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[Our
correspondent and occasional guest essayist Erich Simon has been
talking up gold for as long as he can remember. Recently, however, after
working some comparison numbers based on grocery bills we would have paid 40
years ago, he discovered that gold’s powerful rise was somewhat anemic
before Helicopter Ben opened the money jets. He further notes that our
apparent overestimation of gold’s strength is no accident – that
even the most astute bullion investors have been fooled by our cunning
masters. For the full story, read
his essay below. RA]
The dollar is down about 98% since it
became global tender. Back in 1971, era of Nixon Shock, the price of an ounce
of gold was $35 -- in line with its 1945 conscription. Right after Nixon
closed the gold window, the price popped to $42. All things being equal (and
assuming gold doesn't get used up), at what price must gold be valued to
compensate for a 98% loss from -- call it inflation, debt or whatever you
like. I think the math goes like this: One dollar is now 2% of its former
self. If you divide the 1971 “fair market” price of $42 by .02,
you arrive at $2,100. The price of gold (POG) is in fact now around $1,365.
The $2,100 level is probably more
accurate than the $2,500 prediction I made years ago, when I was appalled at
the large number of billionaires being hatched from the shells of
millionaires. But the higher estimate can stand nonetheless, since we could
easily see, from current levels, the equivalent of the 1980 spike to $850.
The catalyst might be the postponed bank-runs that are baked into the cake.
Mass denial would end in a flash as Americans rushed to exchange paper
savings for necessities and other things with real value. Meanwhile, prices
are continuing to rise.
This unbending reality guarantees an
Argentina-style bust rather than a drawn-out Japanese-style suffocation. The
collapse will be all the more climactic thanks to our history of negative
savings. Also, there's the prospect of outright repudiation of the greenback
by the international community, even as the Fed’s trumpeting of
Terrorism would seek to bring about a single world-currency.
Gold vs. Groceries
If the POG hits $2,100 it will be more
or less aligned with its historical purchasing power relative to any basket
of common goods. One way to gauge the global economic deterioration since
1971 inside the crosshairs of today's Global Pawn Shop Economy (i.e.,
deflation) and the backdrop of overpopulation and resource scarcity (i.e.,
inflation) is to measure gold's purchasing power against a basket of
necessities. Such as food. A representative bag of groceries in 1970-71
(California prices) might include a pound each of pork chops (59 cents),
potatoes (9 cents), apples (15 cents), onions (9 cents)... a bunch of celery
(38 cents), a dozen large AA eggs (59 cents), a quart of milk (33 cents) and
a can of Campbell's tomato soup (10 cents). The total for the 1971 bag is
$2.32. Today, that same bag costs (in Pennsylvania prices): pork chops
($3.95), potatoes (98 cents), apples ($1.16), onions ($1.06), celery ($1.68),
large A eggs ($1.86), a quart of milk ($1.02) and a
can of Campbell's tomato soup ($1.00). The total is around $12.71.
In this off-the-shelf comparison, food
prices are 5.5 times higher than in 1971. That corresponds to a gold price of
about $230 ($42 multiplied by 5.5). There's a lot of distance between $230
and $2,100. Certainly there is some slack in these numbers, and while we’d
like to qualify the calculation, saying “all other things being
equal,” equal they are not. In 1974, when the official price of gold
was $42.22, the New York market price was $159.74. And even though food
prices are, like gasoline, appearing to leap, we are still enjoying much
lower prices of both on a global comparison.
A Diabolical Plan
There are many variables to consider
when identifying an exact target for the POG, starting with a production cost
averaging around $325 these days and factoring in the “food price of
gold” after taking up 25% to 30% of the price “slack.” But
when one compares the gold price with the money supply boon from 1995-2001,
along with all things paper, the men at the Fed have proven clever and even
ingenious in a diabolical way. All ships rise in the money tide, but they
kept gold right where it should have been, all things being equal since 1971.
Most people lack the acumen, or deviant
mindset, to understand how gold and the credit markets could be so heavily
manipulated that the price of gold in 2001, at a long-term nominal low of
$251, could arguably be closer to a long-term high in real terms. Up until
2001 the Fed sat on the POG to keep it in line with its historical purchasing
power against basic necessities, and to help foster the illusion of dollar
solvency. Then, to effect a managed inflation and to hide the evidence that
our prosperity was hollow, the Fed allowed the dollar to lag, and gold to
rise.
Worthless Savings
The POG at $2,100 would accurately show
just how much monopoly money has been injected into the system. Prices of
necessities, like food, are destined to accelerate higher, and that is
already happening in the wheat market. Whether gold can achieve $2,100
remains to be seen because the crossover of deflation can knock the legs out
at any time.
This was all cunningly arranged to
facility theft without protest. A lifetime of paper savings wrung from the
sweat of our brows was rendered worthless as we all looked on; moreover, the
same hands that emptied the social coffer are now taking the bankrupted
masses by the collar into the coming chain of events.
The role of gold has been a distraction,
and it is only now playing catch-up with other asset classes, some whose day
has come and gone, by rising in nominal terms even as it continues to fall in
real terms. In fact, if there is anyone propping the gold price it is the
government, since to do otherwise would be case-closed on the indictment of
our continuing Depression.
Working for Free
Even the infrastructure workers who are
still holding onto jobs do not understand that they are working for free and
living on borrowed time while they await Adam Smith’s
invisible…fist. And the
Gold Bugs are similarly getting spun in circles, enthralled and hypnotized by
wondrous paper gains, myself included. But an ounce of gold is setting up to
buy no more than it did in 1971 -- and then even less, to reflect the true
face of macro valuations.
Limitless amounts of currency were
printed after 1995 while suppressing the nominal price of gold and then
managing it upwards to a level it may or may not achieve. Gold was finally
“allowed” to start moving upward in 2001 while its intrinsic
value, along with the value of many frivolous tangibles in prodigious
oversupply, such as McMansions, is falling. Today
the contamination of America’s food supply -- of the world’s
so-to-speak bread basket -- along with the terminal decay of our
infrastructure and the depletion of Third World suppliers’ resources,
are polar opposites to the conditions that obtained
in 1971. Yes, an ounce of gold is setting up to buy far less than what it did
back then.
Rick Ackerman
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