Can you visualize a possible scenario that
could put a sudden end to the secular rise now underway in gold and silver?
In a recent conference call with the research team of The
Casey Report, we once again collectively tried to imagine what
situation… what scheme… what government manipulation… might
finally put a stake through the heart of gold.
Setting the stage, I think it’s safe to assume that in order for the
gold bull to decisively reverse direction, the following general conditions
would have to be precedent in the economy:
- The financial crisis will have to have ended. Which is to say that…
- Unemployment would have to begin falling by
significant numbers – with 300,000 jobs or more being added month
after month, instead of being lost.
- The housing markets will be stabilizing.
Foreclosure rates would have to fall to more normal levels (and not
because banks are forced to postpone the process for legal reasons,
which is the case now), and sales would have to accelerate in the right
- Government deficits would have to be sharply
curtailed and heading lower.
- All quantitative easing will have ended.
- GDP will have to be on sound footing and rise
based on sustainable, private-sector growth – not based on the
activities of government, which loom so large today in the
- Real interest rates – the yields you earn
over the actual rate of inflation (not the fabricated numbers ginned up
by the government) – will have to be solidly positive. Which, of course, is a big problem given the
sheer magnitude of the outstanding debt. Rising
rates will only beget more debt.
- The monetary base of the country will have to be
contracting, not soaring as it has been in recent years. The following chart from The Casey Report a
few months ago tells the story of runaway printing, and of why gold is
so strong by comparison.
Inherent in the list just above are other
conditions that will have to be precedent for gold’s run to end.
For example, politicians around the world will have to find the
uncharacteristic courage to act in ways that are deeply unpopular with the
very voters that brought them to office. Namely by slashing the scale and
cost of government, with all the many cutbacks in subsidies and services that
such a Great Downsizing must entail. And this rare new breed of politician
would have to retain their jobs long enough to see through the reduction in
government that must occur if stability is to be regained.
Of course, for the politicians to retain their jobs despite voting in deeply
unpopular cuts to government spending will require that the voting public adopts
a long forgotten stoicism and becomes willing to take their licks without
running to the government for relief.
Very much not the case with the students in London who last week
started tearing things up over a proposed reduction in tuition subsidies. Video here.
In addition, the world’s governments will have to step back from the
brink of the full-scale currency wars now darkening the horizon and move to
restore confidence by tossing their fiat monetary systems over the side in
favor of something more limiting. Absent a return to some semblance of
monetary sanity, the purchasing medium that gold has compared so favorably to
in recent years will continue to weaken, and gold will continue to rise.
Then there is the matter of energy. Civilization’s ascent into relative
prosperity is tightly related to the widespread availability of cheap energy.
In the current context – as opposed to the perfect-world vision of a
green energy future – we need the dirty stuff, and lots of it, if we
are going to avoid serious economic pressure that in turn keeps the Treasury
and the Fed throwing money into the furnace.
Like them or not, there’s no denying that coal, oil, and nuclear are
the proven sources of base load power. Sure, implement the latest
technologies to mitigate negative side effects, but don’t let that stop
us from fully embracing their development and production. Which means the
government needs to stick the many new “green” regulations back
on the shelf for a day in the future when we can actually afford them. With
oil stubbornly pushing back toward $100 per bbl, now is not that time.
Even that incomplete list of the hurdles to be climbed before the crisis can
end, and before gold’s run ends as well, begins to communicate the
challenge in finding a scenario where the world’s governments
don’t opt for currency debasement. Or, put another way, where
governments turn their backs on the default practice of using counterfeit
money to buy their way through the next day, the next month, and the next
That’s the “easy” way out… versus the really, really
hard work required to essentially turn back the clock on decades of expanding
government and the currency debasement that expansion has required.
And so, as hard as we try – and we try very hard – we inevitably
come back to the conclusion that the government is now tightly caught between
a rock and a hard place. And that, as a result, the loss of confidence in
government and its fiat money, which is now evident in gold’s rise, is
very likely to continue and grow even more extreme.
This scenario is not a pretty one, and even those of us who have taken
measures to protect our assets won’t like what the world looks like
once gold hits $3,000 an ounce… or who knows how much.
Germany’s hyperinflation, even after burning out, helped set the stage
for Hitler’s rise. In other words, anything is possible.
What Could Make Gold Go Down?
In the late 1970s, then Fed Chairman Paul Volcker, wielding an ax made up of
high interest rates, lopped the head off the gold bull. Leading up to
Volcker’s draconian solution, I can well remember the broadly held
impression that gold could only go higher. His extreme actions changed that
impression almost overnight.
That scares me, because there is a similar – albeit not nearly so
widespread – meme going around today.
Let me share with you a couple of “out of the box” ideas for how
the U.S. government might torpedo gold’s further advance today, in the
same way that Volcker did back then. (As for the rest of the world’s
governments – sorry, but it’s everyone for themselves at this
- Overt debt default. In this scenario, Uncle Sam rolls out of bed one
morning and announces that Treasury debt will henceforth be redeemed at
only pennies on the dollar. To lessen the domestic political blowback,
perhaps he announces a process whereby domestic holders are redeemed at
a higher rate than foreigners… or maybe he most disadvantages debt
held by those foreigners labeled as currency manipulators. There is much
historic precedent for this extreme action – and, other than some
negative consequences over a relatively short initial period of time,
countries that have defaulted have suffered no lasting effect. Case in
point, both Russia and Argentina now have debt-to-GDP ratios well under
10% – among the lowest in the world. In concert with resolving the
debt, the government could promise a new regime of austerity, as well as
issue a new dollar with at least some limited backing. Change-o, presto,
problems solved, and gold heads into the tank.
- Tired of dealing with the “gold
vigilantes,” Uncle Sam simply outlaws gold ownership. Hey, it’s happened before. But what about the
price of gold in this scenario? Our own Terry Coxon
Prohibition would force U.S. holders to sell, which by itself
would tend to depress the price. However, I’d bet on the price going up
because the prohibition would be a signal to the rest of the world that the
dollar’s sponsor had gone completely off the rails.
Still, who knows, maybe an international consortium of nations could agree to
ban gold – kind of like how they all now ban heroin? Unlikely, but
desperate times call for desperate measures.
- The U.S. adopts a gold standard. In this scenario, Uncle Sam, his back against the
wall, agrees to henceforth link the dollar to gold at some fixed price.
With concerns over unlimited government spending capped, gold might hold
at the fixed price while awaiting further signals. Of course, what that
fixed price might be is anyone’s guess – although it would
almost certainly be a lot higher than it is today.
Our own Marin Katusa has identified one
possible sleight of hand that could be deployed should the U.S. decide
to return to a gold standard – and that would be to nationalize
all the nation’s gold deposits, then use the inferred resources in
the ground as backing for the currency. An interesting thought, as it
would greatly reduce the price of gold necessary to reach full backing
of the dollar.
While each of those three scenarios carries
further implications, they may just pass the test of being politically
feasible – which, in this government-dominated world of ours, is
Unfortunately, only the first – overt default – would actually
make a dent in solving the gargantuan overhang of debt that now torments the
global economy. As such, only overt default mitigates the need for the
government to continue its insane deficit spending or the debt monetization
required to support that spending.
In the end, it’s hard to imagine that there’s a way the
government could get out of this situation without the country – and
the world – going through a crash for the history books.
[David, Doug Casey, and the other editors of The Casey Report
spend a lot of time analyzing the economic status quo and envisioning
potential scenarios for the near future. This big-picture view of world
politics and the global economy enables them to find profit opportunities for
their subscribers… even in the midst of a once-in-a-generation crisis. Learn more about prudent crisis investing here.]
Editor, The Casey Report
David Galland is managing
editor of The Casey Report.