How High Can Gold Go?

The blogger Brian at Frankenstein Government is a friend and a Guest Saturday collaborator here at Conservatives on Fire. Brian is a genuine wordsmith, in my opinion. I have  told him before that he is missing his calling. he should be writing “Who Done Its”. He is, after all, an ex-cop. Here are a couple of lines from a recent post that provided the link to the story that inspired this post.

The difference between genius and stupidity is, genius has its limits.

And

Never underestimate the willingness of your adversaries to keep an ugly truth from becoming a hideous reality.

I don’t know about you, but I thought those to be a couple of pretty clever lines.

Brian’s article talks about enormous scams run on the public and how politicians and institutions often work to keep the public from learning of the scams even though there have been a few who try to sound the alarms. he talks about a man by the name of  Harry Markopolis who tried for years to get the SEC to investigate the Ponzi scheme run by Bernie Madoff and how Peter Schiff warned CNBC viewers for two years that the housing market and that banks were going to implode nobody listened. Brian admonishes his readers that it is time to start listening and he recommends we listen to the blogger, Dave, at  the Golden Truth blog who wants people to understand why gold prices are going much higher.

On the side bar of the Golden Truth is this quote from  J. P. Morgan

Gold is money…everything else is credit.

My entire career was spent in the mining industry and the last eighteen years of it were in gold mining. I am very knowledgable  about gold as a commodity. I do not pretend to understand the principles of gold as a store of wealth or its role as money.

There are lots of “Goldbugs” out there in the blogosphere and I do not know how to judge their opinions. But, if you want to scare yourself witless, read this Golden Truth article. For now, I will share a few quote and numbers from the author of this article.

With regard to gold, gold isn’t an investment.  Gold is a currency.  It’s only an investment to the extent that its value as a currency is cheap relative to all other currencies.  The only value behind any paper fiat currency is the “faith” that the issuing Government will maintain supply of the currency relative to the wealth and economic output of the issuing country.  We’re well beyond that ability now in every currency.  Right now the only “value” of the U.S. dollar is the Government’s ability to print more currency in order to avoid default on the Government debt.

At some point the gold standard will be restored to the global economic system.  I don’t know which country will force the issue and I don’t know when.  But in order to create the financial “reset” that will be required to restructure and discharge inter-Governmental debt obligations, the value of gold will have to be reset to a much higher level in current dollar/euro/yen/yuan terms.  Much higher.  Ron Paul wrote a brief essay addressing this issue.  The essay summarizes how the dollar engineered into a pure fiat currency and was enabled to remain the world’s reserve currency:  LINK  The only idea in this essay with which I disagree is the notion that it’s not too late to save the U.S. dollar’s status as the world’s reserve currency.  There’s been too much damage and our country has crossed the Rubicon of dollar destruction.

Whether or not the public ever jumps on this bandwagon and gets it before the reset occurs is irrelevant.  The public participation in driving a bull market is only relevant to the extent that it provides the buyer of last resort for the insiders and smart money to dump (greater fool dynamic).  That will not be required in this situation because it will be the Governments which determine the reset price, not the markets.

The author then goes on to talk about the US gold reserves, which are published to be 8100 tonnes, the most of any country.

But let’s assume that the U.S. gold is intact.  And let’s assume that the world were to resort to the old gold standard which required the value of any country’s gold to represent 40% of the country’s reserves.  In order for the U.S. to “monetize” its $16 trillion of on-balance-sheet debt, the price of gold would have to be reset to $23,500/oz.  That’s just the direct U.S. Treasury debt and that doesn’t include all the other non-direct, non-current debt obligations. It doesn’t include the $7 trillion FNM/FRE debt guarantees.  And it doesn’t address the private sector debt load in this country.

Now, if that number of $23,500 per ounce doesn’t scare you I don’t know what will.

As I said earlier, I do not pretend to understand the principles of gold as a store of value or its role as money. However, I do know that there are powerful people and institutions that do manipulate commodity prices. For example, it is not much of a secret that JP Morgan and Goldman Sachs manipulate the price of gold and silver. For whatever reason, they do not want the prices of gold and silver seek their free market price.  When ever precious metals take off, these banks start selling short gold and silver that they do not have and their influence is that the prices fall back. If you don’t know, you should know that there is not nearly enough physical gold and silver in the world to cover all of the paper certificates supposedly backed by the metals.

Let me share with you a true story from my own experience.

If you want some interesting reading, enter the name Harry  Oppenheimer in your search engine. In 1991, Harry Oppenheimer, the aging CEO of one of the worlds biggest mining conglomerate, Anglo American, in South Africa. Within the Anglo America family are the famous diamond mines of De Beers Consolidated Mines. It was this year, at the age of about 82, that Mr. Oppenheimer made his very first trip to the United States. The occasion was to visit a small gold mining company his company had acquired in northern Nevada. The president of that company in Nevada and I were acquainted. One day I received a phone call from him inviting me to join them at a special dinner for Mr. Oppenheimer at a resort in the mountains south of  Elko, Nevada. Of course I wasn’t going to miss a chance to meet the famous Mr.  Oppenheimer. When I arrived at the resort, I was literally shocked to find out that I was the guest of honor and that Mr. Oppenheimer had requested that I be there. (It’s a very long story how Harry Oppenheimer even knew that I existed. I was but a General Manager of a mine belonging to Consolidated Gold Fields.)

At dinner, I was seated to Harry’s right and his daughter was seated across from me. Harry was a perfect gentleman and  an interesting conversationalist. I was quite uncomfortable. I didn’t understand why I was receiving so much attention from this famous and powerful man. Then as the table was being cleared and coffee was served, he put his hand on my arm and said: “Jim, I would like your opinion on something.”  Harry Oppenheimer wanted to know what I thought about the idea of creating a “Gold Cartel” like the “Diamond Cartel” he had operated for years. (At De Beers there are literally mountains of diamonds that never reach the market. If they did, diamonds would be worthless.) Well, I never heard from Harry again. I guess he didn’t like my answer.

I shared this story with you so you can understand how very powerful people think and act. One must wonder who really controls our destiny?

Well, that’s what I’m thinking. What are your thoughts?

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24 thoughts on “How High Can Gold Go?

  1. Interesting! The probabilities of returning to the gold standard are low, regardless of the new mention it received in the Republican platform. The propositions of Ron Paul in regards to it and the disappearance of the Fed are too simplistic. There are several different implementations of a new gold standard, all of them beyond the understanding of our politicians, except perhaps Mitt Romney and Paul Ryan. None of those possibilities make the disappearance of the Fed or the necessity to apply the 40% formula a sine-qua-non. In general, politicians would fear that it would take power away from them, even it doesn’t, except in a very limited way. The piece on the issue by The Grumpy Economist, published also in the WSJ, is a good start to begin to understand its possibilities.

    Your personal story of meeting Mr. Oppenheimer is very good but you left us hanging about the answer you gave him; no so much about the message – which can be guessed since he didn’t call on you again – but about your reasons for it. Perhaps that is a whole new post. I’ll be waiting!

    Good stuff, Jim.

    1. The world’s currencies, which are being intentionslly devalued, will only stand as long as the faith holds that each country is producing enough wealth justify the amounts in circulation. When the collapse comes, I have no idea what the powers that be will do to replace the present currencies.

      I wasn’t trying to be coy about my response to Oppenheimer. What I told him was that the US had just moved into the number one position of gold producers in the world and the trnd line was for even higher rates of production. Although production was falling in South Africa, it wass expanding in Russia, Australlia, New Zealand, Brazil, Peru and Chile to name a few. I didn’t see how with all the different companies mining in all those countries how it would be possible to keep them following the cartel rules. OPEC has a hard time with state owned oil companies. I also, told him that I was pretty sure it would be illegal for any American compay to participate in any such cartel. What I didn’t tell him and wish I had was that no self respecting free market capitalist would ever entertain the idea of participating in an oligopoly.

  2. There are several problems with going to a gold based currency, not the least of which is that the supply of gold in the world cannot be increased as needed to expand free economies as they grow. Plus, influencing interest rates and stimulating an economy when needed would be impossible under a gold standard.

    I don’t know what the intrinsic value of gold should be, but the arithmetic calculations resulting in $23K per ounce are not within any reality. Of course, this is my opinion.

    There are many reasons why gold is up, now. Gold always increases in price when there is unrest and uncertainty in the world. There is a huge bubble in gold prices, and I believe that given any decent results in the world’s handling of the many debt crises, short-selling gold might be the wiser move. Gold will probably move higher until there is some semblance of good sense in the USA and Europe.

    Of course, I say these things, now, without your knowledge and experience. Certainly, people outside of the USA have a different perspective on gold, and that will go far in determining the world-wide price.

    I have doubts of people being about to manipulate the price of gold and other commodities, unless they are thinly traded. Gold and silver are not thinly traded, and I am reminded of the Hunt family of Texas in the 1970’s trying to monopolize the silver market. Here’s that story:
    http://www.buyandhold.com/bh/en/education/history/2000/hunt_bros.html

    With all that said, I wish I had bought gold a few years ago. This bubble has been blowing up for a while, and gold is no bargain.

    Great article, and looking forward to more.

    1. You may very well be right, Bob, about the troubles of going back to a gold standard. Although, it work quite well until Nixon ended it in 1971.

      The gold and silver markets are being manipulated, Bob. What J P Morgan and Goldman Sachs are doing is quite different from what the Hunt brothers tried to do. They are not trying to corner the market. For their own reasom they are articicially putting a cap on the price. In my opinion, if gold were trafing in a truy free market today, the price would be in the ranfe of $3000 to $4000 per ounce.

      If the powers that be wanted to go back to a gold standard after a currency collapse, the fixed price would have nothing to do with the implicit value. They would fix it at some artificial rate.

  3. Great story Jim! You’ve had an interesting life.

    I have no doubt that if the international plutocrats could find a way to suck all the oxygen out of the air they would bottle it and sell it back to us.

    1. Thanks, Kurt. Institutions like JP Morgan and Goldman Sachs and powerful people like Haeey Oppenheimer, and there are many like him, think they have a right to run the world as they see fit. Mostly they do it from the shadows. George Soros is an exception.

  4. Cool story. I had the privilage this past week to introduce a dozen kids to the gold standard and how it holds its value. I’m trying to do this class in an informative way, but I don’t want to scare them silly with all that I do know.

    I found out that Herbert Hoover was a geologist employed by a Rothschild company (for real) in Austrailia and then in the Kaiping Coal Mines in China. He got busted for swindling them out of their rights with some sort of contorted document. I found that really interesting.

    It all goes back to the end of the Book, in order for the Antichrist to take over, he needs a single currency. God said gold and silver is money. So the antichrist would be promoting the opposite, paper money. God said just weights, but the antichrist adds weightless zeros to the digital legers. It’s all part of Satan’s perversion. You could say I’m a big picture person.

  5. Fascinating story and post, thanks for it! Also I love those Frankenstein Gov’t quotes and may have to use them (with credit!) one day.

    I know less than you about gold, but interest rates stink and the political climate scared me so bad when we returned from overseas in 09 that I put a minor fraction of our savings in it (for lack of any better idea and an inability to buy a home b/c we move too often). Hasn’t been a bad choice . . . yet. But its too expensive now to get in further.

    say that reminds me. I should check the gold prices.

    cheers!
    Lin

  6. The gold standard variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no intrinsic value, but is accepted by traders because it can be redeemed any time for the equivalent specie. A U.S. silver certificate , for example, could be redeemed for an actual piece of silver.

  7. We frequently hear the financial press refer to the U.S. dollar as the “world’s reserve currency,” implying that our dollar will always retain its value in an ever shifting world economy. But this is a dangerous and mistaken assumption.

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