Speaking of soothsaying....
Here's a bit of systematic, well thought-out soothsaying from an expert. The first four presentations tell you why the global economies are in such trouble, nothing new there. You can skip them if you wish, unless you want to establish bona fides.
gold.bullionvault.com
The last of the video series presents a prediction based on facts and figures, assumed rates of inflation, returns and real interest rates. Tustain's understanding of gold and Gibson's Paradox, which he does not mention but obviously considers, is deep, very deep. I think this is someone who can be trusted. He also backtracks to check how his model correlates with history.
I'll confess that I had to view the fourth video twice to understand what he was doing. With your maths skills, you should have no problems.
He considers that gold is under-priced. A good, conservative present value is USD $3800.
He explained his methods in an interview:
chrismartenson.com
"Anyway, the calculation I used was based on risk and reward scenarios, depending on inflationary outcomes. All of which are uncertain. There has been a probability in it, there is a bit of net present value calculation in it. But they are the sort of things which insurance actuaries use when they are working out the value of risks. It is very easy for anybody who is reasonably numerate to see how the calculations work and in fact, I put this on a spreadsheet so people can download it. Anyway, I used this calculator in primarily two different scenarios. And the first thing I did was I took historic economic data, which goes back over about 200 years thanks to a very good book by Professors Reinhart and Rogoff –
Chris Martenson: Uh-huh, it is a great book.
Paul Tustain: --that you may have heard of. It is called “This Time is Different.” And it has got 200 years of data to play with. And I used that data as best I could, to evaluate the probabilities of different levels of currency devaluation over the coming fifteen years. And that was a scenario used in the raw data from Reinhart and Rogoff, which resulted in me coming up with a net present value for gold based on risk reward, of $3,844.00, which is a number that everyone is talking about. But in many ways, it was the next scenario which I did, which I thought was more interesting. Because I had just did the risk probabilities to force the calculated value down to the current price of somewhere around $1,400.00 and what jumped out then, was that to get down to about $1,400.00 you have to be incredibly generous on future inflation scenarios. And you have to discount the hyperinflation risk effectively to zero. And I think that this is the error that the markets are making. The risk of serious inflation is much, much higher than people realize. People always get probabilities wrong, it is what caused the subprime crisis, if they had never experienced something directly, they tend to think the probability is zero and that is wrong. I think the market has got our future inflation scenarios risked all wrong as well. And once you get to see that picture of what is happening to the debt mount and how it is steady shifting to the short end, the risks become very obvious and very material. So I thought that was the interesting part, the fact that the market, at this price, seems to be discounting zero risk of hyperinflation. But when I look at the history and the data, I think that risk is not zero, in fact, in my $3,800.00 valuation, I put the risk only at about 5%, and that is pretty tame next to the historical scenarios of people who started printing money and who always find it very difficult to stop that. So I think $3,800.00, if you look at the presentation and if you look at the spreadsheet, I think you will see, they are largely cautious projections of data that I have used in coming to that number. And they are based around this abuse of our currency systems by principally quantitative easing of what that has done.
Chris Martenson: Cautious? 5% hyperinflation risk over fifteen, that is not cautious, that is beyond cautious. You could make a case to make that number much higher. Maybe add a whole zero to that. Given current policies, it is phenomenal. The amount of printing that we have seen, I do not know, has historical precedent because of the nature of the fact that a reserve currency is involved in this one.
Paul Tustain: Well, I think that is right. I agree with you, I think I am being very cautious when I talk about a 5% hyperinflation risk. But if you put those, all we are doing with this number $3,800.00, all we are doing is saying, look I have got a choice: I can hold my $1,400.00 in cash, or I can hold an ounce of gold at the current price. Looking at all these risks and trying to pass things forward by ten or fifteen years, which is the better decision? And if the probability of hyperinflation, is anything like 5%, you can take it from me: the best bet, is to hold in your hand an ounce of gold than $1,400.00, because essentially, your $1,400.00 are doomed to be worthless."
NB: I hope Jay has read this and viewed the video. I am trying to apply strong medicine to keep him from ever again selling such an underpriced asset. |
