June 4, 2011


I hate sensationalistic titles. This isn’t one!


It is amusing to hear predictions of 5000 dollar gold.  Not so much because the price sounds outrageous, but because they are so arbitrary


Two questions put this prediction in context: first, what would cause the price of gold to go to that level, and second, if it did, what conditions would be required for it to stabilize there and not go higher? Why just 5000 dollar gold? Why not 50,000 dollar gold?


If monetary and fiscal policy was ever so bad as to create a lack of confidence in paper money that sent gold to 5000 dollars, why would anyone think the price would all of a sudden stabilize at 5000 dollars? In my just released book The New Gold Standard I have a section called "Be afraid...be very, very, afraid,” in which I lay out the various scenarios which could unfold, ranging from hyper-inflation to a deflationary depression.


Most are puzzled by the inexorable move of gold and silver to higher and higher prices.  They see a bubble.  What if it is something more?  What if the market is replacing paper money with hard money?  What if technology is making an end run around governments? 


If this is what is happening, the end game will not be 5000 dollar gold.  Any time individuals lose confidence in a medium of exchange, all outstanding money claims lose value. And it happens very fast.  If we get to that point, no emergency act of government, or group of governments, will be sufficient to stop the results from occurring.  What then?  Consider the following.


The BBC World reported on February 2, 2009 that:


Zimbabwe is revaluing its dollar again, removing 12 zeros from the currency with immediate effect.

The country's central bank is introducing seven new notes in an effort to stave off economic collapse.

The country is in the grip of world-record hyperinflation. The most recent estimate in July 2008 put it at 231million%.

Only last month, a Z$100 trillion note was introduced and the government moved to allow people to use foreign currencies alongside Zimbabwe's dollar.

The announcement will see Z$1 trillion reduced to Z$1.

Last year, the central bank was forced to take ten zeros from the local unit in an effort to make the currency more manageable, but the zeros returned within a few months.

On Sunday, USD 1.00 was equal to Z$4 trillion.




So I ask you, what was the price of gold in Z's?  And if the world loses confidence in the US dollar, what would the price be?  I can tell you this—you could not touch an ounce of gold for a trillion dollar note in Zimbabwe. It would take a lot more than that! This is what the end of a monetary fiat system looks like when paper claims are rejected. Today we are headed for a de facto gold (or silver) standard. The market is beginning to shift from paper currencies to specie. There is nothing inevitable about this – but this is the direction we are moving in, and why we must get our financial and fiscal houses in order now.


If people were allowed to accept gold and silver coins the world would look much different. For example, everyone is complaining about the high price of gas.  A gallon of gas is actually cheap. What if I told you that a gallon of gas actually only costs about a dime? It does–a silver dime. At 38 dollars for an ounce for silver, one tenth of that, or one thin dime is worth $3.80 or about what the national average price of gas is. Get the picture?



Theoretically (and if allowed to) you could give your gas station attendant a silver dollar and maybe filler up. Or plop down a buck and a half at the grocers, and purchase a week’s worth of food. We should be able to, but in actuality we are prevented by law from using real money. We are forced to use government money. 


The price of a house has fallen like a rock in terms of dollars, but it has fallen by much, much more in terms of gold and silver. In the time it took the price of homes to be cut in half in terms of dollars, the price of gold has tripled, tripling your buying power. So a house can actually be bought for a lot less in terms of gold.


But here's the problem.  None of this helps you unless you possess gold and silver coin. That is the real money. Even if you are prohibited from using it by law, you can at any time convert your coins into paper to pay for what you need. Imagine if an event such as what occurred in Zimbabwe happened in the US or happened worldwide. All or most of your paper wealth would disappear.  Like I say, it happens fast. Paper money would simply become worthless.


This was the lesson learned by the trillionaires of Zimbabwe.  People say “I would never buy silver or gold at these prices.”  But it's not a matter of price.  It's a matter of possession.  At the end of a monetary collapse what matters is what you actually posses, not what you have claims to. Claims quickly become worthless.



 The worse case scenario, the one that keeps me up at night, is that suddenly paper money will be shunned by the market and silver and gold will become demanded as payment for goods and services.  If this should happen, we as individuals will go to trade paper for specie, and there will be none.  This means that all the wealth we thought we had, in bonds and savings accounts, money market funds and CD's will be worthless.


Wealth is goods.  Money is the claim to goods.  Understand this and you will understand why gold and silver have stayed around as money for centuries while governments and their "legal tender" have come and gone. I suggest you get yours before you can’t.


Market Update:


While the Mega trend since mid 2007 has been one of de-leveraging putting a decidedly recessionary/disinflationary bias into place, we have had reflationary policies instituted to fight this trend which have led to mini spurts of growth and inflation. Hence the two seemingly contradictory articles, "Our Nagging Deflationary Problem", last week, and "Trillion Dollar Gold", this week. The fact is that at the end of the road we are on, could lie either deflation, inflation, or monetary stability. It all depends on what policies we implement, both fiscal and monetary from here.

This is why the rise in the market and the rise in commodities have paused. Will huge new austerity measures be imposed? Will the Fed choose to reflate again as the economy recedes? To what degree will markets correct, and will the public tolerate the correction?

Interestingly, the two markets that have diverged this week were treasuries, and gold. Both went up as many other markets and commodities fell. My take is while appearing contradictory, both markets are defensive safety plays. Central banks that are still taking in more dollars daily than they know what to do with, are forced to choose where to invest those dollars. They have chosen the dollar, the euro, and gold, as their first three choices.

Meanwhile, the investment community has turned defensive and have sold off certain investments and run into cash. The result is a falling market, an unwind of speculative trades, falling commodities, falling interest rates, and a firmer dollar and gold price.

Interestingly, my gold holdings are moving up in value along with my cash equivalents.

Holding same portfolio as last week.