Base Building a Launch Pad for $64,000 Gold?

gold-2015-05-22

Lest you think your editor is engaging in sensationalism to sell newsletters, you are only half right. A $64,000 gold price may sound so absurd that it is an extreme waste of time to contemplate. But I took the time to write the headline above and to show you my latest monthly average gold chart, to show you that the market is building a launch pad for much, much higher gold prices, even if $64,000 is far beyond my lifetime and yours. I want to review the discussion David Jensen and I had in a February 11, 2015, podcast that explains Gresham’s Law and how that will inevitably drive gold and silver prices to levels that do in fact seem unfathomable now. Listen to that interview here: http://jaytaylormedia.com/manipulation; scroll down to the Feb. 11 discussion.

Before I go further, here is the article from Bloomberg Business, which is available to the public, here: http://ow.ly/Nd2U4

ChineseGoldA move to a gold standard in China would require an exchange rate of as much as $64,000 an ounce, 50 times bullion’s price now, according to Bloomberg Intelligence.
A traditional gold standard, in which the precious metal backs the currency, is basically impossible at current prices due to the amount of metal needed and there’s no evidence the sixth-biggest bullion holder will adopt one, Bloomberg Intelligence said in reports published Wednesday. Any attempt probably would involve new technologies and depend on the ratio of what is backed, it said.

Chinese policy makers are trying to establish the yuan as a reserve currency, and backing it with gold would help attract foreign capital inflows, the Bloomberg research unit wrote. Theoretically, to create an exchange rate of one ounce of gold for every $64,000, the country would need about 10,000 metric tons of the metal, they estimated. That’s nine times the nation’s official holdings and about 6 percent of all the bullion ever mined globally.

“It would probably have to be very different than an old gold standard,” Kenneth Hoffman, the Princeton-based head of global metals and mining research at Bloomberg Intelligence, said in an interview in London on Tuesday. “They have all this currency out there, they want it all soaked up by central banks.”

Gold for immediate delivery traded at $1,207.89 an ounce in London on Wednesday.

In another scenario assuming an exchange rate at today’s price, China would need about 525,000 tons, Bloomberg Intelligence estimates. Only about 175,000 tons have ever been mined, according to the London-based World Gold Council.

“It wouldn’t be a traditional system where you walk into a bank and you walk out with an ounce of gold,” Hoffman said. “It would have to be something new and different.”

Gold’s Role

Bullion played a central role in the international monetary system until the collapse of the Bretton Woods framework of fixed exchange rates in 1973. While gold’s role has diminished since then, most central banks have some on their balance sheets.

China last updated its gold reserves in 2009, when it owned 1,054.1 tons. Bloomberg Intelligence says the central bank may have tripled the holdings since then. China and India are the largest consumers of the metal.

Yi Gang, the central bank’s deputy governor, said in March 2013 that the country could only invest as much as 2 percent of its foreign-exchange holdings in gold because the market was too small.

Chinese policy makers are pressing to add the yuan to the IMF’s currency basket, known as the Special Drawing Right, which includes the dollar, euro, yen, and British pound. The Bundesbank said in April that the yuan needs to be seen as freely convertible before it can be considered as part of the SDR basket.

“What else can they do to create a reserve currency that other central banks around the world would want to hold?” Hoffman said. “The Chinese have proved over and over that they are willing to think outside the box.”

Many Problems with the Bloomberg Article

The article from Bloomberg shows clearly that the writers don’t understand gold as money.

1. First, they make the mistake of thinking that there isn’t enough gold to go back to a gold standard. That is a bogus argument because a return to a gold standard would simply require you to think in terms of ounces of gold or fractional grams. For example, one gram = approximately.03 ounces, which at $64,000 would amount to $1,920. But in this digital age, you could easily set up the smallest currency unit of, say, 1/10,000 of a gram, which then would be worth $0.19. Or make the smallest unit of gold currency 1/100,000 of a gram, which would equal slightly less than 2 cents. So the argument that there is not enough gold in the world to support a gold standard is a bogus argument. One need only think in terms of fractional gram units and it could work very well.

2. The second mistake is to believe that the official numbers that China gives are real. As long as China is increasing its gold imports, it has every reason in the world to try to make the world believe that the United States has all the gold it claims to have. Though not explicitly stated, I’m pretty sure that is another mistake the Bloomberg author made.

3. To try to emphasize the point that a gold standard is impossible, the author made another flawed argument, namely that if gold were priced at today’s price, China would need to have 525,000 tons of gold. But as the article points out, only about 175,000 tons of gold have been mined in the history of man. But again, this is a bogus argument for the same reason noted in point #1 above.

4. A nit-picking point, but nonetheless an inaccuracy from this mainstream news media, is the date that Bretton Woods broke down. The article stated it was in 1973. Actually it broke down on August 15, 1971, when Nixon closed the gold window.

Why $64,000 Is Not as Far Fetched as You May Think

My podcast discussion with David Jensen dated Feb. 11, 2015, is titled “Gresham’s Law Predicts LBMA’s End.” I strongly suggest you listen to it and follow the outline of that discussion below. because I think David explains why a gold price at some extreme height is not only possible but a virtual certainty.

David explained by example how. in modern times, Gresham’s Law will ultimately be applied to the gold and silver markets and when it is applied it will likely be applied with a vengeance.

Traditionally, rulers in the past would seek to deceive their subjects by adding more cheap metal, like copper, into the coins so that each coin while having the same face value would lose some of its intrinsic value, gold being more valuable in the free market than copper. As such, as the populace learned of this currency debasement, they would remove from circulation and hoard the more valuable, higher-gold-content coins.

In the modern day, all manner of misinformation about gold, such as what appears in the article above from Bloomberg, plus active manipulation to drive the gold and silver prices down at key moments, have kept people believing in our government’s Keynesian “tooth fairy,” which tells us that the gold standard is barbaric and that only stupid, uneducated people want or need gold. That serves the purpose of those with the printing press (Federal Reserve computers) quite well, as it is a means of stealing from the real wealth-creators of our land, with the proceeds of theft going to government and the bankers.

Now when you listen to David’s discussion of Gresham’s Law, please take a close look at the chart below, which shows that 20.7 million ounces of gold per day are traded, compared to a total global annual gold production of 90 million ounces for the entire year! And how is that “gold” being paid for? It is being paid for by printing press money—money out of thin air.

Now take a look at silver, where the disparity far more extreme. Approximately 800 million ounces of silver are produced annually. But 172 million ounces of “silver” contracts trade daily.

So the big question is this. What happens when all those folks who buy gold and silver with their contracts (and who believe they own gold and silver) finally decide owning “paper gold” or “paper silver” is not sufficient? Suppose they want to take possession of the metal. Now, can you see why $64,000 may not be such an absurd price for gold after all? I’m not saying I think we will see those kinds of prices. The world may well end before we reach those extremes. But I think David lays out the reality that has escaped most of our brainwashed fellow citizens. It is important to pay attention to what is really happening and not what the establishment wants you to believe is going on.

“Gresham’s Law Predicts LBMA’s End” (The Podcast Outline)

1. Definition: Gresham’s Law

A monetary principle stating that “bad money drives out good.” In currency valuation, Gresham’s Law states that if a new coin (“bad money”) is assigned the same face value as an older coin containing a higher amount of precious metal (“good money”), then the new coin will be used in circulation while the old coin will be hoarded and will disappear from circulation.

http://www.investopedia.com/terms/g/greshams-law.asp

By definition, gold and silver are money.
Greenspan himself recently said that gold is superior to all fiat currencies including the USD.

2. The LBMA is trading digital or fiat gold (unallocated gold) that they state accounts for the vast majority of spot gold trading.

The LBMA represents 85% of global daily gold trading volume and the LBMA’s (and LPPM ) daily pricing is, according to the LBMA, the basis for “virtually all transactions in gold, silver, platinum and palladium.”

By trading ‘bad money’ (unallocated gold and silver), the LBMA is guaranteeing its own demise as the ‘good money’ (i.e. gold and silver physical bars) will disappear from the exchange.

The markets flow and choose a path to solve problems and the markets will flow around the LBMA and leave it stranded as it is a vehicle that has been used to short-circuit market pricing of gold and silver.

We can see from our discussion last week that the LBMA has an estimated open interest position (claims) of 400M to 600M oz of gold and 3.5 to 5.0 billion oz of silver. Completely unsustainable as the impossibility of delivery into these positions is known to the market.

GoldSilverChart
3. Dubai intends to open spot gold trading by the end of March 2015

http://gulfnews.com/business/markets/dgcx-aims-to-start-spot-gold-contract-by-the-end-of-first-quarter-1.1453407

Goal of the new trading is to ” set it as a benchmark Loco Dubai price for all stakeholders in China, India, and Africa etc.”

Dubai wishes to develop benchmark gold pricing for Asia and Africa.

Other physical exchanges in Singapore, Hong Kong, Shanghai, Moscow, etc. are going to rapidly move around LBMA pricing and make the LBMA an historic artifact.

4. Some commentators say that the BRICs hold a nuclear bomb on the West which will detonate if they move to a sound money (gold) system

In reality, the LBMA and COMEX are nuclear bombs that are guaranteed to detonate because they are used to distort markets (and have been used to fuel decades of financial bubbles) and according to Gresham’s Law, will by definition fail as good money leaves these exchanges.

5. We have seen complete market failure before.

Kuwait’s “Souk al-Manakh” also dubbed the Kuwait Camel Market.

In the early 1980s the KCM market did a round trip from $5 billion to $100 billion in market cap and back again – at its peak it had the third highest total market capitalization in the world.

Used leverage to explode the value of the Camel Market to astronomical heights (think the open interest in the LBMA).

“Adding fuel to the fire was the type of informal margin financing through the use of postdated checks, which were accepted as a cash equivalent, as per Kuwaiti custom. This type of personal credit didn’t require a bank balance; the “receiver hopes that there will be one when the due date rolls around.” As the Souk al-Manakh market soared to incredible new heights, many speculators became willing to issue postdated checks for double or triple a stock’s purchase price, confident that the share prices would rise by that much by the time they had to pay. (1) An informal futures market arose in postdated checks as investors, upon receiving their shares, used them as collateral to borrow even more money for stock speculation. … By September 1982, the Ministry of Finance ordered all dubious checks to be turned in for clearance, tallying the value of worthless checks at $91 billion.”

http://www.thebubblebubble.com/souk-al-manakh

In the end, it was crickets at the Kuwait Camel Market. That was all that was left and this is what the LBMA is heading for.

“It did not take a trigger to burst this bubble; it simply crested sometime in the dreadful heat of the Middle East’s summer. Its decline was so discontinuous it cannot be called a crash. There were simply no bids.”

http://www.gold-eagle.com/article/memories-souk-al-manakh

ForeignGUSHThe chart on your left shows the percentage of U.S. dollars held by foreign central banks. It peaked right before the financial crisis as Americans conned foreigners into accepting all manner of fraudulent mortgages and other unsavory financial products. When the system imploded, the Fed printed trillions of dollars, which began to break the confidence of foreigners in the U.S. currency. You can see the demise from about 72% in 2007 to around 45% now.

To try to defend the dollar, the U.S. is engaged in perpetual wars to try to control the oil markets and thus keep a bid under the dollar. Is it any wonder that the BRICS are now competing against the petrodollar, over which wars are being fought? Is it any wonder that we are closer to World War III now than at any time since the Cuban Missile Crisis?

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.