THE LIBERTARIAN ENTERPRISE
Number 536, September 13, 2009
"Spirits crushed so badly that the victims
have no way of knowing they've been crushed."
Special to The Libertarian Enterprise
What is gold telling us? It just went over $1002 on the Hong Kong market.
What does that mean as a practical matter? For one thing, it means the value of the dollar is declining. The dollar is down against many other currencies, such as the Japanese yen.
One reason for the rise in the price of gold is the dramatic recent increase in the amount of money in circulation. Consider this chart.
Figuring that is $8.5 trillion in the broadest available measure of the money supply. There is a broader measure called M3 but the Fed stopped publishing that in 2006 when they became afraid of transparency and openness.
Consider another figure, the official gold reserve of the USA government. That figure is 8,133.5 tonnes. Now a tonne, or metric ton, is a million grams of gold. And there are exactly 31.1034768 grams of gold in an ounce troy. Gold is traded on the markets in ounces troy.
Now there is no gold backing the dollar. There is no promise of redemption, and has not been since 1971. But if the USA government were to pledge its gold reserve against the dollars in circulation, the price would be about $31,740 per ounce.
Which means that gold is not currently priced by the market anywhere near the practical value of the dollar, if it were only backed by gold currently held by the USA government. But, of course, there is no backing at allthe full faith and credit of the United States basically means however much tax revenue the gummint fed goons can extort from the people.
Oh, you say, but M2 is too broad a measure of money. We should focus only on the monetary base. That comes from this graph:
Gosh, that one looks rough, too. It sure did jump up all of a sudden when the Federal Reserve started pumping hundreds of billions into failing banks to prop up their cronies. Heh.
Doing the division on that figure, calling it $1.8 trillion because it seems to be zigging around that value lately, I get $6,883 as the conversion of dollars to gold ounces in inventory.
Mind you, the Gold Anti-trust Action committee (GATA.org) thinks the gold in inventory is nothing like the figure the government claims. And they may be right. In which case there is less gold to go around. And, since nobody has audited the Federal Reserve in 96 years since it was created, we really don't know if they are telling the truth about the amount of dollars in circulation.
But we do know what gold says. It says, "The dollar is a bad bet." It has been above $1,000 an ounce before in recent years. So it has been trying to get your attention for a while.
What does it mean when a currency goes hyperinflationary? Many people have experienced this situation, in places like Yugoslavia (1993-95), Zimbabwe (2000-2008), Weimar German (1919-23), the republic of China, South Vietnam, etc. Very often hyperinflation is followed by economic collapse and authoritarian government.
The dollar is a long way from hyperinflation, but the trend is in place. And all over the world, other governments are following suit, pledging to spend as much money (that they don't have) as necessary to end the economic crisis.
"At a meeting in London at the weekend, finance ministers and central bankers from the Group of 20 nations said fiscal and monetary policy would stay expansionary as long as needed to ensure recovery."
That doesn't sound encouraging, to me. It sounds like a uniform global policy of inflation. Yikes.
Will the price of gold go up from here? Yes. Will it also go down? Of course. Prices vary all the time, that's how markets find market clearing prices. Gold could go down to a recent support level at $950, or up to $1300 this year. Or not.
Very recently, Barrick Gold decided to raise several billion dollars to unwind their "hedge book." That means they plan to sell their short positions which hedge off the price risk that the price of gold might drop. Doing so indicates that they don't expect a lot of drops in the price and they want to be un-hedged to take full advantage of the upside in the price of gold.
Also recently, several national central banks have started buying gold. Germany and China have asked that their gold, being held by overseas banks, be returned to their direct possession. These are signs that the dollar is not going to last foreverin case the money supply charts don't seem clear.
Gold and silver in your possession represent a good way to protect yourself against bank runs, bank holidays (national bank closings), and the possibility of high inflation for several years (stagflation) or sudden hyperinflation of the dollar. If you have difficulty finding gold and silver coins in your community, get in touch. I may be able to help.