We’re forced to use paper certificates of government debt as if it were money. This debt is losing value as the government racks up ever more implausible amounts of it ($19.5T at the moment).
by Keith Weiner, Sprott Money:
Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams.
Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat, tossing about in stormy seas, if they would say “that lighthouse went up 5 meters.”
To our point last week, what would be the utility of a lighthouse that you measured from your boat which is going down and up, but mostly down?
Would you wonder if lighthouses had another purpose, any other use? If you could make money betting against other sailors, on the lighthouse’s next position, would you care?
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” – Warren Buffet
Of course, what Buffet doesn’t mention is that we’re forced to use paper certificates of government debt as if it were money. This debt is losing value as the government racks up ever more implausible amounts of it ($19.5T at the moment). Meanwhile, lenders are offered lower and lower interest rates to finance this growing monument to economic insanity.
Surely anyone from Mars would be scratching his head at this, too.
Unfortunately, Nixon’s gold default almost exactly 45 years ago to the day removed the extinguisher of debt. When you pay off a debt using gold, the debt goes out of existence. When you pay a debt using dollar, the debt is merely shifted. So the debt grows—must necessarily grow—at an exponential rate.
Also unfortunately, Nixon’s gold default also unhinged the rate of interest. It began to shoot the moon. It eventually peaked at an insane high (and historically unprecedented) level in 1981. Since then, it has been falling and now it keeps hitting insane low (and unprecedented) levels.
You can get yourself out of the loop by buying gold, but you cannot affect the debt, interest rate, or banking system. You are disenfranchised. Instead, we have monetary policy administered the way the Soviet Union had food prices set by bureaucratic diktat.
The problem is not that gold cannot have any utility. It had it, once. The problem is that the government has locked up gold’s utility. What’s left gold is just betting on the price action in the casino.
Sooner or later, that price action is going to come to an ignominious end. Contra the Quantity Theory of Money, the value of the dollar will go to zero. This will not be because its quantity rises to infinity. It will be because gold owners no longer wish to risk holding dollars, for fear of counterparty default.
About the best we can say is that today is not that day.
Read on for the only the only true picture of the supply and demand fundamentals that ultimately drive the price action. But first, here’s the graph of the metals’ prices.
The Prices of Gold and Silver
Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It rose significantly this week.
The Ratio of the Gold Prices to the Silver Price
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