The following is an interesting article on gold by Ted Slanker on Info-Mine.Predicting the gold price in dollars is tough. That in
itself is a two-part question. In our modern world, there
are two solar systems. One consists of commodities, man's
labor, and finished goods all of which orbit around
real money. (Real money is gold.) Their valuation
relationships are actually constants. But there are
minor variations that occur, but they are cyclical.
The variations between tangible things aways passes through
normal on its way to too much or too little in terms of
relative values. Even gold, the center of the system,
will occilate a little.
The other solar system consists of irredeemable currencies.
They they orbit around nothing except themselves. Over time
they all lose purchasing power. That means that over time
they lose relative value to the solar system of tangible
things and they never fully rebound. For instance, the
U.S. dollar, considered to be one of the world's "hard"
currencies that is now called a safe haven, has lost 95%
of its purchasing power this century and it will never
regain that lost purchasing power.
In terms of relative values, in the first solar system
there are always some distortions. That is why there
is relative movement. If I use the dollar as a temporary
measure (remember it is always shrinking) I can tell you
what certain things are worth.
For instance, relative to finished goods, commodity
prices are about half of their long-term normal relationship.
In other words, the CRB index should be about 500. Gold
should be about $400. Silver should be about $10. Etc.,
etc.
If I make valuation comparisons in terms of real money
I will say that one ounce of gold will buy a good man's
suit or 300 loaves of bread or 40 ounces of silver. In
1900 one ounce of gold bought 300 loaves of bread. It
only buys 220 loaves today. But in time it will buy
300 loaves again.
The dollar, on the other hand, bought 14.5 loaves of bread
in 1900 and it only buys 3/4 of a loaf today.
The dollar's value is based on confidence, and confidence
alone. Currently, the masses are very confident about
some irredeemable currencies (especially the dollar),
but very suspicious about others. That will change. When
it does, it may involve both a relative increase in gold's
relative value versus all tangible things and a loss of
confidence in the dollar.
Ultimately, the dollar will be worthless. When it is one
ounce of gold will still buy 300 loaves of bread and all of
the other valuation relationships between tangible goods
will be the same as they have been for the past few
thousand years.
So, with this explantion maybe you can tell us what the
gold/dollar exchange rate will be in 1998.
The Asian crisis is a credit implosion. Credit implosions
in credit systems based on irredeemable currencies results
in the currency losing purchasing power. That is why the
gold price in South Koran won has soared way above its 1987
highs. Will people continue to flee from the frying pan
into the fire. Or at some point in time will they opt to
hold tangibles?
Predicting 1998's gold/dollar ratio is like calling the
stock market peak. Maybe it is like calling the tangible
peak in 1980 or the tulip bulb mania peak in the 1600s
or whenever it was. Man's current affinity for stocks,
bonds, and paper currencies is just another one of his
passing fads. Therefore it an emotional explosion that
will result in a emotional implosion. The timing is tough
to call, but the ultimate consequences of man's folly is
very easy to predict.
The following is something I wrote recently that may
be helpful here.
Joe Granville has a particular line regarding investments
that I really like. It is, "What everyone knows is
worthless."
Today, can you think of anyone who does not know that
some central banks have sold or are selling their gold?
If I've heard it once, I've been told about central
bank sales more than I have heard that "inflation is
under control," and I've heard that line a trillion
times. When it comes to investing in gold stocks,
there are no two more worthless bits of knowledge than
that the central banks are selling their gold and that
price inflation is under control.
On the flip side of what everyone knows is what they
do not know. And in terms of money and credit, what
the public (including politicians, educators, economists,
businessmen, bankers, and investment advisors) doesn't
know would fill volumes. Yes, what they do not know is
that gold is money and currencies are IOUs redeemable
for nothing. More important, they believe unequivocally
that the dollar is different from all of the currencies
that have ever failed, which includes the Russian ruble,
Mexican peso, and currencies of the Southeast Asian
countries. They also believe unequivocally that price
inflation is under control.
Surprisingly, even though the dollar has lost 95% of its
purchasing power this century, no one seems to be worried
about the dollar losing that last 5%. What is so sacred
about that last 5%?
Gold is money, not a commodity.
For commodities to have value they must be used and
consumed. Consequently, the value of a commodity responds
to a delicate balance between its supply and demand. If
any commodity were to have an available inventory that
even approached 100 years of annualized production, that
commodity would be worthless. Because gold is highly
valued and it has an inventory base equal to 100 years
of annualized production, it is money.
I know that many people have trouble swallowing this
concept. But if the supply of money was too small, its
value would be far more erratic than gold's value. So,
because of its supply (which requires great human effort
to increase) and its great value (even when depressed
its worth about $300 for a tiny ounce), gold is money.
Additionally, gold has many other attributes that proves
it is money. It has a history of being a store of value,
a measure of value, and a medium of exchange. It is
acceptable, homogeneous, divisible, incapable of being
counterfeited, durable, stable in value (over time, over
time), and portable. All these qualities are behind the
definition of money, and nothing but gold has met the
definition of money.
So, if gold is money, then its supply is a positive, not
a negative. With four billion ounces in its "float,"
gold is probably man's most abundant single tangible
product. And, since it is money, everyone has an
interest in having gold, if not to spend, then to save.
When a holder of gold decides to use his gold (money)
to purchase something else, that does not increase gold's
supply. The same is true when someone decides to sell
something for gold (money), that does not reduce gold's
supply.
There are hundreds of reports out today that are trying
to predict gold's value based on analyzing supply and
demand in the "gold market." They are all useless. It
is impossible to determine the value of money by trying
to measure its ebb and flow as if that movement was supply
and demand. Gold has an ocean of supply and infinite
demand. At any given moment, gold can come gushing onto
the market from millions of different sources. On the
other hand, demand for gold can rush the market from
millions of different sources at any given time.
But gold's supply is still rather small. The number of
things held by people who may want to swap their things
for gold (money) at any given moment are in much, much
greater supply than gold. And, one of the most abundant
things people hold, that they may want to swap for money,
is irredeemable currency. The supply of paper money is
exceeded by nothing else that mankind has produced, and
its supply continues to grow nonstop.
Therefore, don't worry about gold, worry about irredeemable
currencies. |
