Is $6,300 Fair Value for Gold?
By Staff News & Analysis - November 20, 2009

The last parabolic spike in gold took off when central banks joined the fray in the 1970s, hoarding bullion with the same enthusiasm as gold bugs. Dylan Grice from Société Générale says it smells much the same today. He sees an eery similarity between the decision of India's central bank to buy half the IMF's entire sale of gold, and the move by France's central bank to start converting dollars into gold in 1965 – which was, of course, the start of the slippery slope leading to the collapse of Bretton Woods and the closure of the US gold window under Nixon. In the gold mania that followed, the price rose to levels that matched the US dollar monetary base (it reached 140% at the peak). If that were to occur today after Ben Bernanke's go at the printing press, gold would have to reach $6,300 an ounce. The US owns 263 million ounces of gold while the Fed's monetary base is $1.7 trillion. Simple equation. Gold has had its ups and downs, of course. It is trading today at roughly the same real price as in the mid-13th Century – when an ounce bought a light suit of chain mail. It doubled in the late Medieval bubble, before crashing 90% over the next 500 years after the Spanish gold discoveries by Cortes and Pizarro in the New World, and then the finds in California, Australia, and South Africa – bottoming around 1930. "Gold isn't intrinsically safer than any other asset. There is nothing mystical about it either," said Mr. Grice. However, precisely because gold is almost useless, it makes the perfect currency, and that is the role it is playing right now as flight from fiat paper leads to fresh records each day ($1150 yesterday). – UK Telegraph

Dominant Social Theme: Aw, who knows what the heck is going on!

Free-Market Analysis: Of the mainstream press, only Ambrose Evans-Pritchard would likely have the gumption to write an article like this in our opinion (at this stage of the market, anyway), though we don't know if he made the headline up or not. And it's not that bad an article in the sense that it does not outright condemn the possibility of gold moving quite a bit higher.

Of course we would hasten to write that we have no idea if gold is going that high, though we continue to think that gold is going higher (and we have been right for the past eight years which is more than you can say about almost anyone writing for the mainstream press).

Anyway, we enjoyed this article and wanted to share it with you dear reader, regardless of whether you buy any gold or not. For those of you who haven't read our previous umpteen articles, we would only point out that there is logic behind our assumption that honest money (gold) is going higher, or dishonest paper money lower (it a matter of perspective). The logic has to do with this being a bear market for fiat currency and a bull market for gold and silver. Pure fiat currency, as we have today, is an unnatural manipulation of the market, counterfeiting if you like. The monetary elite keeps the balls in the air for as long as they can and eventually drop one, then two, then three. And gold and silver begin their relentless rise.

It happened in the 1970s and it's happening today. It is not luck, nor inflation, nor the jewelry market exploding. It has to do with the fiat bust and the resultant bull market for honest money. First the physical gets bid up, then funds and paper of all kinds, and finally even the stocks of junior mining companies. It is not rocket science, dear reader. Just go back to the 1970s and find out the kinds of multiples at which juniors were trading in the late 1970s, the last time a bull market in precious metals peaked. Then allow for inflation and make your calculations. When valuations hit those highs again, or come near them, you will know the market is probably peaking this time around. We have a suspicion there is a ways to go. (We're NOT giving you investment advice, this is just our opinion.)

Of course those in the mainstream want to make it a lot more complex. For them, the rise in gold and silver prices is oh-so-mysterious. They never learned this part in business school. Keynesian texts never explained it. They got ‘A's and graduated with honors, but somehow, someone left a hole in their education as valuable as a box-car of buillion.

Hm-mm … Is it part of a general run toward commodities? Is it the Chinese and Indians buying for their wives? Are people just … ah, diversifying for the hell of it? On and on. A million different explanations come to mind for why gold is going up (and silver too). And then when they run out of them, they just sort of fall silent. Because there is nothing to say. (And, yes, we await that blessed moment, even if it only lasts a few hours before the yammering starts again.)

WE know. We "get it" as, doubtless, you do, too. The free-market has simply reasserted itself. The central bankers and their monetary elite parent-surrogates are in retreat, depressed by the ferocity of the crisis and panicked by the Internet – a communications device the likes of which they haven't had to contend with since the Gutenberg press. Aye, the Internet … It must be driving the monetary elite absolutely crazy.

Look for yourself. Just in the past couple of weeks the news has come that the Copenhagen Treaty that was supposed to usher in a new era of carbon rationing to control global warming has gone bust. Then there was the article we presented yesterday that showed that over 50 percent of Americans had no intention of getting the swine flu vaccine – a vaccine that had been HEAVILY promoted by the mainstream press. And now as gold continues its relentless climb, there will be more and more articles like this one, delving into the reality of gold (and silver) and attempting to figure out just why people are still attracted to it.

Here's some more from the Telegraph article:

Almost all western governments are insolvent. The total net liabilities of the US and France are both over 500% of GDP. The UK and Germany are over 400%.

We are bust. To make matters worse – says Mr. Grice – central bank credibility has been "permanently ruptured" by their collective failure to see the 2008 crash coming. (He is too polite: they caused the crisis by holding real rates too low for a decade, creating a debt bubble).

Given that central bankers have been exposed as mortals/charlatans (ie pretending to command an exact science, when economics is merely a descriptive branch of anthropology), who can have much faith that they will manage the exit from emergency stimulus with skill?

Markets fear that central bankers will try to satisfy political masters by inflating away our debt. (Here too, I have my doubts: my concern is that they do not yet understand the deflationary dynamic underway, and will stay too tight, for too long, until we are in the Japanese abyss. Look at the 7% annualized contraction of the M3 money supply {not the same thing as the monetary base, at all} in the US over the last three months, which Bernanke refuses to look at because he regards M3 as a barbarous Friedmanite relic.)

Mr. Grice's method is an odd way to calculate fair value of gold, but as good as any in a mania – and certainly no worse than ARPU ratios and "market cap to clicks" in the dotcom bubble. So perhaps gold is cheap.

Personally, I take no view on this. As a contrarian, I never like an asset that is in fashion. I loved gold at $252 eight years ago. The higher it goes, the less I love it.

Does any of this sound familiar? We've written a number of articles that make many of these same points, especially about the rupturing of central bank credibility. Did you believe us when we wrote almost a year ago now that the old model was crippled? We don't blame you if you snorted and crumpled up your computer (metaphorically anyway) and threw it away. Central banks, after all, are ubiquitous today as the Holy Roman Church was before the Reformation. …

Oops, maybe that's a bad example considering what happened then! Or maybe not. It's been our contention that central banking has provided the secular spirituality of the Modern Age, that central bankers themselves were acolytes, that the mainstream press was a choir and that you and I, dear reader, served mass. But not anymore. And it's not just that the central banks didn't foresee the crisis. (Of course they did in our opinion.) It is what they did afterwards that is far worse.

Panicked by the strength of the crisis forged in the slovenly heart of modern finance, central banks printed TRILLIONS, and shoved it into the market with abandon. Of course today they refuse to tell us with any specificity where it has gone. They believe, in their arrogance, that it is business as usual. It is not. And if you don't think that the average joe (about to lose his house) noticed that some people controlled trillions while he was losing his job, well … you underestimate the intelligence of the average joe.

OK, we have run on long enough. But since the diet Coke is just kicking in and we're on a roll, let us take the time – yes, we do care – to remind Evans-Pritchard (who may apparently be reading our columns since we write about him enough) that he really will have to discard Keynesian analysis at some point. Inside Evans-Pritchard, in the immortal words of Sugar Ray, is a truth-telling phoenix ready to spread its fiery wings and fly (oh me oh my). We know this because Evans-Pritchard, out of all of them in the mainstream press (on either side of the pond), has the audacity to spell out the PROBLEMS before his colleagues. Real problems having to do with the bust in Spain, the putative governmental bankruptcy in Britain, intractable problems with the euro in central Europe, etc.

And yes, we were disappointed in his article infamous "peak gold" article regarding Barrick gold. But he is a veritable gem in the brick-brac of mainstream media. So, Ambrose … we want you to go home today to your expensive house or flat and take a deep breath and look in the mirror. Remind yourself that inflation is the printing of money, not the appreciation of prices (just an after-effect). Remind yourself that deflation is a good thing that may even hasten the demise of the fiat money system.

Yes, please, realize, as you gaze at your eternally smiling face (judging from your photo) that everything you learned at your expensive British schools is a lie and that goes for economics as well. You are on your own now, Ambrose! You are all grown up. It is a moment of crisis that every public school teacher faces when he or she first realizes that the system of public education is infinitely corrupt. Or that doctors and nurses suddenly comprehend in your abysmal nationalized health care system. Or that young Wall Street tycoons suddenly grasp after the third or fourth too-big bonus check. Fiat money distorts EVERYTHING it touches and makes liars of us all.

Step away from the money changers, Ambrose. Depart from the cathedral of Keynesianism. Walk a straighter line. Tell the truth about the solutions as well as the problems. It will be the most difficult thing you have ever done. But otherwise, it occurs to us, you are living a most uncomfortable existence.

After Thoughts

Well, we hope Evans-Pritchard won't take it personally if he reads the above. We are just having a little fun. Everyone is entitled to his own opinion after all. But it still remains our hope that one day – in the Telegraph or elsewhere – that we will read a stirring call for a private gold and silver standard, one that is to evolve naturally from the marketplace as it has before without government interference. Since that hasn't happened yet, our readers will simply have to put up with the repetition.

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