Q:  My father purchased his first house in 1963. It cost him $25,000 dollars. It was a 3000 sq. ft. home, with four bedrooms and three bathrooms in a new suburb near a large city. Gold was $35/oz. in 1963, so this house cost about 700 ounces of gold. Today a similar home in a similar location in Texas would cost about 190 ounces of gold. If gold is undervalued, why the big difference in ounces?
David Schectman’s Answer:
I have a question for you – is gold undervalued or housing overvalued, or both?
I have written about this several times before.  Nine years ago we built a new house.  We took out a large mortgage instead of selling gold, which I believed would go up a lot in the next 10 years.  I was correct.   Gold was $500 an ounce at the time.
Well, today gold is $1,325 so if I decided to pay off the mortgage now, I could do it using only 37.8% of the gold ounces it would have required nine years ago.  When gold hits $3,500, which we all believe it will, I will sell enough gold to pay off the mortgage, but it will require only 14.2% of the ounces it would have taken in 2005.
Your time frame, starting in 1963, is based on gold’s “Official fixed price” of $35/ounce.  1971 was also the year that Nixon took the dollar off the gold standard and allowed gold to float against the dollar and other paper currencies.  It’s still the same “ounce” it was then, but it now takes 38 times more dollars to buy it.
Put another way, the dollar has not fared well.  We believe the dollar will continue to lose value (because of the Fed’s policy of zero interest rates and the trillions in new dollars they have created and will continue to create) and before the decade is over, it will cost $3,500 or $5,000 or $10,000 or more to buy the same ounce of gold.
Do you think your house will continue to appreciate to the point where it will be worth three times as much ($750,000)?  Or four times as much ($1,000,000)?  Who will have enough money to buy it?  Housing can only rise to a point where people can afford it.  A lot of houses are sold at $125,000 or $225,000 but how many are sold at $1,000,000.
So you ask, “But who will buy gold at $3,000 or $5,000 or more?”  Not the average person, but the money is not spread evenly around to everyone and the top few percent are the people who will buy gold.  I’ll tell you who will buy the gold: The Chinese and Indians and wealthy Arabs will buy gold at the higher prices.  They are right now.  They have to because the reason gold will be worth so much more is because the dollars they are holding will be worth that much less.  They won’t sit on the dollar and watch its value evaporate.  Once foreigners start dumping dollars, the dollar’s value will drop rapidly and gold is the safest and the ultimate currency and it will suck up enough of these dollars to explode in price.  Just like it did between 1963 and 1980, when gold rose from $35 to $850, up 24 times.
The only reason gold is as “cheap” today as it is, is because the Fed with assistance from JPMorgan (and the bullion banks) are using highly-leveraged paper contracts (up to 100-1 or more) to suppress gold’s (and silver’s) price.  (See the article titled “The Paper Silver Market is 250 Times the Size of the Physical Silver Market”)
But the physical demand at these prices is strong enough to offset the shorting on Comex.  Gold has started to rise off of its bottom last year.  We believe the bull market is starting to come to life.  It didn’t end at $1,900.  It took a breather, on its way up.
The Fed’s policies helped push up the cost of housing but at the same time they are working hard to hold down the price of gold.  As you pointed out, the result is that gold is undervalued (and housing is overvalued).  When interest rates start to rise, in a year or so, and the stock market and the economy correct, housing will also fall, maybe dramatically and gold will rise dramatically.  Some are now saying the stock market and the economy will plunge this fall, when the Fed ends QE and stops adding tens of billions a month into the economy.
The 1963 ration you used in your example will be in play again.  $5,000/oz. gold will restore the 1963 level, maybe even less, if housing does fall back.  The rise in gold will not be due to a robust economy; it will be a currency event.  There will be rampant inflation on the things we import, especially commodities because a falling dollar will lead to rising food and energy prices, which is happening right now in the early stages.
Q:  With the impending collapse of fiat dollar (shanghai exchanges); and government issue of a new currency to replace the dollar (capital controls will be instituted);   Since American gold/silver eagles sold through the U.S. mint are considered legal tender with the introduction of a new currency partially based upon gold/silver will the government make purchase/sale and ownership of the gold/ silver American eagles illegal to own /buy or sell. Brokers such as Miles Franklin will cease to exist as market to sell buy American gold/silver eagles will be illegal. The bottom line is that holders of these metals will have these metals but will not be able to freely buy or sell to any precious metal brokers. I don’t see the reality of black market options or barter for transactions. WHAT SAY YEA?
Bill Holter’s Answer:
First, Miles Franklin sells far more product than just gold and silver Eagles.  We sell Maples, Sovereigns, Philharmonics, Pandas as well as private mint and limited strike coins.  We also can source bars and numismatics (which currently are a great buy because the premium is so small).  If it is gold or silver and you want it, the chances are quite high that we can source it.  That said if you invest in precious metals you should diversify between gold, silver and platinum with various coin and bar types.  Holding a good portion of your metal outside of the U.S. in a non-bank vault is also a good idea if you believe capital controls and confiscation are coming.
You say that the “black market is unlikely.”  Really?  Do you think that a farmer would not trade his goods for gold or silver?  In your scenario (which I believe is more than plausible), ATM’s, checks, debit and credit cards will cease to function for a time.  What will serve as “money?”  Gold and silver are money and are viewed as such all over the world. If you have metal outside of the U.S. it would “spend” and not be subject to U.S. laws, inside the U.S. “money” will be what the people say it is by either accepting it or not.  I believe highly unlikely that your counter party will decline accepting real money as settlement.  As for dealers going out of business, this very well may happen because of no product being available, what would that do to the value of a one ounce coin?
On the other hand, maybe we will all be using bitcoin with chips in our foreheads or hands.  A bad joke but probably one that we will hear the punchline to.
Q:  I suspect most MF followers realize that all markets, especially gold and silver, are heavily manipulated by the government, central banks and its agents.   Many of us also realize that given our unstable, unsustainable Fiat Ponzi Monetary System, which now includes something in excess of $1,000,000,000,000,000 in derivatives; it is essential for the government and the Fed to continue to manipulate the system to prevent collapse.  Furthermore many of us strongly agree with the MF Staff and great writers that this manipulation, for mathematical and other reasons cannot continue indefinitely. If we accept the above scenario, then why do we continue to talk about bottoms being in and other types of technical analysis?  Isn’t this type of discussion essentially meaningless?  Isn’t it just going to be a weekend event for the first standard deviation anyway of “reset?”
Andy Hoffman’s Answer:
We agree whole-heartedly; and more importantly, that gold and silver are not “investments,” but savings – and equally important, insurance against what we know is coming.
As I wrote in today’s article, the Miles Franklin’s Blog’s principal focus is helping the public understand that when the inevitable end game of fiat currency collapse arrives, only physical gold and silver will save your finances.  Each individual’s personal due diligence process involves multiple facets, so we simply present the entire mosaic for your benefit.  Some believe in technicals, some fundamentals, and some a variety of other reasons.
Hopefully, the end result of such analysis brings readers to the correct conclusion; i.e., that the need to protect one’s assets with precious metals is critical – and potentially, of a very near-term nature.