This article has been generously contributed for your reading pleasure by Jerry Western, author of Got Gold? Get Gold!
I was both surprised and flattered that Jack Weber mentioned and commented on my last article ‘Why you should have silver in your portfolio as well as gold‘ in his piece ‘Considering all the guesses out there, What will the price of gold ultimately go to – and why?‘.
I have to say that I fully agree with all that Mr. Weber had to say and it provoked further thoughts that I’d like to present to you. The one issue that Mr. Weber had with my post was my “…lack of insight as to why silver rose to $52/oz in 1980, which will not be repeated by the Hunt brothers in the future.” Actually, that was by design. I’m well aware of the Hunt Brothers story and the circumstances surrounding the last great surge in the price of silver.
In my writings my aim is mainly to inform, but it is also to suggest possibilities and to provoke the reader to perform his own research. One tends to internalize and accept as fact one’s own research more so than the opinion or fact presented by another. I want readers to go and perform the same due diligence and research that I have and am confident that in doing so they will come to the same conclusions that I have. Furthermore, we all tend to think in terms of bull and bear markets. We recognize two steps forward and one step back in a bull market and two steps back and one forward in a bear market. We also think in terms of how many dollars we’ve made or accumulated when we should be thinking in terms of how many ounces we have. We don’t tend to think in terms of the end game of the dollar. I want to give the reader something to shoot for that he can understand so that no matter if this bull market does come to an end like the last one with the dollar intact or we move to a new currency system, either way he will win by holding physical gold.
In my most recent article referenced above, as well as one I posted over a year ago, ‘How High Could the Price of Gold Go?‘, I made inferences to what the ultimate dollar price of gold may be at the top of this bull run and reported other analyst’s thoughts. Again, I have to agree with Mr. Weber in his statement regarding analyst targets for the ultimate high in the price of gold. He stated “Well, I’m writing to tell you that they are all guesses and they are all WRONG!!!”. In actuality, I have made no prediction in any of my writings but will make one here. If we continue, as a country, down the same economic path that we’ve been following for the last four decades or more, (and I seen no indication that we won’t even if we wanted to or could at this point), it is mathematically inevitable that gold and silver will approach infinity in dollar terms at some point. As Mr. Weber put it: “And if you divide any number by zero, you get infinity – a meaningless number, but that is the ultimate price to which gold (and silver) is headed.” He was referring to the value of the dollar in the future in his reference to ‘zero’. In reality, there can be no end to this bull market in gold if there is no end to profligate dollar creation.
The mathematical function ‘X Squared’ or ‘X to the second power’, when solved for all numbers and plotted on a graph is a parabola. A parabola looks like a jet fighter taking off. It starts as a near horizontal line and rises gradually at first, but then steeper and quicker, until the line approaches vertical. The line rises at an ever steeper rate.
This is what’s been happening to the number of dollars in existance. They need to be created in parabola fashion to keep the economy afloat. There are more and more of them every day and the rate at which they are being created is increasing at a faster pace as time goes by. Let me repeat, the number of dollars in existence is not only increasing but increasing at an accelerating rate. One way to think about this is to watch how fast the supply of dollars doubles. If one plots a point on a timeline each time the number of dollars doubles, one will see that it is taking less and less time for the number of dollars to double. At first it takes decades for the number to double and then years. Eventually the numbers will be doubling in six months, then three, then six weeks, then three. You see where this is going. An economy cannot function in such an environment. This is where we are headed. We get closer to the abyss and sudden catastrophic collapse by the day as we climb the vertical line.
I really dislike speaking in these terms or sounding alarmist but it’s in the nature of markets and of life to surprise from time to time. How many people predicted the market crash of 1929? The Pearl Harbor attack? The confiscation of gold in 1933? Some did and perhaps some knew ahead of the event but the vast majority was taken by surprise. So too I believe it will be with the coming moves in the dollar, gold, and silver.
Why does the amount of money need to be continually increasing you ask? Because in a fiat, credit-based monetary system such as ours, all money comes into being by way of loans or credit. There needs to be an ever-increasing number of dollars created to pay off existing loans. If a loan is made at 10% interest then there needs to be 10% more currency injected into the system to pay off that loan. Then more loans are issued on the repaid money and the system continues on.
Let’s look at a simplistic example for clarity. A loan is provided for $100 @ 10% interest. The amount of money paid back is $110. That $110 is then lent @ 10%. The amount paid back is $121. That $121 is lent out @ 10%. The amount paid back is $133.10. And so it goes. Do you see how the money supply is increased? Not only is it increased but the amount of money in circulation is increasing by a larger amount with each iteration. If we charted this growth we would see that the line is not linear but is rising and rising at a faster angle over time. After a number of iterations, the line approaches vertical. A vertical line is unsustainable.
Because the amount of gold in the world is relatively stable, and its price is denominated in dollars, and the number of those dollars is increasing, it is inevitable that the price of gold will also rise. As the number of dollars in existence approaches infinity, so too will the price of gold (and silver and all other commodities).
Gold to infinity and beyond! Sounds great but I wouldn’t trade my gold for any amount of dollars when we get to that point. Actually, I believe that ‘changes’ are likely to be made before we get to the point of incipient hyperinflation. I’ll leave what I think those changes might look like for another article. I do believe that those changes will be sudden and catch most everyone – including me – off guard. I think we may see a surprise overnight devaluation or revaluation of both the dollar and of gold. That may be when this bull market in precious metals comes to an end. But you will have won because you have physical metal in your possession.
Suffice to say, you need to understand that the current dollar/bond paradigm we live under is by far the largest Ponzi scheme ever unleashed. It is literally impossible to pay off all claims at current (par) dollar value. If nothing is done and we do go through a hyperinflation of the dollar, all of these fantastic dollar gains in equities will be an illusion. It is those who hold the real tangible items or claims on those items who will win. If you have a bond or equity that is denominated in dollars and only pays out in dollars, have you really won anything in a hyperinflation that culminates in the destruction of the currency? No. Of course not. So your investment in bonds went from a million to a billion and then to a trillion dollars. Big deal when that trillion buys you a dozen eggs. Don’t scoff. It happened in Zimbabwe recently and many times throughout history, including twice in the United States. You only win if you possess an asset. The most liquid, tangible, fungible, recognizable, coveted, time-tested, and easily-converted-to-something-else assets are the precious metals. I would put food, alcohol, and tobacco next in line.
Got Gold Yet?
Full Disclosure: The author holds positions in gold, silver, and precious metals equities.
This material may only be copied or reproduced with permission of the author.
About the author:
Jerry Western teaches classes about silver and gold and is the author of the newly available work, Got Gold? Get Gold! A Book on How to Protect your Wealth with the 21 st Century Gold Rush. It is available in hardcopy and as an e-book from most major book retailers.