The World According to Gold


"$1,500 gold by year-end, as world economies wage currency-devaluation war."

By year-end, the price of gold is going to be $1,500. If you buy an ounce of bullion today, you'll sell it after the Christmas holidays for a profit of +8%. The gloves are off in the ring of major global currencies, all the pretence is gone and it's a horribly blatant competition to devalue currencies is now underway. The disconnect between the actual purchasing power of the increasingly worthless dollar, pound, euro, yen and yuan, as well as their near-future purchasing power, is the latency inherent in a globalized economy regarding time. Price inflation is coming; it is the absolute outcome of monetary inflation in the absence of real stimulus—supply shortage and demand increase based on actual economic consumption growth—not rampant counterfeiting.

What we have is artificial stimulus (monetary inflation). This creates the short-term appearance of robust economic health because it enables the banks and their associated derivative businesses to report massive profits, which induce buying of their widest of widely held shares, which gives you Dow +11,000. The 100,000 Americans tossed out of work and home each month can't eat Dow 11,000. For them, the number is a slap in the face. It's the proof in the pudding that their leaders have abandoned them in favor of optics. The optical band-aid, ultimately, diminishes further the condition of the already-compromised system by drowning it in the substance upon which it now chokes. Wealth preservation can only be accomplished with precious metals in such an environment.

It is a favorite statement bandied about by government economists that never before in the history of humanity have so many people enjoyed such a "high standard of living." What they fail to mention, and choose not to notice, is the millions upon millions for whom the quality of life has dramatically fallen. On Main Street—and, yes, even on Wall Street—thousands of people are losing their jobs and their homes. Meanwhile, the high standard of living referenced by economists means a piece of meat with the previously drab and ubiquitous beans and rice, and a cell phone to boot. Wow! Now that's a high living standard!

If you're wondering who isn't seeing their quality of life deteriorating, and who, in fact, are thriving despite the wider economic woes, look no further than the business of mining and exploration. I'm on a site tour in deepest, darkest (well actually, windiest) Patagonia, where the company hosting the analyst tour has been busily shuttling our group of about 50 all over the Desdeado Massif, as the geological structure underlying Santa Cruz province is called, to view drill core, diamond drill rigs at work, vein outcrops and lots of barren landscape. The company is encountering very high-grade drill holes with grades like 56 grams per ton (g/t) gold with more than 1 kg. per ton (k/t) of silver, and the development of a mine is imminent.

This morning, we watched gold tumble $38 on our Blackberries and chuckled at the prospect of the media and other uninformed personages declaring an end to the gold bull market. On this bus, nobody is out of work or out of a home. Rather, the talk is of upcoming rugby championships and flats in Buenos Aires, great restaurants and who's got the best and worst business class. These are investors in gold and silver that have been quietly prospering for the last 10 years, having embraced the idea that deficit spending by governments would bring about a general devaluation in currencies—that which is clearly underway.

The youngest member of our group posed a seemingly innocent enough question: "Why is gold so important. . .I mean, why gold and not something else?"

There are those who argue that gold, apart from some excellent physical and chemical characteristics that make it unique, is completely undeserving of its status as the most stable instrument of value exchange in the recorded history of humanity. Still others declare it completely worthless. The fact of the matter is that gold has been the instrument of trade for 5,000 years among humans. Paper currency was originally a note from your banker advising the note reader that the bearer was in possession of the stated quantity of gold; therefore, the note was representative of that value in goods, which the bearer could then trade for said goods.

That doesn't really explain the 'why gold' part; rather, it just underscores the 'how' of it. They 'why' is attributable, in my mind, to nothing more than the fact that we value shiny things that are hard to come by—and gold fits the bill perfectly!

There was a lively discussion about when the bull market in gold would end. I find the idea of gold in a "bull market" misleading, as if it's something consumable like oil or coffee or pork bellies. Gold is the standard against which the values of all things are measured. The apparent increase in the price of gold, as expressed in currencies, is as much a reflection of currency's vanishing purchasing power as it is in the increased preference for wealth preservers to hold gold over currency in recognition of currency's debilitation.

Because gold is not consumed, and its rate of disappearance is minute and results only from micro quantities lost to ablative processes and during recycling, it can't be considered a commodity according to the definition of that word. Commodities, like steel, copper, grain, potash, sugar, rubber, etc. are the raw materials that are consumed in the process of manufacturing or just living. Cars consume gasoline. People consume coffee and sugar. The Chinese appear to consume copper, but nobody consumes gold. It is hoarded. Exactly why is a philosophical question. 'Why' is no longer important in the case of gold. . .only that it is what it is. Any attempt to further clarify gold's raison d'être will only complicate that essentially simple fact. Gold is money. It was the first money and will be the last money. Everything else is an imitation. End of story.

So, when you see gold swoon down into the $1,100s, as is likely, don't panic. And don't make the mistake of thinking the "bull market" in gold is over. It's not. Gold will resume its patient rise in price, as expressed in currencies, as long as currencies continue to be indiscreetly mass manufactured.

Theoretically, gold could return to a state wherein the integrity of currency, once again, is preferred over gold as a mechanism for trade and wealth preservation. However, that would mean we would have collectively, as a species, stopped competing to devalue our currencies and consuming all the commodities in sight, and instead managed somehow to cooperate on managing our money, our resources and our exhaust. I don't really see any chance of that happening any time soon. I think a return to tribal, albeit high-tech, warfare will be the ultimate outcome of our current situation. I think there is going to be a general and incremental deterioration over all living conditions for the majority, while an increasingly tinier ratio of lucky and smart people live the high life.

If you want to count yourself a member of the latter group, you'd better start educating yourself on how to profit through gold and silver exploration, mining and investing. If you don't, you'll have nobody but yourself to blame.

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