Q: My one big fear is this. If the precious metals go up in proportion to all the paper money printing does the value of my PM really go up or is it just a wash? Where is the actual gain? Even though the number of paper dollars will be higher it will have no purchasing power behind it. The inflated dollars and precious metals will both go up due to inflation but no real gains as far as purchasing power. What am I missing?
David Schectman’s Response:
You bring up an interesting point, one that is probably on the mind of many of our readers.
First of all, I think you are starting out with a faulty premise. Gold has NOT kept up with the increase in money and credit, so why assume it suddenly will?
In order for that to happen, the money supply and the price of gold should be equal to begin with, and then grow at an equal rate, so let’s see how well the price of gold has keep up with the money supply and credit growth.
The following charts by Sharelynx are not current but if updated, the trend would be even more favorable to gold, since gold’s price has fallen sharply since 2012. The ratio of gold to any of the following metrics is way out of whack. Gold has a long ways to go just to catch up.
Using the government’s inflation numbers (which grossly under-report inflation), gold would need to reach $2,450 in order to equal its 1980 previous bull market high. In other words, gold has to sell for at least twice today’s price to equal its inflation-adjusted price from the peak of the last bull market.
Since the government’s inflation numbers are so under-reported, it is not unreasonable to expect a price of $5,000 or even $10,000 per ounce in the next several years. These numbers are just to “catch gold up” to the current money supply and credit numbers. Future growth in money and credit will add to these prices.
If you accept our position that the price of gold and silver are manipulated and do not reflect the actual supply/demand fundamentals of the physical market place, then it is clear why there is such a large discrepancy between the price of gold and the growth of money and credit (see charts, below) you brought up in your question.
The US monetary base M0 to gold price ratio, from 1940 till 2012
The US M1 money supply to gold price ratio, from 1970 till 2012
The US M2 money supply to gold price ratio, from 1970 till 2012
The US M3 money supply to gold price ratio, from 1970 till 2012
Second, we should also factor in the “overshoot” that accompanies all bull markets. When investors around the world decide they need gold at any price as an escape from “fiat” currencies, the top will be higher than you can imagine.
The key issue is not whether gold will merely keep up with the growth of the money supply (and credit). It has not in the past, as these charts so clearly demonstrate, and we do not expect the trend to ease up in the future. In fact, the separation between the price of gold (and silver) and new money creation should accelerate. The question that concerns me is whether our government will impose punitive an “obscene profits” tax on the gains or whether our government will confiscate gold. These are both possibilities, if you hold on too long.
Another question you should ask yourself if is, “Would I be better off staying in dollars?” I say absolutely not! You would have to find a safe way to grow your portfolio at least 5% – 10% per year, and probably more after taxes to stay even. Granted, gold has not done that for the last two and a half years, but if you go back to 2001, when the bull market started gold – even after this manufactured “correction” is taken into account – is still up 400% in 13-years. Would you have done better not being in gold since the early 2000s? I think not. And we believe that the “big gains” are right around the corner. The bull market is not over by any stretch of the imagination and I think you realize that.
I don’t worry about gold (and silver) keeping up with monetary inflation in the future. I worry about the dollar losing its global reserve currency status, which is starting to happen right now, and I worry about Miles Franklin’s ability to PROVIDE YOU WITH GOLD AND SILVER in the future when the American public awakens to the danger of holding onto paper currency. It will happen and most likely sooner than you think.
Thank you for your insightful question.
Q: Are there any countries/currencies in the world today that are not fiat currencies? Are there any currencies backed by gold or silver?
Bill Holter’s Response:
The answer is that Switzerland used to be 40% gold “backed” and is now less than 20%. By “backed,” this does not mean that it is convertible into gold but that Switzerland holds a large part of their reserves in gold. The same could possibly be said for China. Do they hold 5,000+ tons of gold in their reserves or even more? Probably yes but we do not know for sure. They probably have much more than this if “legacy” gold from past dynasties is included but there is no way to even speculate accurately. So, the answer to your question is NO, there are no fiat currencies that are convertible into gold and depending on what price gold carries, there are no countries where gold could back their currency. At the current price the answer is no, at $10,000 maybe and $100,000 yes.
Q: Why with everyone telling us to buy, buy, buy for years… because the system is going to go under, do metals keep dropping in price, year after year!!!???
Andy Hoffman’s Response:
You couldn’t have hit the nail on the head better if you tried. Here at the Miles Franklin Blog, we exhaustively write of the widening gap between economic reality and the increasingly rigged financial markets. In fact, I last week wrote specifically of this topic, in “The Biggest (Manipulated) Disconnect of All Time.” And today, of how the powers that be were forced to step up such manipulation when gold and silver achieved all-time highs in 2011 in “The Point Of No Return.”
Frankly, the only reason we haven’t seen the next 2008 style crisis yet – which in our view, will not be “reversible” – is the historic levels of money printing, market manipulation and propaganda unleashed by the world’s major Central banks. Part and parcel to this “strategy” is holding down the “Achilles Heel” of the entire financial system; i.e., precious metals.
Even the least financially literate innately understand that falling stock prices are “bad;” let alone, rising gold prices. And in a world of exponential debt growth, interest rates must be held down as well. Thus, the unfathomable support for financial assets, whilst PAPER gold and silver has been attacked viciously.
Fortunately, the one thing “they” can’t create out of thin air is physical metal; and thus, each day the disparity between physical supply and demand widens, the odds that the inevitable end game of metal shortage, surging prices, and a complete loss of confidence in fiat currencies – grows larger.
Remember, physical gold and silver are not “investments,” but the way you “save” your net worth for the long term.