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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Nadeem: Personal Thoughts on Gold and a Gold Standard

Commodities / Gold & Silver Sep 23, 2008 - 06:27 PM GMT

By: Brian_Bloom


Hi Nadeem,

Best Financial Markets Analysis ArticleI commend you for your courage and integrity in publishing that with which you disagree.  There are some editors of some web sites who haven't been behaving like you have.

Of course, you may be right that the gold price is positioning to explode upwards and I may be excessively conservative – but here is a chart of the US Dollar reproduced from an article by Clive Maund, for whom I have enormous respect as a technical analyst.

What interests me is Clive's logical argument. The flaw in his logic – from my perspective - devolves to fundamentals. What is at stake here is the entire world' financial infrastructure.

The Chinese, for example, are sitting on no less that $1 trillion of the US's IOU's. (This is $1 trillion of the 65% of roughly $6 trillion total world reserves – or roughly 25% of total US dollars in the reserves of all the world's central banks added together).

It's a very easy statement to make that “foreigners can be expected to turn away from dollar investments in droves”.

Unfortunately, the fact is that there is no alternative to the dollar at present; and this also begs the question as to who will “buy” the Chinese Dollars if the Chinese decide to dump them? As I said, US Dollars account for roughly 65% of all world currency reserves. If 100% of the “free element” of the entire non-dollar element of the world central bank reserves were applied to buying the dollars that China alone wished to sell, there would be barely sufficient non dollar currencies to buy China's dollars. (Bear in mind that some of the $2 trillion non dollar assets are sitting in hands which are friendly to the USA – including the USA itself; and some of these non dollar reserves are made up of gold – which, I'm sure you will agree – no one in his right mind at Central Bank level will now spend to buy US dollars.)

As a matter of practical reality – even if China landed up with virtually 100% of the “free element” of non-dollar currencies, then the entire rest of the world will land up with all China's dollars and $3 trillion of the world's reserves would still be up for sale.

It becomes blindingly obvious that the arguments of people who don't think these things through are naïve in the extreme.

Now let's look at the alternative being proposed. “Gold will rise in price to compensate”.

Right now, the gold in Fort Knox represents roughly 2.5% of all the US Dollars in circulation, world wide.

Some years ago, the Bank Credit Analyst developed a concept called “Net Liquid Liabilities” to determine a theoretical value of the gold price.

As a quick back-of-the-envelope calculation let's assume that the gold price is “reasonable” at present and let's assume that – as Clive argues – people turn away from dollar investments in droves. Under those circumstances, 100% of the US Dollars in circulation can be expected to become its “Net Liquid Liabilities”. (Of course, roughly speaking)

Take the current price of gold at around $900 in round numbers and divide that by 2.5%.

This would imply that for the “US dollar” to once again become acceptable – because the world is on a gold standard – the price of gold would have to rise to $36,000 an ounce.

Hey, that's some number, so let's repeat it out loud:   $36,000 an ounce!

Now imagine that you are Mr Smith living in a little town called Totnes in the UK and you have to contemplate how you are going to cope with gold at $36,000 an ounce. It's just too hard a concept for an ordinary mortal to embrace. How many grams of gold will be needed to buy a loaf of bread? Is it less than one gram? How do you measure less than one gram? What if someone sneezes whilst I am counting money that is so small that I can hardly see it? Natural reaction? “This is bullshit. It doesn't pass the common sense test. Let's work out our own way of coping”.

It follows, quite reasonably and logically, that the gold price at $36,000 an ounce would still have to be represented by certificates of deposit, and nothing would change. “Who will monitor the integrity of such a Certificate of Deposit system?”, remains a very thorny and  an unanswered question. Can we trust them implicitly? If we can trust them implicitly then why do we need gold? If we can't trust them implicitly then what purpose will have been served? The very idea that the world will ever go back onto a gold standard is childlike in its simplicity. It is a “rationalisation” which some people are using because they can't see other alternatives. But the concept is like looking to put a Band-Aid onto the stump of a leg that has been blown away by a land mine.

The world economy is not stuffed because we don't have a gold standard. It is stuffed because it was hijacked by a bunch of immoral and unscrupulous people and the “process” of Free Enterprise was sabotaged. Market forces were blocked from reacting to stresses in the economy and in the ecology. Power to run the countries affairs was usurped and rules were made which favoured one element of the economy over another. Entrepreneurial flair was encouraged – provided it didn't impinge on vested interests. If it did, government behaviour became obfuscatory and calculated to block entrepreneurial flair. That's ultimately why the USA and Australia failed to ratify the Kyoto Protocols. They liked things just the way they were.

Will the gold price rise in the short term?  Let me put it this way:

The longer we hold on to this illusion that gold holds the answer to our currency problems, the longer we will be failing to focus on the real problems. It will be described as a “Pyrrhic Victory” for gold bugs if the gold price shoots up at this point in time – because it will evidence the demise of the entire world's financial and economic infrastructure. The entire world's financial infrastructure will go up in flames.

Let me put it another way: You would be well advised to pray to God that the gold price does not explode upwards! It will be like the temperature of a patient rising to over 45 degrees C. The patient will not survive!

I am seriously disturbed at how few people can get their heads around that which seems so obvious to me. It follows that one of two conclusions are reasonable:

  1. I have lost my mind and am bordering on the insane
  2. I am 10 years ahead of the curve and can see what few others can see.

Either way, the amount of good this is doing me personally is probably questionable.

Nevertheless, I will probably keep writing these articles because, as the man said: “Hope springs eternal in the human breast”.

One way forward lies between the pages of my novel, Beyond Neanderthal. Of course, it is not the only way, but at least the book has a go at looking at solutions to the “real” problems. The world's unstable currency system is not a real problem, it is a symptom. The politicians are playing in their cots with tinker toys.

Hopefully, you will see your way clear to publishing this particular email and, I hope you don't mind, but I will be forwarding it to the editors of the other web sites which publish my articles. Hopefully, they will also see fit to publish – even if they disagree with its contents. If you re-read my previous article on the Velocity of Money it will become blindingly obvious that the $700 billion bailout plan being contemplated is just more of the same – intended to protect vested interests. It will serve to hasten the demise of the world's dysfunctional economy because it will lead to a sharp reduction of the Velocity of Money – for which there is no sensible Central Bank response.  That $700 billion bailout plan will be like injecting a heroin addict with an overdose of the same stuff. It will kill the patient.

Kind Regards,

By Brian Bloom

You may now order your copy of Beyond Neanderthal from . My guess is that we will both be glad you did. The feedback from readers has been very positive, and I am grateful for that. Via its light hearted storyline, the novel points a direction as to what we should be doing in the event that global cooling starts to manifest; and it also sows some seeds of ideas on how we might defuse the clash of civilisations

Copyright © 2008 Brian Bloom - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Brian Bloom Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Nadeem Walayat
23 Sep 08, 18:45
Gold Bullish Breakout

Hi Brian

The primary aim of the Market Oracle is to present multiple views on market direction, and therefore whether I agree with an article or not NEVER factors into it being published.

GOLD- I have been consistently bearish on gold right from its PEAK in March of this year right upto last week, as wtinessed by numerous articles published over the last 6 months.. But last weeks move up was an explosive breakout higher and a clear signal to me that Gold looks set on eventually hitting a NEW high perhaps by the end of this year, which demands an updated analysis.

I approach the markets from about 85% technical basis and 15% fundementals, the technicals are what I am following with regards gold not fundementals.

All the best, and I ALWAYS welcome ALL of your articles to the Market Oracle.


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