GOLD at $700 is Still Very Cheap!
We Should Not Be Surprised.
Gold's Relentless Rise is no Bubble
Jay Taylor
The price action of gold has defied all the pundits and virtually all the gold bugs too. Gold should correct, we are told. On Saturday, April 21, at the Chicago Resource Conference, Joe Granville told us that gold was in a parabolic rise and that it would soon correct to $581. But rather than correct this past week, it started to close in on $700 per ounce. Joe may still be right. We could correct to $581. But then again, I'm not sure gold will correct to anything like normal technical analysis suggests it should.
One reason I believe normal technical analysis may be unusually worthless now for gold is because past manipulation of the gold price by the central banks and the bullion banks has so badly distorted gold to the downside that its current upward move is akin to the suppression of a gigantic spring. Once the force pushing the spring down is released, a powerful reaction takes place that defies expectations of those observing the position of the suppressed spring for so long. With the enormous amount of pent up energy in the gold markets resulting from central bank suppression, once normal market forces overcame this official suppression of the gold markets, we should not be surprised to see gold rise in defiance of normal market patterns. That is not to say we won't see a pullback. Of course we will. But we are still in the very early stages of a major gold bull market that will take gold well over $1,000.
The lower gold prices orchestrated by central bankers were a key element behind the so-called "Clinton Strong Dollar Policy" of the 1990's. And I recall so clearly. The seeming dollar strength during those years, which saw the dollar gaining vis-à-vis gold and other currencies during the 1990s, caused people like Steve Forbes and Larry Kudlow to call for Alan Greenspan to print more and more money. Forbes and Kudlow were and still are totally clueless. They don't really understand that gold and gold alone (with a
partial exception of silver) is money. These Republicans along with Milton Friedman, who pretended to be a free market advocate, did more harm to our republic than any Democrat ever did! Greenspan did understand what printing money would do to our republic. But for the sake of self-aggrandizement, he printed and printed and printed, and his bosses, the invisible power behind the throne, rewarded him for it. Do you wonder why Mr. Greenspan was knighted by the Queen? Wonder no more!
"Helicopter Ben" Taking the Dollar Toward Zero Value Like All Fiat Currencies Before It
The blue line on the chart above represents the U.S. money supply as measured by M-3, from 1913 (when the Federal Reserve was forced on the American people) through to May 2006. (Please note that from March 2006, when the Fed stopped reporting M-3, your editor has imposed a growth rate for M-3 from that time forward equal to the rate of growth of the Global U.S. Dollar Liquidity statistic, which is one of the seventeen items in our Inflation/Deflation Watch.)
The pink line shown on the chart above represents the market value of gold (measured in dollars) held by the Treasury. You can easily see that the amount of M-3 has skyrocketed, starting in the early 1970s when Nixon unilaterally caused the U.S. to default on its obligations to pay an ounce of gold for every $35 in paper money presented to the U.S. Treasury. When the global monetary system was no longer backed by gold, there was no longer any discipline built into the system that served to keep money supply
growth within some reasonable rate of growth. At the same time, the politicians and bankers have not found a way to print gold. Gold must be won from the earth and as our readers know very well, mining gold is a very laborious and difficult task.
With politicians and central bankers having succeeded in giving themselves a legal right to steal by issuing paper claims against the wealth crated by citizens, that is exactly what they have done. They have issuing huge amounts of money from nothing as shown by the M-3 line above. What you need to realize is that gold, as well as all manner of other commodities, is not really rising in value. What is in fact happening is that the dollar, which we use to measure the price of gold is shrinking in value. Hence we need more dollars to measure the price of gold and other items including houses and stocks and consumer items too. As with any market, when the supply of the item in question rises dramatically, its price declines dramatically. The U.S. dollar enjoys a lot of advantages most currencies do not enjoy. But the dollar too has its limits. It cannot be printed in infinite quantities and remain of value. What is happening now as the world catches on to the fact that the dollar is heading toward its intrinsic value-zero-is that they are increasingly demanding honest money-gold (and silver)-in an attempt to retain wealth. If they hold dollars they lose. Hence the increasing talk on the part of many countries of the need to "diversify" their currency reserves. With the exception of readers of this and other gold-oriented newsletters, most Americans are totally clueless about what this rise in the gold price is all about. Most think it is about oil prices rising or geopolitical concerns. But gold is money and it retains its value, while paper or fiat
currencies always self-destruct. What I think we are seeing now is an acceleration of the destruction of the dollar and thus the move out of paper into real money-gold.
The Fundamentals Suggest at Least $3,000 Gold
How high can gold go? That is a question that is being asked more frequently as gold continues to surprise on the upside. As one who is only one year away from my 60th birthday, I have been around markets long enough to know that a secular bull market like we are experiencing now in gold goes much further than most people think. And I also know that when we enter a secular bear market, the culmination of that bear market is much deeper than can be imagined at its top, which is why I think the equity market in the U.S. still has a long, long way to travel to the downside. But is there a rational way to judge how high the price of gold could rise? I think there is.
Rob McEwen told Pat Bolland a few weeks ago on ROBTv that the U.S. was the only nation that did not sell any gold during the 1990s. That is the official "truth," although there is reason to believe that the U.S. may also have sold or swapped a significant part of its gold hoard. We know, for example, that James Turk uncovered compelling evidence via the Internet several years back that the U.S. swapped ownership of some gold held at West Point to the Germans, who then sold that exact same amount of gold into the market. That looks for the world like a clandestine means of selling U.S. gold by the Clinton Administration. That fact, (which did not decrease the reports of gold holdings by our government), combined with the fact that there has not been an audit of our gold hoard since the Eisenhower Administration, causes me to suspect that the U.S. holds less gold than it claims to hold.
But for the sake of argument, I'm going to make a highly dubious assumption for the moment that the U.S. in fact has all the gold it says it has, as reported every week by the Federal Reserve. If the Fed has all the gold it says it has, how high would the price of gold need to rise to restore a normal value of the U.S. money supply relative to the market value of gold held by the U.S.?
In 1913, when we were on the gold standard and when the Fed was forced on the American people, the market value of gold held by the Fed was $1.63 billion. The Money Supply (M-3) was $20.4 billion. In other words, this measure of money supply had a "gold backing" of nearly 8%. To be exact, it was 7.97%.
From 1913 until 1971 when Richard Nixon took us off the gold standard, the average backing of M-3 was 10.34%. However, that average was taken higher by a major flow of gold into the U.S. during the Second World War when the U.S. proved to be a safe haven, as it was out of harm's way. Also at that time, the U.S. was a rising economic power as China is now. As James Turk has pointed out in past work, gold always flows toward rising economic powers.
Given that we had a 7.97% backing when the Fed came
into being and during the period of time when the world
was on a gold standard, I'm going to assume for the
sake of this exercise that the U.S. would need an 8%
gold cover of M-3 if the world demands a return to the
gold standard. Also, the last time there was a dramatic
vote of "no confidence" in the dollar, in 1980, the yearend
ratio of the value of gold allegedly held by the U.S.
to M-3 was 7.95%. I think it is also worth noting that
the average market value of gold to M-3 since 1913 to
present, including the last number of years when the
ratio was between 1% and 2%, has been 7.49%. By
contrast, at present, the market value of the gold the
Fed says the U.S. holds is a mere 1.70%.
The chart above, which takes into account the amount of gold the Fed claims the U.S. holds, the current supply of M-3 (adjusted by growth of Global U.S. Dollar Liquidity), and the current price of gold, shows that despite the rise in the price of gold to $700, we are a long way from a historical norm. To restore the historical ratio of the value of gold held by the U.S. to the U.S. dollar money supply, the following would need to take place: (1) the U.S. gold supply would have to increase significantly; (2) the Money Supply (M-3) would have to contract significantly; (3) the price of gold would have to rise significantly; or (4) a combination of these three changes would have to take place.
Since it is virtually impossible for the U.S. to increase its gold supply (given its huge trade deficits and declining standard of living), and since contracting the money supply would certainly throw our over indebted economy into a depression, the only likely way this ratio will be restored is by way of a higher gold price. That then begs the question: How high would the price of gold have to rise, given: (1) a constant money supply, and (2) a constant gold supply? Let's assume for the moment that the gold supply will remain constant and that the money supply will also remain constant (which it won't-it is growing "like weeds in the tropics"), the price of gold would have to rise to $3,196! But keep in mind that as the money supply grows-and it is growing at a rapid clip-the price of gold will have to rise still further.
How likely is it that we the world will demand a return to the gold standard? I believe that demand is now just beginning to be evidenced by the cries on the part of a grown number of nations who have expressed a desire to exit the dollar and add to their gold holdings. And the price of gold is telling us they are putting heir money where their mouths are. The voice of the global market is just starting to express a declining confidence in the dollar but, with a coverage for the dollar of only 1.70% with gold selling at $700, I believe we are still in the very early stages of a major gold bull market. Will we see a correction? Most likely we will, but I'm not totally convinced we will see anything like Granville's prediction of $581, though I don't rule that out. If we do see that happen, it should represent one last major buying opportunity for those who missed this latest move.
What history tells us is that we can expect our policy makers to push their paper currency scam as far as they can, until we reach a breaking point. Then you can look for these folks to do whatever they need to do to save their position of power and privilege. In 1980, the dollar was saved with high interest rates but the cost of that was the steepest recession since the Great Depression. Now with the U.S. financial system in such an over indebted, precarious position, a similar tight monetary policy would in my view quickly usher in the freeze-up period of the Kondratieff winter and deflationary depression that could make the 1930s event look like child's play.
This then begs another question: Would the Fed ever orchestrate a similar tight money policy this time around? I think they might possibly do so if the issue at hand is the survival of the dollar and the preservation of America's power in the world. For either a continuation of inflation or deflation we want to be ready-hence our Inflation/Deflation Watch, which continues to point us toward accelerating inflation, at least for now.
May 28, 2006
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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