Gold and Silver Still Cheap

A Market Watch article published in June of 2003 suggested that a hike in the price of gold was unavoidable. Gold was then pric ed at $380 an ounce. The concluding paragraph mentioned that “Statistics indicate the minimum price for gold should be $1700 and that price levels of $3000 to $5000 an ounce are not unreasonable. The economics associated with gold clearly favors a greater gain over the next 10 years than can be seen in ownership of other investments.”

A July 2005 Market Watch article mentioned that gold was the only cheap investment. Gold was $450 an ounce at that time. It was written in the article that “Gold experts believe gold will obtain a value of at least $1500 to $3000 an ounce in the next 5-10 years.”

In April of 2007 a Market Watch article opined that gold was still under priced. The price was $700 an ounce. “Under present day circumstances,” it was written, “$2500 an ounce to $5000 an ounce is a realistic price for gold.”

Here we are today with gold at $1024 per ounce, and one has to wonder whether or not further gold price increases are possible. Let’s look at a series of facts about gold:

1.	Declining purchasing power of the dollar. A 1913 dollar, the year the Federal Reserve System was created, will now purchase less than 2% of what it would in 1913. That is 1/50th of the value of the 1913 dollar. Looked at another way, in 1913 gold was $20 an ounce. $20 (an ounce) x 50 = $1000 (an ounce), is approximately the price of gold today. As long as inflation continues to exist, we can conclude that gold will rise in concert with the depreciation in the purchasing power of the dollar.
2.	Demand for gold is increasing. For the first time in decades, central banks are not selling gold, but rather, they are accumulating gold. Additionally, China has entered the market and is both the #1 producer of gold and the #1 consumer of gold. Less than 2% of newly mined gold is added to the world’s gold supply each year, so increases in demand by huge buyers like China, or central banks, can influence=2 0the price of gold on the upside.
3.	The math of our monetary system is forcing gold to increase in price. In the 1930s and the 1940s, every bit of the U. S. money supply (M-3) could be redeemed in gold. Every single dollar obligation was covered by specie. The Constitution states that “all public debt will be settled in gold and silver species” (Section 10.). The Founding Fathers wanted debts settled in gold and silver species because that rule prevents government from getting out of control financially. When a public debt could not be satisfied, services would cease, or be cut down to a point where the services could be paid for. This was one of the checks and balances placed in the Constitution to limit the growth of central government. Each ounce of gold in the U. S. money supply represented $20 worth of obligations outstanding. Today, every ounce of gold in our money supply represents $59,000 of U. S. monetary obligations. It is easy to see with increasing U. S. indebtedness, persistent inflation, and unfunded liabilities, how math alone will push up the price of gold.
4.	In 1949 the U. S. had 36 million tones of gold backing our money supply (M-3). That amount has been pared down over the years to 8.2 million tones, less than 25% of what we owned half a century ago. The transfer of gold to other countries is a transfer of power. Let’s not forget the golden rule: “He who has the gold, rules!”
5.	The world’s largest gold producer, Barrick Gold Corp., will soon issue $3. 5 billion in new stock. They will use the funds to close out their hedge book (which means buying back “gold short positions” used to hedge their inventory). Barrick is investing $3.5 billion in gold at these prices, presumably because they do not think we will see these prices again soon, if at all.
6.	Current bank “profits” are clearly suspect. Profits are largely from the “carry trade” which is all based upon debt. The “carry trade” works as follows: banks borrow from the Fed at less than 1% and purchase treasury bonds, for example, which yield more than 1%, thereby booking the profit. Mathematically, interest on the treasury bonds are paid by the federal government who is borrowing money from the tax payers to pay interest on the treasury bonds owned by the banks. It is a complete paper profit, and it’s a scam. Government, Wall Street, and the fed are all complicit in this scheme and they know that what they are doing would bankrupt a business. Businesses cannot continually borrow money by making a few computer entries like our government does. We are using government funds to beef up the earnings of banks, at our expense.
7.	The U. S. money supply’s approximate 236 million ounces of gold are worth about $250 billion as compared to our M3 money supply of about $14 trillion (they quit publishing our money supply statistics (M3) about 2 years ago, so we must now make an educated guess at the amount of our own money supply!!!).
8.	Even though gold was $252 in 1999 and it now exceeds $1000 an ounce, the public is still not a big buyer of gold. Various investment funds have begun to take positions in gold and in gold stocks. When more funds focus upon gold, and the public catches on, there is likely to be a spike upwards in the price. China did not allow gold ownership for years, and they are now encouraging Chinese citizens to purchase gold. China has a very high rate of savings, and a diversion of savings to gold, in China, would impact world gold markets.
9.	In 2001, when President Bush was elected, gold was selling at $285 an ounce. With gold at $1024 an ounce, the U. S. dollar has been devalued against gold by more than 70% since 2001!

It’s hard to see how upward pressure on the price of gold can possibly be relieved with increasing government obligations paid for by debt. Debt undermines the value of the dollar, and the loss in the value of the dollar goes hand-in-glove with increases in the value of gold.

A terrific financial writer, Richard Russell (www.dowtheorynotes.com), wrote recently in reference to the possibility that gold will increase substantially in value over time, “Let me get this straight—Obama’s healthcare plan will be written by a committee whose head says he doesn’t understand it, passed by a Congress that hasn’t read it, and whose members are exempt from it, signed by a president who smokes in secret, funded by a treasury chief who did not pay his taxes, overseen by a surgeon general who is obese, and financed by a country that is broke. What could possibly go wrong?” The point is that this country is mired in a huge and complex economic mess. Economic uncertainty always leads to increases in the value of gold and silver. When people are unsettled and distrust their government, and when they are distressed about money, they do what they have done for 7,000 years—accumulate gold.

The bottom line is this: (1) if you believe the government will get it together, don’t buy gold because over time it will go down in value; (2) if, on the other hand, you feel the promised “change” we are experiencing with the new administration means “business as usual” with more taxes and more government, gold should gain dramatically in value.

Carpe Diem. (psssst. – government’s unlikely to change)

A word about silver. Over the last 100 years, the gold/silver straddle (price of gold divided by the price of silver per ounce) has averaged 39:1. At this time, an ounce of gold is 58 times more valuable than an ounce of silver. If silver moved up to the 39:1 historical gold/silver straddle, silver would move from $17.50 an ounce to $26 an ounce, a move of 50% from existing prices. From an historical point of view, silver is substantially cheaper than gold.

Carpe Diem.
George Rauch
September 25, 2009

....