Some of you may remember the book by Ray
Bradbury entitled “Fahrenheit 451.” The significance of that
temperature is that it represents the kindling level of paper. With the
temperature rapidly rising, more and more are opting for gold rather than
paper money. There is little doubt that an excursion to paper money can lead
to a period of rapid growth and advancement for the economy and society for a
period of time. The big problem comes to a head when paper money is abused
without limit. There are mounting signs that we have come to that point and
that the temperature in the oven is in the range of 430-450 degrees.
As it is clear we have transformed to a debt-based monetary system, it should
also be clear that an economy fueled by debt must
continually increase supply since interest is always adding to the total
obligation owed. When debt grows in excess of the rate of the economy which
it is currently doing by several times, interest charges will consume the
economy itself, particularly if interest rates are rising. Could this be why
M3 money growth has taken on growth rates over the past two months that could
only be termed hyperinflationary if they persist? No wonder the Fed plans to
stop releasing this number in the near future. We may have reached the point
where the only way to fund shortfalls in capital is to flat out print it. Gold
moves up when this becomes feared. Among other concerns that are worrisome
are: an oil exchange soon to open in Iran that will offer the sale of oil in
euros decreasing the demand for dollars; and ongoing resignations at the Fed
including the retirement of Alan Greenspan. Could these ultimate insiders in
the money game be bailing out of a hopeless situation so as not to be
directly associated with the implosion of the financial system? You would not
have this impression if you tuned in to Bubblevision on CNBC, where
everything is perceived as just great as long as the stock market stays up
and the economic statistics can be tortured into admitting anything the
masses wish to hear. As long as the money expansion continues at its recent
pace it will be difficult for the major stock averages to move much lower since
the currency, (or measuring weight) is on a constant debasement.
Some signs that gold, silver, oil, and all real things are the place to be
include the high level of deliveries being exercised on the COMEX recently in
both gold and silver trading. Investors may finally be wising up to the
fallacy of depending on paper claims to hard assets as opposed to the assets
themselves. Jimmy Rogers manages one of the biggest commodity funds and had
the research dead right but is learning the hard way about paper claims
through the defaults at Refco. If you own futures and the demand for the physical
soars you get on line and hope you get filled with something other than more
paper. Those that get caught in
that dilemma have not completed their homework or understand a big part of
the reason for owning gold and silver in the first place.
So how do we know when that time has come when paper promises are no good and
when we go to the bank to get our money it is not really there? How do we
know when the next dollar printed will tip the boat and lose the confidence
of the people and lead to massive losses in purchasing power? I for one do
not know exactly when that time will come, however, I can see quite clearly
today that the risk of a problem runs quite high right now and has for some
time. I only know that as far as confidence in money goes the limit for
additional dollars can only be described as “one dollar too
much.” It should make one shudder to consider the outcome. Yet, if you
asked 100 people to name the ten smartest people they know, I would bet that
considerably less than 100 of that 1000 would have any exposure to precious
metals at all. For some reason, the threat posed by the current financial
system can not be grasped or confronted by the vast majority of people and
the subject is absolutely vital. If the financial system goes which if you
understand its true mechanics it is destined to, the move to gold and silver
will be as instinctual as it has every other time paper money has failed. If
this is so then we can have some idea of what the potential range for where
gold could trade.
The current value of all the gold in the world approximates $2.5 trillion. US gold which
is supposed to approximate 261 million ounces is worth roughly $135 billion. We
say “supposed to” because
the gold hasn’t been audited
for a very long time and with all the gold leasing that has gone on over the
past 20 years it is very unlikely that everyone is still holding the gold
they claim. Comparing this with the US only M3 money supply - $10 trillion
and the world bond market - $35 trillion, and gold would have to appreciate
over 18 times or $9306 per ounce. Using only these two components should
provide a very conservative estimate of what we could expect. However,
let’s take into account that a lot of debt would just disappear due to
cascading defaults and discount
that number by 80% and we get $1861 per ounce. Jason Hommel of
goldismoney.com uses the M3 figure of $10 trillion and divides it by the 261
million ounces and comes up with $38,314 per ounce which I believe will
ultimately be closer than my two conservative targets. Another important
consideration is the terrible fundamentals and deficits affecting the US
dollar which would most likely shift the results back up in favor of a higher
US dollar price of gold. While it is clearly a moving target it is a pretty
good risk to reward bet that the additional investment demand for gold and
silver just as supply is falling off will provide a strong upward catalyst
over the next few years. As the heat is turned up on the US paper
shuffling economy and the temperature approaches Fahrenheit 451 you will be
glad to have your wealth in gold rather than paper which can be expected to
kindle into nothingness.
Richard
J. Greene
Managing Partner,
Portfolio Manager
Thunder Capital Management
More articles by
the author can be accessed by the
"Research Articles" choice at: www.thundercapital.com
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not intended to constitute individual investment advice and is not designed
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and there is no obligation to update any such information. The author, 24hGold, entities in which they have an
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