DO YOU VALUE GOLD AS A COMMODITY OR AS A CURRENCY?

As gold nears $2000 again, there is much speculation as to a "fair value" and what to expect next.

There are many billionaires like Ray Dalio, Jim Druckenmiller, Paul Tudor Jones, Jim Rogers etc who are still aggressive buyers of gold.  Most of these base their decisions on fundamental analysis having to do with expanding money supplies and debt loads in the major economies.

Then there are many technical analysts like Bob Prechter of the Elliot Wave school, and TV personality Jim Cramer's favorite chartist Carley Garner who fee that gold is on the verge of a major bust and has no real intrinsic value at all.

The real difference in analysis comes down to whether you view gold as a currency or a commodity.

Historically gold was the major global currency for at least 3500 years of recorded history.  Silver was also used in about at 10 to 1 ratio as a secondary currency.

Paper chits or IOU's were also used insofar as they were convertible into gold..

In 1933 The United States had issued so many paper chits they decided to freeze the price of gold and make private ownership illegal because they could no longer honor the conversion of paper into gold.

From this point on the Federal Reserve bank and the US Treasury created a system of floating paper money uncorrelated to anything but the "Good Faith" of the US Government.

All the governments of the world still used Gold as the currency of last resort.  All Governments of the world stored gold in their central banks for use as currency of last resort and for large international payments.  And all paper was still supposed to be convertible into gold at a controlled price.

In 1971 Richard Nixon closed the gold window for good in the United States.  Gold was no longer money available for the settlement of commercial transactions.

The Question is: is it still a currency?  If not it's value is purely emotional and sentimental, which is the argument of many technical chartists. 

 If its value is emotional and sentimental what is it's value?  Honestly, I have no idea,

And if it can not be used in the settlement of trade, how can it be a currency?

The answer is: it is a currency because it is held by the central banks of all the major global governments.  Why do they hold it?  Because it is an asset that as readily convertible into every major currency, it is durable, divisible, immutable, and has a 3500 year track record of holding its value over time.  In short, all the conditions that Aristotle laid out for currency in 500 BCE.

And right now Gold is the only asset held by the central banks of the world that are holding many trillions of dollars worth of liabilities in the form of bad debt they've taken onto their balance sheets to bail out the over leveraged banks and corporations of the world.

So if you accept the premise that gold is still a currency then what is the value?  

First, you can ask yourself what price would gold have to go to in order to make the central banks of the world solvent?  This is not an easy question, but surely the answer is much higher than it is now.  And this is the reason many billionaires who are looking at the global economy and seeing great value in gold disagree with many chartists who are looking at their computer screens and computing stochastics and wave counts and relative strength indicators and seeing a commodity trading at perilous levels.

Gold's Best Friend Ever, hard at work destroying the value of the dollar

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Perhaps the single greatest thing preventing gold from taking off into the stratosphere has been the strength of the safe haven status of the US Dollar.

Since gold is first and foremost a hedge against instability, as long as the US Dollar had also been a hedge against instability, Gold's primary function had serious competition.

The dollar has long had serious debt problems to contend with.  However, it had been backed by the strength of the respect that the US Government has commanded internationally, as well as the respect for the depth of our financial markets.

Until now.

Now the US Government is the laughing stock of the developed world with a President who thinks Science is a hoax, a free press is the enemy of the people, and that brown and black people are inferior.

He has also long believed that a weak dollar benefits real estate - which it does, and since his wealth is held in real estate he is all for destroying the value of the dollar.  Which he is rapidly succeeding in doing.

A Global de-dollarization effort is underway.  Contracts for commodities like metals, food and oil have largely been settled in dollars,  This has given the dollar a special status around the globe.  Every country needed a reserve of dollars.  This has also helped support our massive debt.

But Trump's trade wars, and  his lack of respect of international treaties and institutions have initiated a global move to settle contracts without dollars. Which means countries around the globe do not need a reserve of dollars.

At the same time Trump's historic ineptitude in dealing with a virus is crippling the once vaunted US economy.

So as countries around the globe de-dollarize and our economy sinks, the dollar is quickly losing its special status as the global reserve currency, and its value is sinking.

Whatever other damage this is doing to our economy, it is probably the single greatest thing to happen to gold in the post war era.

Because when investors get nervous now they look away from the dollar.  So where else can they look?  The euro has structural problems.  The Yuan is gaining strength but the Chinese economy is still relatively closed.  The yen is burdened with even more debt than the dollar.

Gold is becoming the currency of choice, as its status as a safe haven currency loses its greatest rival.

U.S. budget deficit shattered one-month record in June as spending outpaced revenue by $864 billion

An extraordinary assault on US Fiscal Solvency is under way under the Trump administration and because of all the other crises, this one gets little play in the media, yet it may be the most damaging of all/

The Federal Government is now running close to a TRILLION DOLLAR DEFICIT PER MONTH/  Meanwhile the FEDERAL RESERVE BANK OF THE UNITED STATES OF AMERICA if standard accounting practices applied would be running a parallel annualized deficit also close to A TRILLION DOLLARS A MONTH - when you account for the fact that they've taken over 10 trillion dollars of Bad Debt onto their balance sheet to support this imploding economy.

When the Fed took on Three Trillion Dollars of bad debt after the crisis of 2008 they promised to "normalize their balance sheet as soon as appropriate."  They briefly tried to do so in 2013.  The stock market immediately began to crash it what was dubbed a TAPER TANTRUM.  The Fed immediately desisted proving once and for all that their true mandate is to support the risk assets of the very very Rich.  (They've since insisted that much of the bad debt was repaid, without ever opening their books to back up this claim.)

Where is the talk of a normalized Fed balance sheet now?  There is none, because, frankly, it would be regarded as an absolute joke.  

Where is the talk of fiscal responsibility of the Federal Government now?  There is none.  It would be a joke.  The only talk is how many trillions of dollars more do we print up to stave off a depression?

A Solvency Crisis is looming.  And not just in the US.  It is a global crisis.  The only question is what will protect your personal finances during a Solvency Crisis?

The shrinking dollar (another chart to illustrate the inflation super cycle. And a Politician who gets it!

Surreptitious intervention in the gold market by the U.S. government is the target of legislation introduced in the House of Representatives by Rep. Alex X. Mooney, R-West Virginia.

Mr. Mooney has introduced a bill HR 2559, Mooney also has introduced legislation to protect Americans against the Federal Reserve’s steady devaluation of the dollar — legislation to forbid federal taxation on the sale of gold, silver, platinum, and palladium coins.

In a letter to colleagues seeking support for his Monetary Metals Tax Removal Act, H.R. 1089, Mooney writes: “The Internal Revenue Service does not let taxpayers deduct the staggering capital losses they suffer when holding Federal Reserve Notes over time, so it is unfair to assess a capital gains tax when citizens hold gold and silver to protect them from the Fed’s policy of currency devaluation.”

THIS HUNDRED YEAR GOLD CHART SHOWS THE EFFECTS ON
THE GOLD PRICE OF A MASSIVE INFLATION SUPERCYCLE.  YOU
CAN SEE THE CYCLE GO BALLISTIC STARTING WITH THE
CLOSING OF THE GOLD WINDOW IN 197O,   

IN THE CHART BELOW YOU CAN SEE THAT AT THE SAME TIME WAGES AND SALARY AS A PERCENT OF GDP STARTED TO DROP PRECIPITOUSLY.

THE CHART BELOW ONLY SHOWS THIS PERCENTAGE THROUGH 2012.
IT DROPPED OFF A CLIFF IN TH LAST 3 MONTHS.

COINCIDENCE?

THE QUESTION IS: HOW CAN ONE BEST PROTECT ONESELF FROM THE MALIGNANT CONSEQUENCES OF THIS CYCLE?

STOCKS?  PERHAPS.  BUT STOCKS ARE AT THE MERCY OF THE EFFICACY OF THE FEDERAL RESERVE BANK TO ENDLESSLY SUPPORT THEM.  MAYBE THEY CAN.  MAYBE THEY CAN'T.

REAL ESTATE?  PERHAPS.  BUT REAL ESTATE IS SUBJECT TO THE VICISSITUDES OF OVERCAPACITY AND THE MORTGAGE MARKET.

THAT LEAVES REAL ASSETS: GEMS, OLD MASTERS ARTWORK, HISTORICAL ARTIFACTS, GOLD. 

WHY INVEST IN GOLD NOW?

This is a chart of the Gold price over the last 100 years.  This is the definition of an inflation mega-trend.  Except for the period after the depression when the gold price was fixed until 1971 when Nixon closed the gold window in1971, the line slopes ever upward.

The Financial community is very invested in convincing you there is no inflation, therefor zero rates are appropriate.

Look at the chart.  Does that look like there is no inflation?  Look at your personal finances.  Are things getting cheaper and cheaper?  Or is life getting more and more expensive?  I think unless you are so rich you can't tell the difference because it's all pocket change to you, the answer is obvious.

Are you afraid of getting in at the top here?  Then ask yourself this: is the inflation megatrend about to stop?  For that to happen rates would have to rise to the real cost of money which is currently about 10 percent year over year, plus a risk premium.  

But rates are controlled by the CENTRAL BANK.  They are not set by the FREE MARKET.  For the Government to allow rates to rise when the US deficit is 26 Trillion dollars and rising by 2 trillion dollars a year, and when the real economy is in a depression, and when the Central Bank's own balance sheet is carrying over 10 trillion dollars of debt - THAT IS IMPOSSIBLE.  

Ever since Volker temporarily halted inflation in 1979 by raising rates to 17 percent, every subsequent Fed head has simply slashed rates at any sign of a downturn.  This gave the impression of financial stability.  Meanwhile Debt piled up, Inflation in Real Assets skyrocketed, Malinvestment went wild, and the wealth gap careened out of control.

Now rates are at ZERO.

REAL RATES will only go lower.  While Nominal Rates will hover between ZERO and NEGATIVE.  

What are Negative Rates?  In theory they don't even exist.  Because it means you pay somebody for the privilege of loaning them money.  The catch is nobody will loan you money at any price because if you need it you probably can't pay it back.  But if you want to try to get a return on your money it will cost you, because the government is so broke it's the only way they can get money.

Absurd?  Right?  That is what happens when the inflation megatrend spins out of control.  That is where we are.  What is the Policy Prescription?  There isn't one.  That is why gold is only at the very beginning of its mega-rise.

Gold's best friend tirelessly supporting the gold price every minute of the day

June and July are normally the months that gold sells off, because these are the months where Asian buying dries up so that the big banks can knock the gold price down with massive short sales of future contracts.    They tried, but failed, as gold has managed a muted if somewhat controlled rally.

Why?  Because though gold likes massive money printing, massive deficits, and unbearable debt loads all of which the Trump administration has delivered to the Gold Community, gold LOVES INSTABILITY.

Trump campaigns/governs (there is no distinction in the Trump Party) on Massive Instability.  His fourth of July speech was full of promises to Destroy his fellow citizens on the Left in the same way America destroyed Hitler, Stalin and Bin Laden. 

Why is Trump so set on supporting the Gold Price?   Who cares? 

As we get closer to the election Trump's rhetoric of Instability, his promises of Violence, Rigged Elections, and his laying the groundwork to contest his loss by declaring a National Emergency over election Fraud will send gold to record highs. 

Count on it.  This will be so massively destabilizing to the American - and global political and economic system the Gold Price is sure go go ballistic.

Let's say Trump actually wins the election.  His campaign of destabilization will continue unabated - and his refusal to deal with the carona virus will continue to destroy the real economy - also great for gold.

Let's say Biden wins and Ttrump graciously concedes (Ha ha ha).  The Fed's balance sheet will still be 10 Trillion dollars, the Federal annual deficit will still be 2 Trillion, and corporate taxes will go back up forcing even more money into gold.

The Trump damage has been done.  It's win win win for gold.