BELIEVE IT OR NOT, there is a plausible path to a $10,000 an ounce Gold Price And it doesn't require a breakdown in civil society
.
Speculators
see central bankers as modern-day superheroes, able to push markets
around with a single phrase. In the minds of most investors, Ben
Bernanke, Mario Draghi and Masaaki Shirakawa might as well be wearing
tights, masks and capes. These superhero central bankers continuously
swoop down into the financial markets to defend them from
downticks...and to insure that they always deliver capital gains.
The
reality, of course, is that these superheroes are frauds. They have no
superpowers...other than the power of mass delusion. The powers of Mario
Draghi and the other central bankers in Europe are waning. Excess debt
is like kryptonite: Each new wave of printing has less impact on
markets. As the popular phrase goes: "This is a solvency problem, not a
liquidity problem."
In other words, new money supply cannot restore health to sick loans and government bonds. The only way to restore solvency to the system is
to deflate the economy or slash the amount of debt in the system
through mass bankruptcy.
Or is there another way? Is there a
"reset button" that central bankers can push (with the approval of
political leaders) that would restore balance to the system?
We know central bankers would never want to deflate the economy or crash the value of debt, which would destroy the banking system. So how about inflating the money supply to dilute the value of debt? All in one fell swoop?
Right
now, central bankers are diluting the value of debt very slowly by
pushing interest rates below the rate of inflation. Some call this
"financial repression." It's an unspoken policy that has many negative
consequences. What is an alternative, since all attempts to "fix" the
current system with more borrowing and printing are failing?
How
about the classical gold standard, which stands out as the least flawed
of all the systems we've tried. Each nation could choose to peg its
local currency to gold at a price that allows for enough growth in bank
reserves to greatly reduce the burden of public- and private-sector
debts.
Re-pegging a currency like the US Dollar to gold at the
current price (about $1,550) has its pitfalls. Most notably, it would
not deleverage an overleveraged banking system. But re-pegging the
Dollar to something like $10,000 an ounce might do the trick.
Hedge
fund managers Lee Quaintance and Paul Brodsky from QB Asset Management
wrote a fascinating outline on the potential reintroduction of gold into
the monetary system, while simultaneously implementing what one might
consider a debt jubilee. QB explains the mechanics of how it could work
in the US:
Using the US as an example, the Fed would purchase
Treasury's gold at a large and specified premium to its current spot
valuation. The higher the price, the more base money would be created
and the more public debt would be extinguished. An eight-to-10-fold
increase in the Gold Price
via this mechanism would fully reserve all existing US
Dollar-denominated bank deposits (a full deleveraging of the banking
system)."
Below is what the remonetization of gold would look like
in chart form. The yellow line would rapidly approach the blue line.
And the blue line will keep rising as we see further growth in the money
supply. QB's "Shadow Gold Price"
divides the US monetary base by official US gold holdings.
Policymakers, who always feel the need to manage something, would
appreciate that this is the same formula used during the Bretton Woods
regime to peg the Dollar at $35 per ounce. In other words, the Shadow Gold Price
is the theoretical price of gold after the Fed inflated the supply of
Dollars to a level that would cover systemic bank liabilities and then
re-pegged the Dollar to gold. Behold the path to $10,000 gold:
This
path would weaken the economy-sapping effects of debt created since
President Nixon closed the gold window. It would transform a debt-based
currency into an asset-backed currency. No longer would one ask the
unpleasant question "What backs the Dollar?" and come away with even
more questions (and a headache). Right now, the Dollar is backed by
Treasuries held on the Fed's balance sheet, which are in turn backed by
Dollars, which are in turn backed by faith in fiat money — i.e.,
nothing!
QB's monetization scenario would impose losses on certain
parties as the reset button is hit, but unlike most of the policy
prescriptions we've seen lately, it seems to solve more problems than it
creates. Most notably, politicians could argue that this reset would
involve "migration of value, in real terms, from leveraged assets to
unleveraged goods, services and assets." Wage earners would be winners
relative to asset owners, because "stable to higher nominal asset prices
would require even higher nominal wage and consumable pricing looking
forward."
This scenario argues for holding some shares in
producers of physical commodities (especially gold miners), even if it
feels like we're in a deflationary environment. A gold standard, after a
one-time debt monetization, would make for a more-balanced, efficient
global economy less prone to violent booms and busts.
As an added
bonus: Central bankers would no longer be viewed as superheroes! Just
meager servants, pegging the money supply to gold and letting the free
market determine the price of money. After all, when in history has
central planning worked better over time than the free market?
We
can hope the central bankers of the world stumble their way to a
solution like that proposed by QB Asset Management before they inflict
even more damage to the foundation of the global economy. Unfortunately,
conditions may have to get much worse in financial markets, banking
systems and economies before such "outside the box" ideas are
considered. A defensive portfolio with exposure to gold and other real
assets seems like the right mix in today's environment.
Give us a call for all of your precious metals needs at 801.889.7200 or online at valleygoldminesaltlake.com
