Gold is currently trading in excess of $1200 an ounce. This is well above
the 1980 all-time high. However, this is an incomplete representation of what
gold is trading at relative to US dollars. When you look at the gold price
relative to US currency in existence, then it is at its lowest value it has
ever been. This is an example of how paper assets are completely out of tune
with tangible (real assets).
The US monetary base basically reflects the amount of US currency issued.
Originally, the monetary base is supposed to be backed by gold available at
the Treasury or Federal reserve to redeem the said currency issued by the
Federal Reserve. The Federal Reserve does not promise to pay the bearer of US
currency gold anymore; however, it does not mean that gold (it’s price and
quantity held), relative to the monetary base has become irrelevant.
When the US monetary base gets too big relative to the gold price (&
US gold reserves), then market forces seek to correct the situation. This has
happened a number of times over the last 100 years, but on two occasions, it
was so critical, that the situation actually over-corrected. This was during
the 30s and the 70s.
Below is a chart from inflation.us, which illustrates this:
It shows the extent to which the US monetary base was backed by the
official US gold reserves over the last century. Note that even under the
gold standard, US currency was not fully backed by gold.
One can see the two occasions (1933 & 1970) when the lack of gold
backing became so critical that the gold price corrected to a situation where
US gold backing actually became more than 100%.
What differentiate these two occasions from other times when the ratio of
US gold backing was also low (like 1921, for example), is the timing relative
to economic conditions. The low level of gold backing in 1933 came after a
period of massive credit extension (the roaring 20s), and a few years after
the Dow’s 1929 peak. At that time (post 1933) the economic conditions were
such that the ability to extend credit was severely limited, due to the
excesses caused by the credit extension during the 20s. This led to reduced
economic activity over the following years.
In a similar manner, the 1970 low level of gold backing came after a
period of massive credit extension (post-war period), and a few years after
the 1966 Dow peak. At that time (post 1970) the economic conditions were such
that the ability to extend credit was severely limited, due to the excesses
caused by the credit extension during the post-war period (to early 60s).
This led to reduced economic activity over the following years. Note that
the 70s were a bit different because debt levels relative to GDP were low as
compared to the 30s.
Currently, the gold backing of the US monetary base is at all-time lows,
and it appears that we have reached a point similar to that of 1933 and 1970.
In a similar manner to the 20s and the post-war period, we had massive credit
extension from the late 80s. Furthermore, the Dow appears to have peaked like
it did in 1929 and 1966.
This period seems to be more like the 30s than the 70s because debt levels
relative to GDP are excessively high. Deteriorating economic conditions, with
high relative debt levels and an inability to extend credit further are the
worse conditions for banks to operate under. These were the main reasons for
the banking crisis of 1933.
This will be the main reasons for the coming (already happening) banking
crisis. The lack of confidence in banks will be a critical part of the coming
gold rally. Remember that if we were to get a 100% gold backing of the US
monetary base, based on current US official gold reserves, gold would have to
be trading in excess of $15 000.
Greatest Depression
Previously, I have written about the Gold to Monetary Base ratio chart.
There is a strong fractal analysis signal that the worst economic (and
political) years are straight ahead, and this agrees with the expectation
above. I believe the coming period will be far worse than the Great
Depression.
Below is that Gold to Monetary Base ratio chart (from macrotrends.net), I
have previously featured, as well as some commentary (italics) that went with
it:
On the chart, I have indicated the three yellow points (a) where the
Dow/Gold ratio peaked. These all came after a period of credit extension,
which effectively put downward pressure on the gold price. Points 2 were
placed just to show the similarities of the three patterns.
After the peak in the Dow/Gold ratio and point 2, the Gold/Monetary
Base chart made a bottom at point 3 on each pattern. It is at these points
that the monetary base could not expand relatively faster than the gold price
increased. Today, this could mean that the point at which the game is up for
those who are short gold.
I do not know if point 3 is in on the current pattern; however, given
the fact that the bullion banks are under pressure as indicated in the spike
in the gold coverage ratio at the COMEX, it might well be.
Since then, the ratio has started spiking upwards, due to the spike in the
gold price, and the drop in the adjusted monetary base. It actually seems
that point 3 could very well be in.
After point 3 in November 1932 and December 1970, very bad economic years
followed. During the Great Depression 1932 and 1933 was in fact the worst
years of the entire Depression. Again, current pattern (or period) is more
like the Great Depression period than that of the 70s.
I believe we will will have similar events in the immediate future:
- gold and silver revaluation (probably mainly in the open
market) – this will mainly be in the form of currency devaluation.
- major government (especially the USA) and corporate
bankruptcies/defaults
- increase in wars (all kinds of wars)
- banking collapse
- and much more..
When you compare the current pattern (1980 to 2016) to that of the Great
Depression one (1920 to 1932), it gives you a visual of how much worse the
current depression (The Greatest Depression) will be.
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I have also recently completed a Long-term
Silver Fractal Analysis Report .
