Gold Prices, Fort Knox, Debt…And The Twilight Zone

December 30, 2020
Market Analyst, Author, and Founder of The Deviant Investor

Story at a Glance:

Gold rose $58 to $1,840 (recent low about $1,760) for the week ended December 6, while silver rose $1.66 to $24.21 (recent low around $22.00) for the week.

As we descend into the Twilight Zone, the major stock indices made new highs this week, showing, once again, that fake money encourages fake prices.

Stock market capitalization reached an all-time high compared to GDP. 1929 and 2000 peaks come to mind….

Gold and silver prices are inexpensive relative to “paper” prices—see below.

Jeremy Grantham:

“There is as much craziness now as there was in late 1999 or 1929. This is the real thing… It looked like we were in a bubble mode this summer, but the real craziness has come out in the last few months.”

Yes, the U.S. has slipped over the edge into the twilight zone of fiscal, monetary, political, and social craziness. Crazy behavior and policies have consequences.

Fiscal Craziness: Official national debt exceeds $27 trillion, about $200,000 per employed adult in the U.S. Practically speaking, no one cares. Congress will pass another (expensive) COVID bailout, tax revenues are falling, expenditures are up, and debt will blast higher. No one cares, yet.

Feds Admit $2.3 trillion in Improper Payments

Possible Head of Office of Budget and Management:

“Deficits and debt pose no comparable risk [to COVID-19]. Policymakers should set aside their concerns about red ink and deliver the response the crisis demands.” (Translate: spend, spend, spend!)

Monetary Craziness: Global central banks have created over $28 trillion in “fake money,” which boosted stocks and bonds to extreme heights. That “fake money” lifted the wealth of billionaires while millions of Americans lost jobs, and thousands of small businesses closed their doors forever. Bankruptcies escalated because of lockdowns.

Political craziness: Election fraud has been prevalent for decades. Politicians play fast and loose with the truth. Pervasive lies, loss of trust, and delusions (regardless of political affiliation) will extract a large price.

Social craziness: Lockdowns, required masks while exercising outside, wearing a mask between bites of food (California), children are asked to report parental mask and multi-family violations (Vermont), not wearing a mask is an “act of domestic terrorism (L.A.), churches rebranded as “family friendly strip clubs” (the virus is communicable in California churches, but not strip clubs), Mayor of Austin, TX “We need to stay home… this is not the time to relax.” [He was in Mexico.] Add suicides, drug abuse, alcoholism, spousal abuse, and other consequences of government mandated confinement.

CRAZINESS IS RELATIVE TO THE OBSERVER:

  • To some people, believing what the controlled media distributes is sensible.
  • Others don’t trust the media, remembering too many falsehoods, conspiracy theories that became conspiracy facts, and obvious lies.
  • The political and financial elite sell the delusion that gold and the gold standard are useless. Others understand the gold standard is the best way to create responsible fiscal and monetary stability. People hold strong opinions if their power and wealth depend upon “funny money,” paper wealth, QE4ever, and “paper” market profits.

Who can we depend upon? What is real? What reduces craziness? Where is the vaccine that protects people from dishonest money? Consider the following comparisons.

  • Paper and digital currency units. U.S. dollars are debts of the Federal Reserve and are backed by nothing but “faith and credit.” They depreciate in purchasing power every year. They can be outlawed or recalled at any moment. Digital units can disappear into cyberspace.
  • Gold survives, and bars and coins do not deteriorate, even in salt water. Gold has been valuable for thousands of years.
  • There is no “dollar standard.”
  • The “gold standard” is the premier status. People do not value the “yen standard” or the “fiat dollar” standard.
  • Unbacked paper and digital currency units boost the power and wealth of the political and financial elite, to the detriment of the lower and middle classes.
  • Fifty years ago, a dollar was worth 1/40th of an ounce of gold. Today it is worth 1/1,800th ounce of gold. In a few years (depending on craziness), a dollar will be worth 1/10,000th ounce of gold.
  • Those Federal Reserve Notes (U.S. dollars) are like a Thanksgiving feast left in the rain. What was once valuable soon spoils and should be dumped into the trash.

SLIPPING OVER THE EDGE INTO THE TWILIGHT ZONE:

Let’s loosen our grasp on the official narrative, leave the beaten path, and tumble into the Twilight Zone. There we might find:

a)  A world where President Kennedy was not killed by “a lone gunman.”

b)  The Gulf of Tonkin incident, that justified the Vietnam War, was fiction.

c)  President Nixon acknowledged closing the gold window in 1971 was permanent.

d)  The Federal Reserve admitted their policies are NOT designed to preserve the dollar’s purchasing power.

e)  Truth about the 9-11 attack was revealed, not repressed.

f)    The Treasury department released the truth concerning gold stored at Fort Knox. In the Twilight Zone, that gold was audited, assayed, and counted.

Once we have delved into the Twilight Zone, what do we discover regarding gold, silver, paper currency units, and unpayable debts?

GOLD, FORT KNOX, DEBT, AND M3

Compare the price of gold to population adjusted National Debt and M3, a measure of currency units in circulation.

Gold prices are inexpensive compared to five decades of national debt and M3. More importantly, gold prices compared to national debt are as inexpensive as they were in 1970 and 2001. The decades from 1970 to 1980 and from 2001 to 2011 experienced enormous increases in gold prices.

Assume the 147,000,000 ounces of Fort Knox gold are real, unencumbered, not stolen, and have not been replaced with tungsten. [The last audit was in the 1950s.] But in the Twilight Zone, 147,000,000 ounces of real gold still exist.

Assume that Fort Knox gold is valued at market prices and compare that value to national debt and M3.

The graphs over five decades show that debt and M3 increase more rapidly than the market value of Fort Knox Gold. The abundance of currency units and massive debt make the gold stored in Fort Knox appear tiny and irrelevant—until that gold is required to stabilize a failing monetary system.

Descending deeper into the Twilight Zone, assume The Federal Reserve loses control (someday) over confidence in the dollar, bond markets, and demand for dollars in world trade. Hyper-inflation could occur after enough months or years of QE4ever.

WHAT TO DO? If few people trust Federal Reserve Notes (dollars), then the Fed must back the dollar with something people trust. What could the Fed use to back the dollar?

a)  Promises from politicians?

b)  Faith and trust in Janet Yellen?

c)  Bitcoin?

d)  Euros?

e)  IMF currency units?

f)    Ford F-150 trucks?

g)  Unopened packs of cigarettes?

h) Gold? Bingo!

But, the naysayers scream, there is not enough gold to back a national currency. Nonsense! Price gold high enough to compensate for the trillions of digital dollars created since 1971.

Read: Central Bank of Uzbekistan Introduces Parallel Currency - Gold

How high? Suppose that 20% of dollars in circulation, as measured by M3, were backed by the gold in Fort Knox. Ignore the other smaller depositories where gold is supposedly stored. Honest money should be backed 100% by gold, but assume ONLY 20% backing.

Graph the required price of gold per ounce for the 147,000,000 ounces of Fort Knox gold to back ONLY 20% of M3.

Suppose the Fed backs the national debt with gold at the same 20% rate. What would the price of gold be if 147,000,000 ounces of gold backed the national debt?

Thoughts: If they must price gold at $25,000 to $40,000 (in late 2020) to back only 20% of M3 or national debt, then gold prices at less than $2,000 are inexpensive. In a monetary or hyper-inflationary crisis, gold prices will be reset far higher, to create faith in a new gold backed currency after they have printed Federal Reserve Notes into oblivion.

From Technical Traders: Gold Wave Forecast $3,750 or higher

CONCLUSIONS

  • A DOW at new highs makes sense only in the deeper regions of the Twilight Zone when debt, unemployment, panic, pandemic lockdowns, bankruptcies, and political craziness are reaching extremes.
  • Debt and M3 increased—2011.  more rapidly than gold prices, except during the gold bull markets of 1970—1980, and 2001Too many fake dollars have been created!
  • Gold has begun a bull market that should last for years, to 2026 or possibly later, per Charles Nenner.
  • The price of gold should be 10—20 times higher if the Powers-That-Be back ONLY 20% of dollars with gold officially stored in Fort Knox.
  • Political, social, fiscal, and monetary sanity may return to markets and the U.S, but we don’t know when. While waiting for the return of sanity, as the U. S. flounders in the Twilight Zone, the price of gold will zoom higher.

Miles Franklin sells real money—gold and silver bullion and coins. Owning gold and silver makes sense unless you trust the powers-that-be to protect your assets and purchasing power, and you expect they will reverse the craziness.

I do not.

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Gary ChristensonGary Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of the book, “Gold Value and Gold Prices 1971 – 2021.” He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy and central banking.

The Incas thought gold represented the glory of their sun god and referred to the precious metal as “Tears of the Sun.”

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