Stefan brings up a recurring topic of discussion here at FOFOA. He asks, "How could gold ever be worth more than $10,000 in today's dollars?" And I reply, "How could it not?"

Then again, look at what we're arguing over. As Michael Maloney said, It'll either be breathtakingly spectacular or stunning, one or the other.

Stefan Pernar said...

Have been doing a bit of math:

Total world wealth in 2007 in 2000 US$ = 125.25 Trillion [1]
Equivalent 2010 dollars = 125.25 TUS$ * 1.25 [2] = 156.56 TUS$
Total above ground gold = 158'000 metric tons [3]

Theoretical maximum gold value assuming ALL wealth flows into gold = 156.56 TUS$ / 158'000 tons = 30'816.55 USD / oz

Comments: this assumes that all the value of all other assets (silver, commodities, stocks, gems, houses, currency, land, etc) drops to zero. Assuming that only half the value of all other assets flows to gold then we are looking at a rationally defensible 15'000 USD / oz in 2010 dollars.

Considering that since 2007 total wealth dropped significantly due to the stock market correction this figure will have to be corrected downward 25% again. So we are looking at a realist maximum 2010 dollar gold price of around 10'000 USD / oz.

Projecting a 50'000 2010 USD gold price assumes world gold wealth alone (50'000 USD / oz x 158'000 tons of gold = 254 TUS$) eclipsing total 2007 world wealth (all assets) by about 2/3.

Conclusion: A future gold price of 50'000 USD / oz in 2010 dollars without an accompanying global total wealth increase by about an order of magnitude is grossly unrealistic.

[1] Estimating the Level and Distribution of Global Household Wealth, United Nations University, 2007
[2] http://www.westegg.com/inflation/
[3] http://www.coinlink.com/Resources/fun-facts/how-much-gold-is-there-in-the-world/

June 18, 2010 7:58 PM

Hello Stefan,

I don't think it is as simple as pouring a hundred cups of water into one large beaker and noting the total volume. But you do bring up a few common misconceptions. There are a few trillion possible methods to attempt to presage the full impact of this thing called Freegold. So as I said in Metamorphosis, "Let's spin this globe and take a look at things from a slightly different angle."

Instead of looking at wealth, or even debt, let's look at "purchasing power". Better yet, let's look at the concept of "Stored Purchasing Power". Now I realize that most people's "stored purchasing power" will be deployed at some point over the next ten or twenty years... those that have any. But for the sake of understanding the theoretical concept, imagine that I have immense stored purchasing power. Imagine that I am a "super-producer" giant. Imagine that I make something that everyone in the world wants and needs.

Let's suppose that I am similar to Bill Gates, only much more necessary to the human race. Yes, I have moral charity obligations that come with my significant wealth, but do I not also have the right to store some of it for future use? Should it be illegal for me to store my productive effort so that my descendants could benefit from it for generations to come? If you make such a thing illegal or impossible I will likely not produce as much of what everyone wants and needs! Is this a good economic strategy? Or is it an economically limiting (perhaps even deflationary) strategy spawned only by envy?

You see, time is the factor most ignored in the concept of "stored purchasing power". It is ignored because it is relatively irrelevant to most people. This is perfectly understandable. But does this mean that I should forfeit the fruits of my labor after some point in time or at some maximum? Of course not! That would be socialist nonsense. As long as my storage of wealth medium does not infringe on anyone else's industrial growth, then my accumulation actually contributes to economic expansion.

The future amount of time is infinite, therefore "stored purchasing power" is theoretically limitless. The only thing that limits its potential is a faulty storage medium, which limits the collective confidence in its ability to preserve wealth over time.

With a faulty storage medium I will not be as eager to store the fruits of my labor for deployment so far into the future. For I will recognize that at some point in time the medium will fail and my efforts will have been for naught. So I will be more likely to "spend" my considerable wealth in the here and now. Not right now, but you know what I mean. I'll probably build a 70,000 sq. ft. high tech castle on a lake for me and my wife and things like that.

And an interesting side effect of spending my considerable wealth in the here and now is that it not only reduces the purchasing power of the rest of my wealth, but also everyone else's who holds a similar medium as me. In aggregate, a faulty storage medium is self-limiting.

So, quickly cutting to the chase, the logical conclusions we can deduce from this conceptual line of Thought are that:

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

I say this is the rough limit because it represents the emergency exit from said flawed medium.

So the next step is to ask ourselves the obvious question. How much "stored purchasing power" exists in the world today? This is a good question, yes? But how could we possibly know? Today it is all denominated in worthless paper! As Another said:

One should grasp that "today, your wealth, is not what your currency say it is"! In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds its worth, as in the exchange rate for another currency?

Many will "think long and hard on this", but will find little reason for this position. For it is in your history to know only "things valued in paper terms".

Your past holds little of knowing value outside of currencies, this does block the good view!

Hear me now, what the wealthy and powerful know: "real value does not have to always be stated or converted thruout time. It need only be priced once during the experience of life, that will be much more than enough!"

Stefan, is an American home on an eighth of a desert acre really worth 200 men's suits? Is an Ivy League education in Investment Banking really worth 2,000 barrels of crude oil? Who knows? We have been living in a fantasy of government-sponsored malinvestment and soft money financial engineering for more than six decades. How will we ever know what things are really worth before it all collapses?

I am not as smart as the Superorganism that makes up the marketplace. No one is. So how much "stored purchasing power" exists in the world today? It is an impossible question to answer, yes? But let's try thinking about it for a moment anyway.

For at least 66 years now the whole world has been operating under the $IMFS. But when we really look at "who is the dollar faction" and "who is the non-$ faction" we see that roughly 25% of the world profits greatly from this system and 75% of the world is essentially "taxed" by it. In other words, roughly 25% of the world has been running a trade deficit for 66 years while 75% has been running the necessary surplus to support the other 25%. I know this is a bold, generalized statement to make without full explanation, but these are conservative numbers that I have used and explained in many posts.

For simplicity, let's call these two zones "The West" and "everyone else". Now what are a few broad, sweeping generalizations we can make about these two zones? For one thing, those in the West, unlike most everyone else, operate, as ANOTHER put it, "without 'loss of currency' Experience." And because of this they exhibit a level of confidence in paper storage of purchasing power that is quite surprising to everyone else.

The West loves its paper wealth. It loves to record it, to publish it, to know where it is, to know where it stands, to throw its weight around with it, to tax it, to track its movements, and occasionally to take it away. It is this $IMFS fascination with paper wealth that made it possible for you to even find a number for "Global Household Wealth", Stefan. And when I think about this number for a while, it is hard not to laugh at the absurdity of it.

Let me ask you this. Does that UN survey take into account the "stored purchasing power" of the Indian wives? How about the sovereign wealth hidden in Saudi Arabia? What about "old money" and "royal wealth" hidden in Europe? Large swaths of the "everyone else" 75% never stopped storing their purchasing power privately in gold, knowing that one day it would be restored.

Other recently liberalized regions are now playing extreme catch-up. And yet other subsets of "everyone else" learned the hard way how "all paper can burn" under a soft money regime. How are they all storing their productive efforts these days? What lessons did they learn from 'loss of currency' Experience?

And what about the 66 years worth of surpluses centrally accumulated in national central banks and sovereign wealth funds? Were they counted as part of the "Global Household Wealth"?

This transfer of wealth that is coming is not a direct and equal transfer. It is not like pouring one pitcher into another. It is more like flipping a switch on the virtual matrix. Turning off the monetary plane that hovers over the physical plane and claims to tell you how much "stored purchasing power" everyone has. When you turn it off, all that purchasing power disappears in a flash. And then what lies beneath is exposed in daylight, the real physical world. No real capital is destroyed, only the myth is destroyed. But true capital is exposed and revalued.

And as I said earlier, true capital as a storage for purchasing power has no limit whatsoever to its total size relative to normal prices. This is because it uses the time dimension with unequalled confidence. Absolute confidence allows it to stretch as far out into time as it wants. And this confidence is a self-reinforcing, self-sustaining feedback loop in the same way that a faulty store of purchasing power is self-limiting by its intrinsic lack of infinite durability.

So when the plug is pulled on the matrix and the pitcher of water disappears, how much water will be revealed in the physical plane beneath? I guess this is the $50,000 question, yes?

If you are just dying to be able to visualize the actual mechanics of this transfer of wealth that could explode aggregate value to a much higher level than your linear model allows, Stefan, I'll give you a brief glimpse. Gold holds its unique position because it is pretty much used for nothing else. It has an extremely high stock to flow ratio. "Stock" means those who are sitting tight on their physical gold, letting it lie still for the future, and "flow" means those who are presently trading their gold.

One of the false assumptions of your linear model is that real physical gold must hold the same time-value-durability confidence level throughout 100% of the world that paper wealth holds in 25% of the world. So as people sell their paper wealth and buy physical gold, the price rise will bring down the stock to flow ratio to a much lower equilibrium point somewhere around $10,000 per ounce.

Gold is not like other commodities where supply is economically driven to ramp up and meet demand as prices rise. Nor is it like paper investments that have external metrics like price-to-earnings ratios and interest rates. With gold, a rising price sends the exact opposite signal to the place where supply comes from. It confirms the belief in those that already hold the "stock" that it is a good investment and it is best to sit tight and not re designate it to "flow".

Commodities and paper investments are limited to the upside by economic forces and future earnings metrics respectively. Yet they are unlimited to the downside for the same reasons. Gold, on the other hand, has none of the upside limitations that everything else has. It will only find its point of equilibrium when enough "stock" is reassigned to "flow" to meet demand. And this dynamic obviously has nothing to do with today's paper gold market where physical stock lies very still and paper stock meets most of the demand.

Lastly, understand that currency flows through assets, not into them. In fact, a limited amount of dollars can flow through the same gold many times, over and over, driving it higher and higher with each pass, as long as new gold stock is not coaxed out of hiding. And the interesting thing in this process is that, as I said above, it actually causes the opposite of the expected supply/demand reaction. With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.

This is the feedback loop. It is confirmation to the gold investor that his gold is a good investment. And it also says something very distinct about the alternatives. Namely that they are failing. And with this confirmation, it is from existing gold holders that less supply comes. This is not true of any other investment class because they all have external metrics for valuation or economically limiting forces. All except gold.

The true Giants of this world that hold large amounts of gold have a good idea what their gold is worth. And yet, when it finally gets there they will still not liquidate their "stocks". This is because gold as a store of purchasing power has an infinite time horizon. These Giants are not interested in "catching the top" like Western traders. They are interested in storing purchasing power well into the future.

I guarantee to you that the Noble families of Europe still possess some of the same exact pieces of gold that were in their families in the 16th, 17th and 18th centuries. And this is purchasing power stored (and increased) through several currency collapses!

So, cutting to the chase once again, the biggest fallacy in your model is using "Total above ground gold" as your point of comparison. It's not the stock that matters, it's the flow.

Now, if you have a supercomputer you can try to run this unimaginably complex flow algorithm. But be careful with your assumptions. One wrong assumption can throw the whole thing off by orders of magnitude. Here is what my supercomputer spat out:

Take it for whatever it's worth, which, of course, only you can decide for yourself. The $IMFS is failing. Please don't let the fears, envy or baseless doubts of others obscure this reality. You can choose to participate in the recapitalization of world finance or you can be a victim of it when the lights go out. The choice is right in front of you. So decide what you'd rather be: a participant in the rebuild, or a victim of the collapse. Amazingly you still have this choice available as I type these words.

Sincerely,

FOFOA

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