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Gold Price: USD 65,000/oz in 5 years?

from BullionStar:

Gold Price: USD 65,000/oz in 5 years?
16 June 2021 is exactly five years from today. What will the gold price be on 16 June 2021?

Currencies are Worthless

As the world’s fiat paper currencies have lost 99% or more of their purchasing power over the last 100 years, its critical to understand that fiat paper currencies are not a suitable unit of account for accurately measuring prices.

In fact, gold is a far superior measuring stick of value than paper currencies.

A paper currency doesn’t measure anything. It merely has an arbitrary value placed upon it by the population using it. It’s not backed by anything and it can fail at any time. From historical experience, we know that the unbacked fiat paper currencies used today will ultimately destruct and become worthless. All unbacked fiat currencies throughout human history have failed.

A more accurate measurement would be to measure fiat currencies in gold. If we look at the US Dollar measured in gold, we can see that the US Dollar has utterly failed in retaining its value, as its value has plunged about 98% over a mere 50 years. It cannot therefore be seen as a store of value.

Extrapolating into a likely future, a future in which you will need a stack of USD 100 bills to buy a carton of milk and a couple of eggs, underlines that the US Dollar gold price is meaningless as an indicator of value. When discussing the price of gold, the key is to recognise that gold retains its purchasing power over time. If a 1 oz gold coin can buy an exclusive men’s suit today at USD 1,300 and the same 1 oz gold coin buys an exclusive men’s suit at USD 2,600 tomorrow, this only means that gold is still reflecting USD 1,300 in today’s purchasing power and hasn’t gained in value. It’s the US Dollar that has depreciated vis-à-vis gold. Similarly, if the gold price goes to USD 650 and it can still buy the same suit, then it’s merely the US Dollar that as appreciated vis-à-vis gold.

As a society, we should by now have transcended the idea of measuring value in fiat currencies. Currencies are not a reliable measuring stick. Just imagine if the centimeter, meter, yard or foot were to fluctuate in length.

100 cm 100 years ago has become 2 cm today. Think about it. This is what has happened with our currencies.

The Gold Price

The gold price is an interesting term because the gold price doesn’t reflect what’s happening on the physical gold market whatsoever.

In today’s marketplace, a lot of things are regarded as “gold”. On the London Gold Market alone, there’s 600 times more gold traded each day than there is gold mined globally on that same day.

All sorts of paper gold passes for “gold” on the financial markets. The vast majority, certainly more than 95%, and likely more than 99% of this paper gold is not backed by any physical gold.

“Gold” is created out of thin air as paper obligations. The demand for and supply of this paper gold has little to do with the physical gold market.

During the last couple of year, demand for real physical gold has been insatiable , however the price of gold has not reflected this huge demand. Physical gold has been flowing from the Western vaults to Asia. The Chinese in particular have been vacuuming the London vaults for gold. However, this substantial physical demand hasn’t been reflected in higher gold prices because whereas Easterners have been buying physical gold, Westerners have been selling paper gold.

Given that the price of “gold” is set on the OTC paper market in London and on the COMEX futures market in New York, the US Dollar denominated gold price continued to fall between 2012 and 2015 despite the massive physical demand, and instead, it created a physical shortage of gold.

Whether physical demand is up or down 5 tons in China or India matters little when there’s 5,500 tons of paper gold traded each day in London as visualized in this infographic. London, and to a lesser extent COMEX in the US, are the price discovery markets for gold. However, paper gold on these markets is almost exclusively cash settled with less than 1% of the contracts/futures settled with delivery of physical gold.

The gold price is therefore not dependent on the market fundamentals of physical gold but this may very well change in the future.

With China picking up all physical gold available every time the price slides, widespread shortages are a likely outcome if the gold price ever were to decrease significantly again. Given that the historic vaulting capital of the world, London, has already been running out of stockpiled gold, there just wouldn’t be enough physical gold to satisfy demand if the price were to ever plunge significantly again.

It’s actually been a healthy development for the physical market’s demand/supply balance that the gold price has increased 22% in USD Year-to-Date 2016. However, we have to understand that the largest potential for a revaluation of the gold price paradoxically may be preceded by a decrease in gold prices.

When trend seeking Western investors sell their paper gold and the price slides, Easterners take the opportunity to buy physical gold at bargain prices, thereby stressing the physical market with shortages as a result. Such shortages may very well be what ultimately breaks the neck of the paper markets. Because when there is no longer any physical gold available at the price dictated by the paper markets, there will be a disconnect between the price of paper gold and the price of physical gold. Paper gold will go towards zero whereas the price of physical gold will skyrocket.

Such a revaluation of physical gold will bring the fiat paper currencies to their knees as their worthlessness as a store of value will become clear to all.

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2 comments to Gold Price: USD 65,000/oz in 5 years?

  • rich

    Robert Pringle (author The Money Trap)-Govts are imprisoned in a cage from which they see no way out?

    Mr. Pringle wrote a book titled “The Money Trap” in which he lays out his thesis that central bank policies since the financial crisis in 2008 have met with limited success. The book argues that governments have been using the wrong policy weapons. On his blog, Mr. Pringle recently wrote this article which summarizes the problems he lays out in his book. Here are a few quotes:

    “What is the money trap? How can we get out of it?
    Let me try to reformulate the thesis of my book in the light of recent developments.
    Since the 1970s we have been in a period of transition to a new paradigm of monetary policy. Governments have tried various approaches to the challenges of managing money: in the 1970s, they put full employment top, and used monetary policies to expand demand, taking risks with inflation; the result was high inflation, high debts, the Third World debt crisis, and, eventually, high unemployment. The 1980s saw a backlash as popular discontent with high inflation made policy makers give priority to price stability; this led the way to inflation targeting (IT) and central bank independence (CBI). After meeting with apparent success in The Great Moderation, the 2008 crash showed this policy model was also deficient. Since then reforms have focussed on strengthening bank capital but the basic framework of the system – IT + CBI with flexible exchange rates – continues.
    This period has culminated in some of the biggest experiments ever – a massive expansion of central bank balance sheets, official interest rates held near zero for several years and in some cases deliberate currency depreciation in an effort to spur growth.
    Results have been mixed. Banks remain under great pressure, lending remains sluggish, real capital investment disappointing while households and businesses pile up cash balances.
    To quote William White: (former BIS)” . . . . .
    . . . . .
    “To recap: Governments are evidently imprisoned in a cage from which they can see no way out. Indeed, there is no way out while they remain under the illusion that they can achieve their objectives by fiddling with monetary levers. Whatever form the central bank doctrine takes, whether reinforced by regulatory powers or whatnot, and whatever rules or objectives central banks follow, make no essential difference: they fail to achieve their ends; economies remain unstable, financial systems fragile. Public trust is lacking. Popular discontent and anger rumbles on dangerously.”

  • Z RIch

    Disclaimer: I own gold $ silver coins + bitcoin.

    judging how fast the prices move, I would bet bitcoin hits 65,000 a coin before gold hits 65,000 an ounce, but they will both hit 65,000 at some point

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