Gresham's law states that "bad money drives out good". What this means is that bad money drives the good money out of circulation. Think about silver coins, pre-1965. If someone had $50 in silver coins and $50 in paper money, they would put the silver in a jar in the closet and they would spend the paper money. So the paper would stay in circulation and the silver would go into hiding.
In our current environment, legal tender laws do not allow gold to function as money. Nevertheless, central banks around the world still hold gold as a "foreign reserve". So the world has not forgotten its "money function".
Also, in our current environment, it is a widely held belief that the value of physical gold is greater than the price of paper gold. So in a way, it is behaving like a competing currency. If you have $700 in cash and one ounce of gold, you are more likely to spend your cash and stash your gold.
This explains the apparent shortage of physical gold right now. It is Gresham's law in effect, even though gold is not legal tender.
But on the national scale, we hear stories about China, Russia, the Middle East and others "diversifying" their reserves into gold, and away from the dollar. So are we seeing the large scale fractal pattern of Gresham's law?
One thing we know from Ender is that the dollar gains value from usage. In other words, the USDX will rise when the dollar is being used in great quantities. The USDX does not go up if everyone is stuffing greenbacks in their mattress.
And the flow of value from unreal derivatives to real things, like gold, must pass through dollars. So that explains the recent rise of the dollar on the USDX. It doesn't mean that people or nations are stashing their dollars in the closet... it means they are SPENDING them. All the trashy derivatives in the world cannot be used to directly purchase real things like real estate or gold. They must first be sold for dollars, then those dollars can be used to buy real things. This is happening right now.
So let's go back to Gresham. The "good money" disappears into a glass jar in the closet. This is gold. It is not available on the open market in great quantities right now because those that have it are net-hoarders, not net-sellers. On the other hand, the "bad money" is spent. This is the dollar, in which an increase in transactions is reflected in a rise on the USDX.
So I propose to you that we are currently witnessing the fractal pattern of Gresham's law being played out on the largest scale. The close view of this will seem confusing, or "chaotic". But the long view makes perfect sense.
Look at Hugo Salinas Price's graph again. Foreign paper reserves (which are mostly dollars) are declining at $30 billion per month. At that rate, they would reach $0 in 20 years. That's pretty fast when you consider that they took 40 years to reach this height. Also, that would be a completely linear decline. But we had a parabolic climb. So it is likely that we are just seeing the topping right now, and the steep decline is yet to come. In any case, these reserves don't have to go to $0 to cause major problems for the dollar. In fact, just by not increasing exponentially, the dollar dies, simply because this change causes the inability of the US to keep paying its mounting interest payments with new debt. This would mean either a crushing economic super-depressionary collapse, an outright payment default, or a hyperinflationary printing default, a la Zimbabwe. These options are unavoidable in this situation, which is almost assured at this point.
So the bottom line is that Gresham's Law is killing the dollar right now. And it is an exponentially accelerating process. So I will go out on a limb here and predict that given the G20's impotence this weekend, we should see gold over $1,000 possibly by December 1st, and probably by Christmas. I give it a 25% chance for Dec. 1 and a 50% chance for Christmas. In other words, some unknown, unpredictable human action is required to stop this from happening, and I give that unpredictable event a 50% probability.
Further, I believe we will see a major sea change taking us in the direction of FreeGold possibly by January 20th, and probably by February 20th. Personally, I put a 25% probability on this. Increase that probability to 40% by the April G20 meeting and 50% by July 1st. I give FreeGold a 75% probability by the end of 2009. So please, by all means, be sure to "diversify" your financial portfolio accordingly.