bubble and who then watched their investments crash into a heap. So is gold high or low? Certainly it is higher than it has been — gold has shot up over 500% since 2001. But if it went up another 500% prices today would seem pretty cheap.

Sticking your neck above the parapet often means you get splattered by tomatoes, whether you’re right or whether you’re wrong. I greatly enjoy getting attacked by those who resort to name-calling, but being misquoted is very annoying. A recent dispute regarding Paul Krugman had an adversary accuse me of saying that “gold is high”. Really? Gold is high? Compared to what?

That’s $115 trillion stacked in $100 bills, or the total U.S. debt — public and private — as of July 2011. If the amount of money in the economy shoots up way faster than gold, and demand for gold remains relatively constant, then the price of gold will rise:

And that’s the monetary base. Bernanke pumps money into the economy — via the primary dealers and their commodities and forex desks — in the hope that it will circulate and bring much-needed productivity gains. And if we had productivity gains then people would become more confident about the economy,  spending and investment would rise, we would have growth, and demand for gold — the hedge against everything — would fall. The problem is that any productivity gains from quantitative easing and the stimulus packages have been offset by pessimism, by food and fuel inflation, by the sovereign debt crisis in Europe, Asian deflation, Keynesian liquidity traps, geopolitical instability, resource wars, and the decline of the dollar. That’s if we had any productivity gains at all. So confidence and productivity are falling, and worst of all the ultimate haven for the last sixty years — US Treasury debt — has been left marred by Chinese downgrades, S&P’s downgrade and America’s failure to come to terms with its debt, oil dependence and import addictions. In that context gold has emerged as the ultimate haven: a form of wealth that cannot be debased by money printing. Here’s gold against currencies in the last ten years:

And without the real and sweeping infrastructural reforms that I advocated last week — widespread solar energy, synthetic oil, carbon scrubbing, ultra-high speed internet, 3D printing, a reinvigorated transport network, improved food infrastructure, re-industrialisation and so much more – the foundations will become shakier, fiat currencies will become more debased, and people and institutions will seek solace in gold pushing the price up further.

And — yes — if America truly rises to the challenge in the next two to five years and transforms itself back into the world’s greatest industrial behemoth, then gold is in a bubble, and will probably see a peak of around $3,000 an ounce, and a sharp fall back. But what prospect is there of that? It would require a complete about-face from government and private industry, an end to extending and pretending, to wasteful imperial conquest, and to the excesses of military industrial complex and corporatism. It would require government to stop bailing out banks, or at least institute a proper firewall of separation between investment and retail banking. It would require its citizens to ditch their widespread addiction to junk food and reality TV and instead focus on engineering, urban farming, solar energy, and entrepreneurialism. It would require Wall Street to cease operation as asset strippers and money-changers and assume their proper role as investors and job creators. Much prospect of that?

Not really. Civilisations need to be shaken before they awaken to their problems. From the decline of Rome and the Qing dynasty, Niall Ferguson extrapolated this:

Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.

And my analysis suggests that he is right. A full-on imperial collapse, the death of the dollar as the global reserve currency, and global humiliation may be the thing to wake America from its trance, and impel it to do the right thing. If any country in world history can survive this, it is America. But as we teeter on the edge of the precipice, gold is still very, very cheap. If America had to back every dollar in its money supply (M2) with its gold reserves, each ounce would be worth over $9,000. It looks like things are going to get pretty heavy.

6 thoughts on “Is Gold High or Low?

  1. Thats why 9000 dollar is a base case scenario, look how much fiat there is world wide ! the graphs you posted mention Swiss franc, Japanese Yen, Euro. and boy are the Swiss Franc (banks) and Euro (banks) Leveraged. it’s some serious fun !

    Personally i find this video very educational from Mike Maloney on the 20.000 dollar case on gold.

    What is more worrysome then the current fiat printing is that Gold is currently in (partly) backwardation.meaning that the smart money is not only hammering the physical silver market wich is in backwardation since January 2011 but also the gold market. Hugo Chavez blew some fail safes for sure.

    Anyways as Ron Paul said it strikingly, If someone finds 5000 years from now a treasure trove on the bottom of the sea with gold/silver coins it will be worth something. Nobody is gonne care however about large quanities of dollars if it were on that same bottom.

    As always Fiat will return to its intrinsic value of “Zero”

    • Thanks for the video Marcuz — this is a must-watch for everyone who wants to get through the next 5-25 years with the skin on their back intact.

      I will be blogging about gold going into backwardation. The significant development — and underlying causality — was Chavez demanding physical delivery. I remember being told by gold bears back when gold was under $1,000 that I was a fool for getting into precious metals, and they were in a bubble that was about to burst! I’m not sure we’re heading to the moon right now. Silver was in backwardation in January and a lot of prominent voices were screaming that “the game is up for Blythe!” and since then it has been depressed. I’ve long believed the unwinding of the dollar would be slow and painful. So long as the CASH 4 GOLD people keep buying and the public keep selling I know gold will keep going up! Only when Joe Public comes en mass to buy gold will it be time to sell — and get the proceeds into hard productive assets, like industrials, agricultural land and real estate.

  2. A wise investor once simplified investing in this way. When interest rates are below “actual” inflation (the hard part is figuring out what actual inflation is) invest in gold as the trend will always be up. Charted over decades this investment strategy seems to work and it makes sense that it would. If the interest paid on holding dollars is less than the increase in what a dollar buys, then over time gold will cost more to buy…in dollars. Right now it’s an easy decision. Interest rates are around 0% and real inflation is much higher than that.
    The second part of the equation is that if and when interest rates start to rise gold actually starts to go up in value even faster. This is because the higher interest rates are needed to fight inflation but at first they actually increase the burden of any debt we have causing more money printing. They are also moved up at a slow pace so even though they are higher than 0% they are still below the real rate of inflation. The best move the Fed could do is raise rates instantly above the real rate of inflation to about 8-9%. Unfortunately that would probably cause a total default by the government so it isn’t really a possibility. This will probably be an endless gold bull market until a major change in spending or the currency dies.

  3. I have my own theory on how to calculate real rates: there isn’t a uniform one. There’s one for every economic entity, because every economic entity experiences a different rate of inflation. The closest thing I would say there is to uniform negative real rates is when 50% of the population’s individual rates become negative. So right now (by my method), real rates are very definitely negative, because “core” inflation is irrelevant to 70% of people: the bottom 70% are hit hardest by food and fuel hikes. Here’s an article you may find interesting:

    This is a variation on the crash view, from Damon Vickers in Seattle:

    Personally, I feel the end will come with an oil shock. I think the death of the UST will take a lot more force than China just saying “we won’t buy USTs”. The Fed could monetise their way through that for 3-4 months, and then oil sellers might say “fuck this, pay us in gold”.

    Unfortunately I do think Vickers is absolutely right: we’re headed to a one world currency, which brings with it a massive set of black swans, some of which we can guess at (the problems afflicting the Euro — countries without monetary independence setting their own budgets — magnified to a global level) most of which nobody can.

  4. Black swans or Deus Ex Machina like events, will happen and yes the rumors of a NWO-currency system is also something that is buzzing in the ether for quite some time. However i do think that the crisis might be triggered in Europe in either Luxembourg or France, They have insanely leveraged banks like Societe Generale, Dexia or BNP paribas. and the ECB doesn’t have the mandate the FED has. ECB is often reffered to as the most Under capitalized Hedge fund in the world today.

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