I am no longer surprised by how misunderstood gold is in the historical monetary context. Detractors like to point out its uselessness as a fungible unit of trade (you can’t buy a loaf of bread with a bar of gold) while wizened investors maintain a 10-15% allocation to gold in the event of a systemic failure in monetary currencies.
Most people can’t imagine a monetary system failure such as those that have historically occurred to many countries from the Zimbabwean dollar to the German Mark.
These currencies, and all currencies, are susceptible to collapse if they’re rate of production exceeds their total valuation by the international community. In short, people stop accepting currencies that are hyperinflating.
Hyperinflation of monetary supply is when the government has to keep increasing the rate at which it “prints” money because the quantity of the currency demanded by producers of products keeps increasing because the quantity of the currency keeps increasing until nobody accepts it. Monetary inflation drives price inflation, which is the engine that terminates in hyperinflation and collapse.
The US dollar is currently at the earliest stages of such a hyperinflationary collapse, with the Fed creating over $2.3 trillion of Tier 1 equity, or “new money” in the last six months.
That is a ~50% jump in the quantity of Tier 1 Equity on the Fed’s balance sheet in less than a decade, and is the flashpoint from which the burgeoning hyperinflationary fire proceeds.
Distributed into the upper layers of the Primary Banking System, that money is exponentially multiplied in accordance to the ratios set by the Bank for International Settlements by subordinate regional commercial banks, which range from 8:1 to 12:1.
In other words, a bank can lend $8 to $12 for every $1 of Tier 1 capital it holds in reserve. This is called fractional banking. But each subsequent dollar fabricated from thin air through this process qualifies as Tier 1 equity on the balance sheet of whomsoever holds it, and so the seeds of hyperinflation are sewn within the deficiencies of the fractional banking system. But this is by design, and is the principle methodology by which the world’s largest and oldest banking families continuously amass wealth over generations.
Within the largest capital pools of the world comes a proportional amount of influence over governments, which is why the “law” is set in such as to protect the private interests of these largest capital pools to the direct detriment of the public.
Future histories of this time in human evolution will one day refer to this as a criminal enterprise, but for now, we call it “justice”. Anyone smart enough or influential enough to attempt a sincere realignment of values at these highest levels is either soon co-opted by the elite group, or else they jump off of a building or bridge or have a fiery car crash.
So gold, which catalyzed the establishment of paper money, is the only unit of value that can be said to be immune from the Fed’s (and all central banks’) fabricated Tier 1 capital (misleadingly classified as “debt”). To accumulate gold in hyperinflationary times is to buy insurance against the collapse in value of any portfolio valued in the hyperinflating currency.
Gold is increasing in price because the value of gold is nominally increased at precisely the rate at which currencies are inflated relative to the increase in available global gold supply. The increase in available physical gold in the last ten years is not equivalent to 50% like the Fed’s inflation of Tier 1 capital. It’s more like 4%. So the increase in the price of gold should be at least 46% higher than the price of gold 10 years ago.
I say “at least” because lets not forget, that through the miraculous perennial fraud of fractional banking, That 46% increase is probably more like 546% in increased US-dollar-denominated value in circulation created in the same timeframe.
As the US dollar accelerates into full fledged hyperinflation – which is likely happening as we speak – a feeding frenzy in gold will be incited as the efforts of mainstream media to mislead the public about the condition of the monetary system stop placating the masses, and that stampede moment finally arrives.
The central banks have so far been able to extinguish the hyperinflationary embers with yet more hyperinflation, and as long as confidence in the US dollar translates into broad acceptance of it as a unit of payment, the hyperinflationary fire burns out of sight, like a forest fire smouldering underground.
But the day the farmer says “no I do not accept USD” for payment any more, because he can’t buy anything with it that is worth more or the same as the product he produces, is when the hyperinflationary arc is complete, and the currency collapses into something else, usually a new fiat currency, with all of the seeds of hyperinflation built into it yet again.
So when somebody tells you that gold is outdated, or obsolete, or not usefull as a currency, feel free to laugh in their face, bob your head in agreement, and offer to buy whatever physical gold they possess at a discount to the spot price. (Don’t get excited – this guy won’t have an ounce of gold to his name)
And don’t be fooled by the argument that you can’t buy a loaf of bread with gold. I used gold to buy a whole farm, and now can bake bread made from organically grown wheat on my own property, if I want, every day.
Using Asymmetrical Gold Exposure to Inflate Personal Wealth
Putting a predicted future price on an ounce of gold makes people sit up and take note, but its really pointless. Understanding the forces behind increasing gold prices and positioning to profit from it is the only practical response.
Owning a gold bar bought with USD is symmetrical gold exposure at the moment of the transaction’s conclusion. From that moment, the increase in value of the gold relative to the currency it was purchased in is your evolving profit.
Asymmetrical exposure occurs when you own something that will increase in value at an exponentially higher rate than the price of gold itself. Like a share in a gold company during hyperinflationary times.
A gold bull market generally ensues when the largest capital pools begin to perceive an elevated threat of a hyperinflationary event within a major currency.
A bull market generally will have 5 phases:
- The price of gold bullion begins to rise persistently;
- The major gold producers start to experience persistent valuation increases as the rising gold price induces an accumulation interest by investors in the major miners;
- As the majors become more fully valued, investors then start to flock to mid-tier gold producers;
- And finally, junior gold exploration companies start to get fully financed, and start rising sharply in value;
- The whole complex becomes overvalued, and the “bubble” begins to deflate, and the whole cycle repeats.
Unless of course, this time the hyperinflationary fears are justified and result in a total collapse of the major international unit of trade, in which case all bets are off, and the there is no telling where gold will end up being priced, until such time as a new unit of international trade can be established that attracts a sufficient level of confidence to stabilize trade again.
The 4th phase of the bull market is now underway, which is why I will be focusing on gold juniors of extreme quality in my premium letters for the foreseeable future.
The Fed’s and Central Banks’ arsenal of sinking interest rates and shock and awe printing is well worn in the current cycle, and so I can’t for the life of me imagine any scenario in which these combined forces pull some as-yet-unknown monetary rabbit out of the proverbial hat. I believe that we are in the midst of the above-pontificated hyperinflationary event, which is why I moved to a farm and am learning to bake bread.
midasletter.com – James West