Thursday, May 27, 2010
One good thing that has come out of this blog is that new people are discovering ANOTHER and FOA every day. Another positive development is that gold price predictions are no longer capped at $2,000. Of course I don't presume to give credit for this second development to my small blog, but these are just two significant changes that I have observed since starting it in Aug. 2008.
Back then A/FOA were ignored and/or banned everywhere I looked. I found only one other person on the entire Internet who had read the archives and wanted to talk about them. Since then I have found hundreds more while gathering more than half a million total visits from 180,000 unique IP addresses.
Also back then, the highest gold price predictions I could find were $1,650 on JSMineset and $2,000 from Peter Schiff and Eric Janszen. That is, until I read A/FOA's predictions of $10,000 to $30,000 from back in 1997. Today high predictions are not uncommon at all. In fact, just yesterday Ben Davies was on CNBC talking about gold at $36,000 per ounce! (I wonder if he reads my blog! ;)
But as I believe I definitively demonstrated in my post Gold: The Ultimate Un-Bubble, the future price of gold is completely arbitrary. Unlike everything else, it has no economic restraints whatsoever, therefore it can go as high as is needed.
The gold base has always existed and has always been vital to whatever fictional monetary system was layered on top of it. The gold base is the volume of gold times the price of gold (GB=VOGxPOG). And this base is de facto vital on all scales, from global to national to individual.
The gold base not only exerts pressure on monetary systems but it also receives pressure from them. There is a symbiotic relationship between the gold base and monetary systems, whether money is exchangeable for gold at the bank or not.
Of course at one time physical gold and silver were the monetary system, and nothing else was considered money. But today, and for the past several systems the symbiosis between the gold base and money has been very active.
As monetary systems mature, be they a gold standard (pre-1922), the gold exchange standard (1922-1971) or the dollar reserve standard (1971-present), the price and volume of gold (the gold base) is under constant pressure to expand. Concurrently, whenever the gold base is restrained from its necessary and natural expansion (either through mining restriction or price appreciation restriction/fixed or semi-fixed parity) it exerts pressure back on the monetary system.
This symbiotic dynamic becomes a classic feedback loop that always ends in 1) a new or reworked monetary system and 2) an explosive expansion of the gold base. Today is no different.
What I write about here at FOFOA is the very meaning of this inevitable end, this "phase transition". And what this phase transition, or paradigm shift, will look like from the other side. I try to write about it from as many different perspectives and angles as I can come up with to not only share my understanding, but also to test my understanding. And so far so good. Here are a few recommended posts for the newcomers who find this subject interesting...
The 21st Century Bank Run
GOLD & MONEY: More Than Meets the Eye
Greece is the Word
Living in a Powder Keg and Giving Off Sparks
Gold: The Ultimate Hedge Fund
I can feel it coming...
Gold: The Ultimate Wealth Reserve
Gold is Wealth
Gold is Money - Part 1
Gold is Money - Part 2
Gold is Money - Part 3
Fair Value Gold?
Your Own, Personal, Freegold
Say Goodbye to Wall Street
Shake the Disease
The End of a Currency
No Free Lunch
Confiscation Anatomy - A Different View
The Waterfall Effect
The Call of the Century
Bondage or Freegold?
Call Me Contrarian
The Triumvirate of Wealth
The Bermuda Triangle of Currency
Mona Lisa or Ben Franklin?
Taking Delivery of Physical
The Underwater Beach Ball Effect
Worst Case Scenario (12" Remix)
The Judgement of Value
All Paper is STILL a short position on gold
As for price prediction calls, these are most difficult to make, second only to timing. Because once you realize what is actually happening, that paper gold markets like COMEX, the LBMA, GLD and others are the new restraining factor in gold base expansion, you must come to the ultimate conclusion that the next explosive gold base expansion will be a price reset of physical gold only. And that it must be large enough to solve today's biggest problem, infinite debt, or put another way, debt without any limit.
What makes it doubly difficult for the reader of such price predictions is that almost no gold-price prognosticators differentiate between inflation-adjusted and non-inflation-adjusted predictions. And rest assured, they do this for a reason! That reason is that by reserving differentiation, they utilize inflation as a hedge for their predictions. In other words, inflation will ALWAYS prove them correct in the long run.
But I have never taken such liberties. I have always been clear that when I guess at the future price of gold, it is in inflation-adjusted dollars. That is to say, my predictions are in today's dollar's present purchasing power. Non-inflation-adjusted or nominal gold prices in the future are simply impossible to predict. Just look at Zimbabwe. An ounce of gold could easily pay off the US national debt, nominally, if history is any guide.
But perhaps if the debt would have been allowed to collapse and default along with the banking system and a few of the most profligate governments, the marketplace would have only imposed a gold base expansion to somewhere between $10,000-$20,000 per ounce, that is, in today's dollars. But this was never to be.
We cannot know where the market will take the physical-only price of gold in order to solve today's debt problem. But we do know a few things that can give us a clue. 1) It will be a phase transition, or a paradigm shift that will knock your socks off. As someone recently wrote, you can heat water to 99 degrees Celsius and it will not boil. But go one degree higher and matter itself changes form. This is a phase transition. 2) The gold base expansion/phase transition will be completely unrestrained by economic forces, unlike any other physical material like oil, for example. In other words, it will appear completely arbitrary by all rational expectations and past ratios. The only scale on which it will make any sense is that it will solve the global debt problem.
But beware! This "market solution" to the global debt problem may not be as pleasant as you think. It might be, to borrow a fantastic phrase from Dan Amerman, a reluctant state of “Accidental Virtue”, to which we will all be dragged kicking and screaming.
The systemic rise of global imbalance, the creation of massive amounts of new and ever-more-worthless government digits, all to shore up unimaginable debt mountains held at the banks and central banks... all this and more, now demands settlement in very scarce physical gold metal. And with no international "window" to deliver such metal settlement at today's price, it must come from the global gold stock, from the holders of physical gold. The "flow" at today's price is not nearly sufficient. But the "stock" is plenty big... at the right price.
Gold must become free to settle all the massive imbalances that have accumulated for more than 88 years.
Before 1922, domestic debt claims in each nation were the "paper gold" of the day, as they were the only thing other than physical gold that the banks could hold in reserve and issue more credit upon during the gold standard.
After 1922 "paper gold" was expanded to also include British Pound Sterling and US dollars. But the banks receiving these new "paper gold reserves" (dollars and pounds) deposited them back in their banks of creation in London and New York. And as such, these "international paper gold reserves" doubled the money supply in amounts equal to all balance-of-payment deficits run by England and America. New credit was issued upon these reserves in both the surplus-running country and the deficit country of origin and deposit.
So the US and UK deficits never contracted the aggregate purchasing power of those countries after 1922, the way deficit settlements are supposed to. Instead, they exported their monetary inflation outward to the surplus-running countries. This was the very beginning of the US exorbitant privilege that continues to this day.
The collapse of the credit expansion bubble built upon this "double pyramid" contributed to the amplification of a simple recession into the Great Depression of the 1930's. This unforeseen development forced the overnight devaluation of all "paper gold" worldwide.
Following World War II the US dollar became the only "paper gold" accepted as international bank reserves, doubling monetary base in amounts equal to the crescendo that became the US trade deficit for the next 27 years. This "paper gold" pyramid finally collapsed in 1971, sending the price of gold up more than 2,000% in 8 short years.
And from 1980 until today, well, you all know what the modern "paper gold" looks like. And yes, the banks' reserves now consist of domestic debt claims, US dollars, "paper gold", other foreign currency, and yes, even foreign debt claims today. And yes, the recycling of trade deficit payments back to the country of issue continues to multiply the reserve base of the global banking system, the same way it did in 1922.
The "miracle" of modern banking is that all this exponential monetary inflation is cycled directly into assets and "investments". In other words, it is funneled into DEBT! It rarely hits the grocery store, at least not at levels that the people notice. Not yet that is.
But what this all means is that economic growth has no hope of ever keeping up with "financial growth". To stock market investors at certain times in history, like 1999, this seems like a new manna from heaven. Or for those lucky few who bought homes in 2000 and sold them in 2006. What a miracle!
But the reality is that we have a big problem today. And that problem is all the debt that is simply unserviceable on the physical plane of reality, let alone ever paying back the principle on collateral worth half what it used to be worth. This is a really big problem, and it will be resolved in a really big way.
Now, what is not going to happen this time like times in the past is that no one is going to manually reset the gold base at a new level to make things temporarily sustainable again. First of all, there is no gold window like before where they can reset the price. There is no sovereign hoard being dished out for them to protect. In fact, the higher the price goes, the more existing hoards are protected!
So, the way I have started looking at this, from a macro perspective, is; What will market forces do to fix the problem? And the answer is that the market will recapitalize itself through the gold base, just as it has done for thousands of years. This is a free market force I am talking about. It will not be resisted by those in power when it happens because they have bigger problems to worry about than trying to restrain the value of their only true reserves below market value.
This action I'm talking about could come at any moment. It is not something that relies on a specific metric hitting a specific critical number. Like a deep-water oil reserve, the pressure is already there, and the hole has already been drilled. All it will take is an event... any event. Like the forced default of a sovereign nation on its debt service, or a failed auction of new debt from Earth's biggest debtor, or a bad stock market crash, or a failure to deliver physical gold to the wrong recipient... or whatever. The list is long.
And the realization that I have personally come to is that the market wants to recapitalize the world, default some of the global debt and settle the rest of it after recapitalization. This is not a human-managed restructuring I am talking about. It is "the mountain coming down" via gravity. So in very rough terms I am looking for the worst transgressors to have to part with roughly half of their gold after revaluation. This will leave them with enough real capital to rebuild within the new, emergent meritocracy... the reluctant state of “Accidental Virtue”.
So the point of this post, what I hope will sink in, is that the future "inflation-adjusted" price of gold, the price in TODAY'S dollars, can literally be anything. Forget ratios. Forget technical analysis. Focus only on the debt! And this epiphany... this realization... this discovery... should be enough to convince anyone to get on the receiving end of this "very unfair" transfer of wealth. Actually, fair or not matters little. What else is fair in this world? Seriously. I am not here to pass on my moral fortitude, only to share my observations and understanding.
And here is the definitive issue. Does gold's "future price" need to suffice at a "gold window" in exchange for dollars? No. So does it need to relate to the $5T in existing monetary base? No. Does it need to credibly establish convertibility with all existing debt? Yes! And how much of the world's gold needs to establish this credibility? All of it? The stock... the flow? The answer is that the global stock doesn't matter. And present flow is irrelevant. What matters most is future flow and the existing stock of the biggest debtors. This is the incalculable calculation that will lead you to the future price of gold.
I put it most likely around $100K, but at least somewhere between $50K and... well... here's Steve Hickel's take...
Those [nations] with high dollar reserves and low gold reserves are exactly the point of a gold revaluation. By the US divesting itself of one-half of its gold reserves (let’s have an audit first, however) of 261M ounces of yellow at a value of $500K/ounce, it can swap $500K for each ounce of one-half of its reserves. In the end, China and others will not have any (or at least fewer) dollar reserves and much higher gold reserves and the US will (if it has not already divested without our knowledge or consent) still have half of its reserves.
Preferred buyers of US gold are those holding large tranches of US Debt. We have all heard (read) here that $60T appears to be the value of all US debt both internal and external. I would belabor the math again, but to summarize, if the US swapped half of its gold for $60T in debt, it would have to do so at $500K/oz. plus or minus a few 10’s of thousand dollars per ounce.
A one-time quick and unexpected valuation of gold at $500K per ounce, of course, would have unintended consequences. But let’s suppose the US and IMF decided as a measure to support International currencies [and debt] that such a one-time act was warranted (this was one of the measures of the G20 goals — "support international currencies"). It cannot be worse than the unintended consequences were are seeing by adding more debt on debt. Those left out in the cold regarding gold's value would be those countries such as the UK, who under PM Brown, divested most of its gold holdings at the low in the market. It would also leave out non-holders of gold assets in the investor class worldwide.
Again, I point out the absolute ridiculous nature of gold pundits who predict a price of $1600 as a high-mark for gold. It may hit $1600... on its way to $500K/oz... but only for a few seconds. I believe the reason there is the gold battle documented earlier today between Asia and the US gold markets is because there is a line in the sand. If this is breached then as we have heard cited, “we stare into the abyss….” I take this to mean that the dollar will be toast.
The cost of high gold in the eyes of those who spend so much to keep gold down (the Fed and some Banks who act as its agents) is a failed currency. Time does not favor the anti-gold. They who seek to control the paper gold market through outright intervention (manipulation) and secret back-room deals, have already lost the war. It is only a matter of time now that such matters will resolve themselves. Ammunition is running low. We only hope that US gold is not running low too — as I fear they may have tapped the hidden wealth of America to keep Humpty Dumpty propped up on the wall a tad longer.
Time for America to come clean and pay its debts…
Here is one final Thought for you all to ponder. Gold is not an investment. It is not insurance. Gold is the wealth consolidator.
I'll end this post of reflection with what I submitted as my "bio" to a couple spotlight sites. It consists solely of a few poignant quotes from two of the best friends I never met...
A Tribute to the Thoughts of Another and his Friend
Gold is about understanding the events that brought us here, and those still unfolding
"Brokers and traders will show you, "turn your gold into wealth", "put it to productive use, Trade It"! "Sell your gold and buy it again, many times". "Do this and find the value lost from your youth"!
But I say, spend your time in the company of truly wealthy ones, see how they make gold lie very still! Know this now, the world will again, in your time, feel value in gold as never before. And that value will be as the "productive use of holding wealth thru the fire of change". "Yes, you can also walk in the footsteps of giants".
"The economic game is ending! Watch closely as the world currencies and markets fall one by one. Watch in absolute wonder as the demand for oil plunges and its price goes thru the roof. Yes, oil stocks will crash with the markets. And gold? You will never know its price. It will stop all trading as it slices thru $10,000+."
"Sir, the world is going to change, and the rules of engagement will also change. Gold will be repriced, once! It will be enough for your time of life."
"Finally, we will all have a wealth reserve that places our footing in life on equal ground with the giants around us. Gold! Understanding the events that got us here and how they will unfold before us is what the Gold Trail is all about."
"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"
"What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an over valued dollar that we spent without the pain of work."
"Hear me now, what the wealthy and powerful know: real value does not have to always be stated or converted throughout time. It need only be repriced once during the experience of life, that will be much more than enough!"