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A few months ago I made the statement that “long term, gold must and will go up in terms of U.S. dollars, this is not my opinion it is fact!”  This statement sparked a firestorm and I immediately took a rash of verbal abuse (as I may again for writing this but please read it all before screaming at me) for what I said.

Before I go any further, I want to preface everything I write and the following logic with the premise that modern day alchemists do not figure out how to turn lead into gold, or create gold in laboratories as they now can make diamonds, or a 1 million ton meteor of solid gold doesn’t somehow strike Earth.  In other words, as long as the “supply” situation doesn’t dramatically change (which I cannot foresee happening), I stand by what I am about to write.

Throughout all of recorded history the amount of gold mined is estimated to be about 170,000 tons.  The world mines roughly 2,700 tons per year now and this number has been steady (maybe slightly declined) for the last 10 years.  In other words, there is about 1.5% more gold above ground year in and year out.  I might add that “discoveries” for the last 10-15 years have been few and far between which means that for at least the next 5-10 years there will not be any increase in newly mined gold supply.  The picture here is a very stable, static amount of new gold that can hit the market each year and it’s not like a crop where good weather and lots of rain can create a bumper crop.

We also know that central banks say that they hold 32,000 tons of gold in their vaults.  This number is hogwash as we know for a fact that much of this is either double counted or has already been leased out, sold into the market and is no longer potential supply.  I think a good estimate of what is left is certainly less than 15,000 tons but this is my opinion after reading evidence that points to central bank gold having already left the vaults.

The above is all about supply, basically that new incremental supply is nearly carved in stone and that unless a California gold rush were discovered there will not be any big changes in this side of the equation.  Next of course is the “demand” side.  We know that the Chinese and Indian populations have increased their appetites for gold.  We know that sovereign nations have turned from sellers 10 years ago to buyers now.  You might ask, “What if governments made it illegal to import or buy gold?”  We already have the answer to this one, India tried this for a couple of months and the black market of smuggling arose in response.  Actually, if anything, this created more demand and “demand” that you might even call emotional.  Suffice it to say that demand has increased no matter where you look.  But all of this demand could possibly diminish or wane so how does this prove “fact or opinion?”  It doesn’t except to show that the human animal is already reacting in his best interests.

OK, so the above is a start but it can certainly be argued that nothing “factual” has been proven yet.  We live in a “fiat” world of currencies that are based on confidence and these currencies can be created in any amounts and for free.  In fact, because of the over indebted nature of the world more and more fiat currency HAS to be created to pay the interest on existing debt.  If money supply doesn’t grow then the debt will end up getting defaulted on because the “money” wasn’t created to pay the interest.  Simply put money supplies AND debt levels MUST grow…and grow exponentially otherwise the system collapses on itself.  This is a fact.

Now let’s look at the other side of fiat system.  Money supply (and thus debt) has grown for years above and beyond the growth rates of the actual economy.  This has to happen because of the nature of the diminishing returns to incremental debt, once you pass a certain limit…more debt and more money supply do not create an equal amount of growth or activity in the real economy.  If it did, we would have seen a rip roaring economy over the last 5 years, we haven’t.  I guess that you could argue that it is not “mandatory” to increase debt and money supply but even a dimwit like Paul Krugman would win this debate.

So, we absolutely must create more debt and money supply to service (and reflate) old and existing debt.  Factually if a system is not growing (or growing very slowly) and you create more and more debt and more and more money supply…the currency is continually worth less and less.  This is simple logic where more slices of the same pie are continually smaller and smaller.  We live in a system which has morphed into a Ponzi scheme no matter where you look.  The banks?  Fractional reserve.  Retirement plans federal, state, muni and corporate?  Underfunded.  Derivatives?  Can you say “over $1 quadrillion.”  Treasury debt?  We have to issue more debt to retire old debt and to pay interest.  Please remember that ALL of this (including the entire world’s financial system) rests on top of the dollar.  A dollar which has no backing other than the “full faith and credit” of a bankrupt issuer (the Treasury or the Fed, take your pick) and dollars “spend” based solely on confidence alone.

Let me wrap this up.  Over the long term, 10 years, 20 years or even 50 years, (our current financial system will not, CAN NOT exist in its current form) gold, “mathematically” will be more valuable in dollars.  No, gold won’t “go up,” in fact it won’t do anything other than “be” gold.  Dollars on the other hand will continue the 100 year spiral down in value because it mathematically MUST.  We absolutely, positively, no if’s and’s or but’s have to INFLATE OR DIE.  It is either one or the other.  In either case the value of the dollar versus real “stuff” will drop.  The dollar either loses purchasing power through inflation or loses value because its issuer goes bankrupt and defaults.  Either way, “stuff” will require more dollars over the long term in order to make a “trade.”  Gold and silver are the ultimate “stuff,” in fact they are and always have been money itself…

I used the word “mathematically” above because a finite supply of any “good” will take more currency to purchase if that currency is and can be created for free and in infinite amounts.  I will say this, whether you bought gold at $250 per ounce, $1,920 per ounce or today’s price of $1,385…it will be more valuable in terms of dollars tomorrow, next week, next month and next year.  “But, but, but…the price; goes up and down, I bought mine 6 months ago and it went down” you say?  Yes, the “market” price does go up and down and is certainly affected by many factors both natural and manmade.

My answer is this: there is a “market price” and there is a “true value” to any and every asset.  For instance, an 800 square foot apartment in New York City might trade for $1 million, is the price the market price or the true value?  A stock can double in a day or drop 50%; the market price and true value were obviously not equal for such a big price move to occur.  In the long run, market price will adjust to true value which is simply investors acting in their best interests.  You can go through this thought process with anything which is what “markets” are for, buyers and sellers “voting” by their trade actions.  My statement above regarding gold mathematically being worth more dollars each and every day speaks to true and mathematical value, not market price.  Every single day there are more dollars created than there is gold mined.  Whether on a relative basis or an absolute basis this is true.  Please do not nit-pick me and say “but money supply shrank yesterday,” yes it does maybe 10 days out of the year but my point is that money supply has grown, is growing and will grow faster than gold is, can or will be mined.

“OVER THE LONG TERM, GOLD BECOMES MORE VALUABLE IN TERMS OF U.S. DOLLARS”…this is not an opinion, it is factual and borne out by past economic and monetary policy (since 1971) and by current and future policy that has only 1 option left (printing).  Inflate or die…