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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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