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Saturday, July 27, 2013

Valuing Gold

Nathan Mayer Rothschild, - once the richest man in Britain and probably in the world, was appointed as the chief bullion broker to the Bank of England in 1840, and went on to operate the Royal Mint Refinery in 1852. 

N M Rothschild & Sons became a powerhouse in investment banking, lending, underwriting government bonds, discounting commercial bills, direct trading in commodities, foreign exchange trading and arbitrage, and dealing in Gold bullion. 

When asked what the value of the barbaric metal was worth, Nathan used to say, “I only know of two men who really understand the true value of Gold – an obscure clerk in the basement vault of the Banque de Paris and one of the directors of the Bank of England. Unfortunately, they disagree.

Ben Bernanke also admitted on July 17th that he doesn’t understand the yellow metal. “No one really understands Gold prices,” Bernanke told the Senate Banking Committee, adding he doesn’t get it either. Calling it “an unusual asset,” the Fed chief said that investors hold Gold for “disaster insurance” and as an inflation hedge. He expressed surprise about the latter, noting “movements in Gold don’t predict inflation very well.

Bernanke is right.  Gold has little to do with inflation hedging and everything to do with disaster insurance.  

Gold is a Monetary Stability Hedge.  Say it 100 times slowly.

The price of gold at $2000 an ounce reflected a combination of great worry about the management of the US economy by the major banks - including the Fed.  Coupled with a certain amount of trading/gambling that attempted to game the prevailing sentiment.

Gold at $1300 represents an enormous amount of faith restored in Big Banking and the Fed - coupled with gambling/trading by those same banks attempting to game the prevailing sentiment.

To figure out which way gold will go you have to figure out the true overall risk to the US and Global banking system, which is to say you have to figure out how stable the paper monetary system is.  This gives the sure fire long term direction to gold.

Shorter term you have to figure in the gambling/trading of the Big Banks who are gaming the sentiment that they are, in fact, helping to shape.

This is why unless you are a Big Bank, trading right now is a fools game.

But it is also why, over time, gold will certainly come to reflect the true overall risk factor to the Big Bank economy.

Because if you think that a monetary system based on gaming ever greater amounts of debt is inherently stable, then you should pour all your money into options on stock futures.

The question: With 60 quadrillion dollars of debt derivatives floating around, how long can a debt crisis be delayed by the exponential creation of debt?

The same answer will tell you when gold will once again take off.

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