Reverse of the American Buffalo gold coins (Photo credit: Wikipedia)
After eleven years of up, up, up, gold has been down, sideways, or down since it peaked at $1,900 in August of A.D. 2011. Last week, we saw several consecutive days of gold falling between $10 and $24 per day. On Thursday, gold fell below $1,550 and left many wondering how low gold can go. Confidence in gold was badly shaken.
Société Générale S.A. is a French multinational bank headquartered in Paris. It’s France’s second largest bank and the no. 8 bank in the European zone. So it didn’t help to restore confidence in gold when Kitco News posted an article entitled “Societe Generale Sees Gold Under $1,400 By Year-End”
$1,400 gold! Two weeks ago, I would’ve dismissed such predictions as silly. But, last week, I began to wonder if maybe $1,400 gold was possible.
According to that article,
“Societe General looks for a U.S. economic recovery to mean that quantitative easing is likely to be scaled back in the fourth quarter, with bond yields rising ahead of this.”
Say whut? Societe General is predicting $1,400 gold based on a “U.S. economic recovery”? What “recovery” is that? I’ve heard predictions of a U.S. economic recovery for at least three years, and I’ve yet to see credible evidence that such recovery is close or even possible.
Sure, there’s evidence of an illusory recovery—if you believe our central government’s illusory statistics on inflation (1.7%), unemployment (7.7%), and national debt ($16 trillion).
But if you believe Shadowstats.com, the real, non-illusory inflation rate is about 5.5%, the real unemployment rate is over 20%, and the national debt is $85 trillion (the Congressional Budget Office says that, including unfunded liabilities, the national debt is over $200 trillion)—then there’s no recovery nor can there be a recovery in the foreseeable future.
Thus, I can’t see an objective foundation for Societe General’s prediction for $1,400 gold. But that prediction still has me talking to myself.
“Societe Generale listed a 2013 full-year forecast of $1,500 for gold. The bank listed a first-quarter forecast of $1,625, then $1,550 and $1,450 the next two quarters before $1,375 in the fourth. Silver was forecast at $30 in the first quarter and $24 in the fourth.”
Q: Are those predictions even possible?
A: Absolutely.
Q: Are those predictions probable?
A: Not in my opinion.
Why? Because I see certain “fundamentals” that can’t be doubted or ignored which guarantee the long-term trend for gold should be up, up and up. These fundamentals are:
1. First and foremost, the national debt is too great to ever be repaid.
Obama claims the national debt is $16 trillion. If so, each American man’s, woman’s and child’s “fair share” of the national debt is about $50,000. In theory, that debt , might be paid in full over a period of ten or twenty years. It wouldn’t be fun, but we could do it.
However, according to Shadowstats.com the total national debt is actually about $90 trillion. That works out to about $290,000 for every American man, woman, child. There’s no way to squeeze $290,000 out of each living American. That debt can’t ever be paid. Instead, in my “guesstimation,” at least 80% (and probably 90%) of the national debt will be repudiated.
It gets worse.
According to the Congressional Budget Office, when we include the government’s unfunded liabilities, the national debt is over $200 trillion. That’s about $650,000 for each living American. There’s no conceivable way for that debt to ever be repaid in full. I’d guesstimate that at least 95% of that debt must be repudiated.
The implications are enormous.
2. What can’t be paid, won’t be paid.
My second “fundamental” sounds so obvious, it seems silly. But I’ve argued the importance of that principle for at least four years. If the national debt is too big to ever be repaid, then some or most of that debt will not be repaid.
Instead, most of the national debt will be repudiated by inflation or by an open admission that the government is bankrupt.
Big deal, hmm? Who cares?
Well, it is a big deal and you should care because my third “fundamental” is:
3. One man’s paper debt is another man’s paper asset;
I.e., paper debts and paper assets are mathematically equal and two sides of the same “coin”.
If I borrow $100,000 from you, I have $100,000 to spend, and you have a piece of paper bearing my signature and promise to repay you $100,000 plus interest. If anyone asks, you’ll tell them you have an asset worth $100,000 because you have a promissory note (paper-debt instrument) that bears my signature. I have a $100,000 debt and you have the correlative $100,000 paper asset.
In our fiat monetary system, there are no paper assets (debt instruments) without a correlative paper debt. Without the paper debt, there can be no paper asset.
Therefore—if, for whatever reason, I can’t repay my $100,000 debt, your paper asset (my $100,000 promissory note) becomes worthless. The value of your paper asset depends on the value of my paper promise to repay the debt. Similarly, the value of your US Treasury bonds depends on government’s ability and willingness to repay that debt.
Whenever any paper debt can’t be paid, its correlative paper asset (paper-debt instrument) becomes worthless.
This principle is of enormous significance because it means that you can’t repudiate a paper debt (say the national debt) without also destroying the value of the correlative debt instruments (bonds, pensions, So-So Security, etc.) that memorialize that debt and are currently treated as paper assets.
Thus, if the national debt is $200 trillion and the government can’t pay 80% ($160 trillion), then $160 trillion dollars in paper assets will rendered worthless. Our economy can’t withstand the loss of $160 trillion in paper assets without collapsing into a depression and widespread poverty.
If and when the government admits that it can’t pay the national debt and the paper “assets” memorializing that debt vaporize, where will we find the currency to borrow to build another factory, house or shopping center?
More, once the national debt is openly repudiated, if there’s any “money” left to lend, the interest rate will be so exorbitant that borrowing will be almost impossible for a decade or more.
Without assets to lend, there’ll be no credit. Without credit, the economy will not only collapse, but tend to stagnate for years, even a decade or more. As with the Great Depression, the only way we may finally dig our way out may be by means of another World War.
We can get by without debts, but we can’t get by without assets. There may be some reality to our paper debts, but our paper assets are definitely illusions and thus subject to disappear as easily as Cypriot bank accounts.
4. The value of physical gold is not debt-dependent.
As people start to see the falling value of paper assets, they’ll increasingly invest their wealth in something tangible like gold because the value of gold as an asset is not dependent on someone else’s debt.
I.e., if I hold a paper-debt instrument in my hand as an asset, the value of that paper “asset” can be instantly destroyed by a debtor’s refusal or inability to pay that debt. But, if I hold a gold coin in my hand, its value as an asset remains without regard to anyone else’s promises to pay. Unlike paper assets, a gold asset is not debt-dependent.
In a world where 80% to 95% of the debts can’t, and won’t, be paid, it follows that 80% to 95% of the paper assets can and will be deemed worthless. In such a world, gold has enormous utility as a means of preserving wealth since gold assets can’t be destroyed by debt repudiation. Gold is an asset, no matter what.
As people begin to appreciate that gold assets are reliable, but paper assets are illusory and unreliable, the demand for gold will inevitably rise. The price and value of gold will follow.
5. Government wants inflation.
The only way the US government can avoid openly admitting that the national debt can’t be paid is by inflating the currency so they can pay off the national debt “nominally”—but with cheaper dollars. I.e., if the national debt were $16 trillion, and government could cause 100% inflation, they could pay off the national debt with $16 trillion that had an actual purchasing power of only $8 trillion. 100% inflation can cause the real national debt (as measured by purchasing power) to be cut in half.
By reducing the dollar’s purchasing power by 97% since the end of WWII, government has demonstrated its determination to inflate the currency.
Given the persistent history of inflation, I presume that government’s policy of inflation will continue and even accelerate. I presume that the only way the current, overly-indebted economic system can survive for even a short while longer is by means of inflation and perhaps even hyper-inflation. So long as inflation persists, the price of gold must rise.
If my presumption (persistent inflation) is mistaken, then we’re headed into an era of deflation where paper dollars grow more valuable, government is forced to repay its debts with more expensive dollars, and the national debt (as measured in purchasing power) grows larger and increasingly unpayable.
The only way the national debt can be easily repudiated is by inflation. If government can’t or won’t cause inflation, the government won’t be able to borrow currency, it won’t be able to “stimulate” the economy, and the whole economic system must collapse. In the midst of such collapse, paper dollars will be worthless but everyone will desire gold.
5. Economic knowledge is growing.
As inflation accelerates, people increasingly recognize the inherent dangers of paper debt instruments. As that knowledge spreads, people will try to move their wealth out of paper and into something tangible whose value is not debt-dependent and therefore preserves wealth during an economic depression or collapse. That “tangible something” might be land, guns, food or tools. But primarily, that “tangible something” will be gold and silver. As the demand for gold and silver rise, so should their prices and value.
7) Two trends are your friends.
We aren’t the first nation to implement a fiat (debt-based) monetary system. Throughout history, a score of nations have succumbed to the temptations of a fiat monetary system. Every attempt to rely on paper-debt as a source of wealth has failed. The persistent failures of fiat/paper monetary systems is a trend you can depend on. Just as the Weimar marks and Zimbabwe dollars inevitably failed, so will the fiat dollar. As the dollar fails, the price and value of gold will rise.
Another dependable trend is the fact that while the fiat dollar has lasted for just over 40 years, gold has been recognized as money around the world for over 2,000 years. While gold is sure to be recognized as money 5 years, 50 years and probably 500 years from now, it’s not even certain that the current fiat dollar will even exist 5 years from now. Doubt about the dollar’s survival will move people to seek gold. As the demand for gold rises, so will it’s price and value.
Conclusion
For me, when it comes to predicting our economic future, the fundamental “fundamental” is the national debt. Unless that debt can be paid, the whole debt-based monetary economic system must collapse. If our “money” is based on debt, and it becomes common knowledge that the underlying debt can’t be paid, the “money” must become worthless. It’s that simple.
Inflation makes an illusory “payment” possible and will at least allow the “system” to survive a while longer. Deflation (more valuable dollars; a falling price for gold) makes paying the national debt increasingly difficult and will accelerate the inevitable collapse.
Deflation is a hallmark of economic depression. If the government allows deflation, the economy will collapse. That collapse will quickly destroy the value of most paper debt instruments. Economic hardship and political uprising could follow.
Therefore, once a government embraces a fiat currency, that government should not allow deflation unless government is too weak to actually control the economy or government wants an economic collapse.
Although the decline in the price of gold over the past 18 months is consistent with deflation (dollar growing more valuable; price of gold falling), I remain convinced that government wants inflation.
But government can’t have inflation without allowing the price of gold to rise.
Therefore, despite the past 18 months of falling gold prices, I still expect inflation to continue and even accelerate (perhaps to hyper-inflation). If I’m right, with rising inflation, the price of gold must rise.
I’m arguing that it’s in government’s self-interest to allow and even cause the price of gold to rise. This is not to say that the price of gold will be allowed to skyrocket. But I am arguing that the price of gold must be allowed to rise by 10% to 20% a year in order to confirm that inflation is real.
Why? Because gold is the primary indicator of the fiat dollar’s value. If the prices of bread and gasoline double, that’s evidence of the inflation that government depends upon. But if the prices of bread and gasoline double, while the price of gold remains static or even declines, many will believe that deflation is becoming predominant.
The system runs on public confidence. If a substantial number of Americans conclude from a falling price of gold that we are in an era of deflation, they’ll also believe that we’re in or near an economic depression. If that belief propagates among the American people, that belief will be lethal to the economy and the US government.
I’m therefore compelled to connect my seven “fundamentals” into what strikes me as a “chain of logic”. As I do, a conclusion becomes inescapable: the price of gold must rise.
Why? Because:
1) The national debt is unpayable;
2) What can’t be paid, won’t be paid;
3) Paper assets depend on the promise of paper debts. When we repudiate national debt that can’t be paid, we must also destroy value of their correlative paper assets (bonds, pensions, So-So Security and even paper dollars);
4) The value of physical gold is not debt-dependent.
5) Government wants inflation to repudiate the national debt;
6) Economic knowledge is growing. As it grows, the people will move their wealth from inflatable paper to gold and silver;
7) Two historic trends (fiat currencies always fail; gold has been the primary money for over 2,000 years) are unlikely to ever be reversed. Thus, the fiat dollar is destined for damnation and “money” must once again be based on gold.
Despite the decline in gold’s price over the past 18 months, I remain convinced by the “logic” of my “fundamentals” that the price and value of gold must rise dramatically in the foreseeable future.
Unfortunately, my “fundamentals” don’t tell me when the price of gold will again rise or how high that rise might be.
But I’m a patient man. I invest in the future rather than speculate (gamble) on the present. My “fundamentals” tell me that the price and value of gold must increase dramatically over the course of the next several years.
So long as that’s true, I’ll hold my gold.
If you’re interested in your financial survival, you should do the same.