Below is an excerpt from a commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, July 17th, 2007.
To say these are interesting times is undoubtedly an understatement in my view, as I am a conservative by nature. And the dichotomies - don"t get me started on them. In the US, supposedly the exemplar of free enterprise in the world, never have so many owed so much to the state, while at the same time it appears those in power have embraced capitalism to its fullest degree, spending money here and there as long as kick-backs in the form of political contributions keep coming. What do we call this - selective capitalism? What"s scary is current circumstances in America are very similar to the period preceding the French Revolution, where it appears we are witnessing the proliferation of a Bourgeoisie class of "well to-do"s" in knowing the right people. Isn"t that a scary thought for some! If this is true, business leaders, bankers, and politicos should beware.
In returning to this century now, narrowing our focus, and still with a view through the rear-view mirror, while above considerations may become germane at some point in the future, I can think of others that will have a profound impact on our lives first however, perhaps the precursors to such events. An obvious one is a function of the growing gap between the "haves" and "have-nots" in our society. How long do you think people will continue slaving to pay rising interest expenses and taxes while the beneficiaries of these efforts grow richer? Information travels fast these days over the Internet, so my guess is not long now. But in the meantime however, and in relation to the title of this piece, our ruling class will continue to push the envelope, pushing more usery and taxes upon the masses at every opportunity.
Further to this, it"s interesting to note that increasing numbers of people are now discovering this is why "they" print money, or should I say fiat currency, so that the current power structures are maintained. Here, in circular fashion, the "haves" push this newly created currency through the system to pay the interest and taxes to the ruling class, more and more being required all the time to keep up with the rising prices such practices create. As alluded to above then, we can say "never before have so few enslaved so many - or something along these lines." And while this concept may be a bit fuzzy due to cross pollination issues, meaning "is life so bad for the masses these days?", there is one very clear understanding one should arrive at while attempting to digest the concepts presented above, that being at some point "the poop will hit the fan", where "havenots" will no longer be able to foot the bill, and the party will be over for all.
Before this occurs however, with the resultant macro-economic condition being deflation, undoubtedly the ruling class will push the above mentioned envelop to the limit, meaning if history and natural human process are to guide our expectations, then some degree of hyperinflation on a grand scale should be expected. Ironically, some have been expecting this for a long time now. In fact it"s this expectation that took gold prices up in the 70"s as Bretton Woods discipline in the global monetary system was formally abandoned with Nixon closing the gold window in 1971. What"s more, and as with above, it"s my perception more and more people are beginning to understand this sequence is in the works, and that for this reason, they should hold gold. Of course the "haves" wish to dissuade the "have-nots" in attempting to protect themselves from the eventual vulgarities associated with fiat currency regimes, so at every opportunity they beat the gold price down in an attempt make it appear their policies / system are still functioning well.
And this practice is nothing new. Gold is a political metal - always has been and always will be. Of course keeping it under wraps these days is perhaps a bit more important to US authorities than it was back in my father"s time considering the hollowed nature of today"s service based economy here at home. They need to keep gold under wraps because if it"s allowed to rise in more accurately reflecting the true degree of inflation in the system, interest rates will rise, and the wild credit bubble Westerners are exporting to the world will be popped, along with all the asset bubbles in turn. So you see, for the ruling class, bubble maintenance is essential, meaning unlike the 70"s, fiat currency growth rates (inflation) cannot be allowed to slow such that key asset bubbles, like the stock market, are maintained. This is why while gold is not rising like it should be if the price were not so heavily managed. At the same time, don"t expect it to go down much either.
What"s more, and further bolstering this view, is the realization a negative savings rate, along with the fact demographic conditions are quite different now when compared to the 70"s, implying monetary authorities must make up for these two HUGE FACTORS on an increasing basis as time moves on. This means monetary debasement rates will need be accelerated higher if current pricing structures are to be maintained. And as mentioned a few weeks back, they will use Houdini tactics, switching from one means of inflating to another in an effort to hide the dire nature of this condition. Of course in the end gold will tell the story, where again, and unlike the 70"s, the un-natural heavy management of it"s price means a dramatic mid-term correction (see Figure 4) is unlikely this time around; and, like a beach ball that has been pushed deep under water, this barometer of bad times will literally explode higher at some point. And if the "haves" are not careful, it could get away on them, potentially rising rapidly to inflation adjusted measures now well in excess of $2,000. (See Figure 1)
Figure 1
Source: The Chart Store
This of course means that LIKE the 70"s, nominal gold pricing should play catch-up with all the monetary largesse perpetuated by unprincipled bankers over the past 25-years, where the 25-fold move between 1970 and 1980 was more a reflection of past inflation, not the future. Like today, prior to the 70"s gold was held down to not alert the public of the growing imbalances within a morphing global economy busting at the seams due to energy availability, and the population growth that accompanied the trend to easy living. What does this mean in terms of nominal gold pricing then? Well, for one thing, it means arriving at a good representation of what a real gold price should be today might better be accomplished by factoring it against historical money supply growth and not a contrived Consumer Price Index (CPI) that is blatantly lacking in terms correctness. (See Figure 2)
Figure 2
Source: Steve Saville
Above you see such a chart, where Steve Saville has put gold against M3 going back right through the 70"s. According to Steve, the gold price overshot what it should have peaked at in the 70"s in relation to the degree of M3 inflation experienced up to that point. I"m not sure how he arrived at this conclusion, as I have not studied prior relative growth rate models that would verify such a claim. As for the rest of his observations found in the attached directly above, I must concur with them however, meaning in terms of future nominal price gains, gold has a great deal of catching up to do, and perhaps even some over-shooting once it gets moving higher for real. This is why one should remain very patient with respect to a lagging precious metals sector (both stocks and bullion) right now, because when this catch-up move gets underway it should be something to behold, with gold likely moving far higher than what Figure 1 would suggest. Of course a weighted historically based projection would throw some cold water on such a view, meaning the larger move would indeed end in the 2011 area at roughly $2400, or thereabouts. (See Figure 3 below)
In taking this vein of thought a little further then, if the move in the 70"s were to be proportionally duplicated in the current sequence, a possible future target for gold would be approximately $2,400. We arrive at this figure by weighting gold"s performance from the 70"s against what it"s already proportionally traced out in the current sequence. Here, if we assume the move to $730 last year completed the first wave up that compares to the top at $195 in 1974, which was a 5.5 fold move from $35, then on a weighted basis the 3 fold move (~ $250 to $730) this time around (less powerful) is suggestive a factored projection of $2,420 (4.4 x $550) would mark the top in taking last year"s retrace back down to $550 ($542 & $563 averaged and rounded) as the mid-term correction low. You see the approximate 3 fold move from $250 to $730 was roughly 55-percent of the gain seen in the first wave experienced in the 70"s, where when put against the strength (an approximate 8.0 fold move) of the second advance that topped in 1980, we arrive at a factor of 4.4 (8 x 55%). (See Figure 3)
Figure 3
Source: The Chart Store
Above is a view of the 70"s experience from our essay The Need For Speed that talks about the fact time wise a comparable mid-term correction would run 20-months, and would also involve a move considerably lower than the 38-percent retrace which up to this point appears to be the bottom for the current sequence. Based on an assumption the domestic economy is too weak at present for authorities to allow a further slowing of the instantaneous economic stimulation monetization practices sponsor however, especially if they don"t wish to risk an accident before the election next year, in our view the likelihood of gold coming close to duplicating a 70"s style mid-term correction is quite remote now. This of course implies the lows are behind us, and raises some important questions with respect to the strength of the next impulse higher once it begins in earnest.
Certainly for me, chief amongst these questions is whether the more shallow present day mid-term correction is a result of official price suppression, meaning the price of gold should have gone higher and then corrected back down more profoundly, or because the entire move will be weaker on a percentage basis simply due to the fact we are dealing with larger nominal values. If the latter is the condition gold"s condition is in, then the above projection should prove accurate, making this target our minimum nominal price target for the larger move set to run into the next decade. If however the shallow showing in the present day move proves to be more a function of official suppression tactics than anything else, then it"s possible ratio related multipliers associated with both historical and future money supply growth rates take hold of pricing drivers at some point in the future, catapulting nominal values in all fiat currencies far higher than any historically derived comparison(s) would allow for. Here, the sky is the limit if hyperinflation takes hold, where gold in Rentenmarks during the German episode in the early 20"s took prices into the billions.
With the dollar ($) unable to rally in spite of traditional signals, such an occurrence should be well underway already you would think, where one does have to wonder if the market has decided to challenge the lie at this point, or at least rattle our respective cages in terms of what it will mean when the Greenback eventually loses global reserve currency status. One by one, more and more US trading partners are attempting to move away from the $, which at some point must take its toll on exchange traded value in more profound fashion. Such a development would surprise a great many people right now, not the least of which would include many US trading partners with huge $ reserves they may wish to protect. This of course could cause somewhat of a panic into gold and silver, and with few either prepared or expecting such a development, things could get quite interesting quite quickly.
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