Wednesday, October 19, 2011

THIS Is Why We Own Gold - 10,000 Reasons

The big question we always get about gold is, "how do you know when the bull market will be complete?" I have always said that will occur when a big country/entity rolls out a new gold-backed currency and concomitantly revalues the price of gold substantially higher such that it provides a credible backing for this currency.  To me, China - or a China-led consortium - is the likely economic power to do this because it is large enough in terms of imports/exports to demand that all trade that occurs with it - and/or the consortium - has to be conducted in this new currency.  In this manner, the new global reserve currency - gold-backed - will be born.

With this idea in mind, Paul Brodsky has expressed what I consider to be the best analysis for gold that I have come across that also includes this idea of new gold-backed reserve currency.  This is a must-read and you can read that  HERE   Mr. Brodsky recently did an interview in which he laid the case for $10,000.  Here's the LINK  And finally, today the invaluable King World News published some more commentary from Brodsky in which he lays out the math for why $10,000 is his number: 
We figured you should take the monetary base and divide it by official gold holdings.  That would give you the price in terms of monetary inflation that it would be worth today.  Coincidentally, after we came up with that theory we went back and looked at what they used to use, the formula for arriving at the Bretton Woods dollar exchange value with gold at $35 and it was the same formula.  So if you were to divide base money by official gold holdings today, after QE2, you would come up with a price just north of $10,000 an ounce.
Here's the LINK

Now, there will always be hair-splitting debate over what variable to use in calculating where the reval of gold - and corresponding deval of fiat money - will take place.  My publicly-expressed view is $10,000 but I can also make the case for a much higher number.  To be sure, as this ultimate "reval event" draws closer, I fully expect that gold will easily go a lot higher than $10,000.  But 10,000 is a very safe bet.

In the meantime, I thought I would treat everyone who has not seen it yet to the gold investor's version of pornography, presented by my friend and colleague "Jesse" of Jesse's Cafe Americain:

In the meantime, until the reval/deval event occurs, I have to say that the precious metals sector still represents the best value and the best investment opportunity I have seen in over 30 years of investing, studying and speculating in the financial markets.  You can take that one to the bank - just don't use Bank of America.


  1. Dave,

    despite the devaluation of the fiat currencies that will continue to be taking place, and the probably upcoming correction in the broader equities markets, do you still feel the gold (and silver) mining equities will dwarf what we saw in the bubble, especially once gold gets to a $10,000?

    (It's hard to feel confident about the mining sector, being down over 30% in my portfolio.)

  2. (Dave)

    Yup. I hope you left room to add to your holdings because at some point there will be an epic opportunity to add to positions. Need to wait until either the next big slug of QE happens or the mining stocks break away from their correlation with the SPX.

    Dude, over the last 10 years, I've had periods where my stock portfolio is down 70% from its previous peak and w/in 18 months I was at new highs.

  3. Thanks for the reassurance, Dave. I have left some room to add to my holdings. Hopefully, we'll start to see some rallies starting next month...


  4. (Dave)

    Doesn't mean I'll be right this time. But I think the odds are skewed pretty highly in our favor. I have 90% of my net worth in the sector.

  5. What are they waiting for? It would create a worldwide would reduce unemployment, increase investment across the board, third world countries would have capital, reset a new cycle and remove old debts ...what gives?

  6. 2011 has been the year of the gut check. Your chart is interesting.


  7. I was there at the conference for Brodsky's discussion on gold, it was great! James Bianco also likes gold very much.

  8. Brodsky seems to stop short in his analysis. He calculates the required gold price of $10,000/oz using only currency and reserves at the Fed. But, in addition to gold, UST bonds are used by central banks world wide as backing for their money. If the Fed were to switch to managing the dollar/gold exchange ratio, it seems to me that central banks would redeem their bonds for gold and eliminate counterparty risk. With $15 trillion bonds outstanding (and growing at $2 trillion/year), the required gold price is currently about $57,000/oz.

    Yes, I know, not all bonds are used as central bank reserves, but a lot of them are and the amount is growing, so the number will get there eventually.

    The point is, if we price gold too low, we'll have exactly the same problem Nixon had, over-valued dollars being turned in for under-priced gold.

    Dave, am I missing something?

  9. Sitting here having a beer in Spain I read the following. Guess what happened - had to clean up my screen as I proceeded to blast my beer through my nose cause I started laughing so hard....

    Here's the whole reason why the EFSF came into existence. The whole purpose is the following...

    "If an euro zone country has a track record of good borrowing, has no bank solvency problem and European Central Banks and euro zone deputy finance ministers approve, then the EFSF will be able to buy the country's bonds from the markets, according to the guidelines."

    Speaking out of two "holes".

  10. By the way.

    I am in the luxury yachting industry, the mega wealthy. Some interesting things.

    There are three levels here - low/small yachts, medium/30 to 55 m and high end/ above 55m. The high end is going from strength to strength - the other two are hurting. So really big money is getting rid of cash and building more and more 80 to 90 to 125meter yachts.

    The more interesting thing is having had a discussion with an 82year old German mega rich - the top of the 1%. He also is in finance.

    His comment was that in a few years there will be no banks left!!

    So where will we "store" wealth then and how will be "exchange". This being a more personal question its hard to get those answers. This function was always done by the Swiss - ie stable currency and hidden from view.

    Which is the easiest way to do that now? You can guess! Its an easy answer. Out of view and easy to store. So all this other crap written about investment is BS, the rich know it.

    The other thing is - these yachts will now be used to get away from governments, registered in Tax havens and going to places you would otherwise not be able to go to.

    So we are being played all the time....

  11. I think they want your gold, too...on the cheap.

    Revealed – the capitalist network that runs the world

    AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters' worst fears. An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

    The study's assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist
    say it is a unique effort to untangle control in the global economy.
    Pushing the analysis further, they say, could help to identify ways of
    making global capitalism more stable.

    The idea that a few bankers control a large chunk of the global economy might not seem like news to New York's Occupy Wall Street movement and protesters elsewhere (see photo).
    But the study, by a trio of complex systems theorists at the Swiss
    Federal Institute of Technology in Zurich, is the first to go beyond
    ideology to empirically identify such a network of power. It combines
    the mathematics long used to model natural systems with comprehensive
    corporate data to map ownership among the world's transnational
    corporations (TNCs).

    "Reality is so complex, we must move away from dogma, whether it's conspiracy theories or free-market," says James Glattfelder. "Our analysis is reality-based."

    When the team further untangled the web of ownership, it found much of
    it tracked back to a "super-entity" of 147 even more tightly knit
    companies - all of their ownership was held by other members of the
    super-entity - that controlled 40 per cent of the total wealth in the
    network. "In effect, less than 1 per cent of the companies were able to
    control 40 per cent of the entire network," says Glattfelder. Most were
    financial institutions. The top 20 included Barclays Bank, JPMorgan
    Chase & Co, and The Goldman Sachs Group.

  12. 10,001...add $1 for integrity.....

    EU Commissioner Seeks to Prohibit Rating Agencies from Rating Stressed Debt; IMF Report on Greece Held Up in Dispute with EU

    Never Underestimate the Stupidity of Bureaucrats

    EU Commissioner Michel Barnier obviously believes the rating is the problem, not the debt, or the likelihood the debt is paid back.

    What about ratings that are too high?

    Never, ever, underestimate the blatant stupidity of government bureaucrats, especially desperate bureaucrats. Instead, one can look at such asinine proposals and make a simple judgment: the s*** is about to hit the fan.

  13. Is there anyone who has done good work on the decoupling of precious metals in history and could show it graphically?

    Everytime we precious metal investors have to be saved by the main markets but yet we are the one who are very vocal that we will see a collapse etc. This is especially true in the miners. Can they even go anywhere if we have a complete disaster.

    So isn't it a case of "careful what you wish for".

    I'd appreciate it if there is some sort of graph of decoupling. Not the ratios of precious metals to the main markets. So what basically happens is that precious metals recover further than the actual markets but actually consistently decouple - no? Here and there - yes.

  14. Decoupling starts when system blows..choo..choo!

    Norcini - Central Banks Collapsing the Financial System

    What has happened is that these large scale traders, many of them locals, are no longer able to alter the spread relationships like they had been able to do in the past. The size and scope of the money flows being generated by these hedge fund computer algorithms is running over anything in its path, including the spread traders.

    There are two things worth noting about these computer algorithms that generate this massive buying and selling that is constantly distorting the various markets. First, they do not care what the fundamentals might be in any market that they are programmed to execute orders.

    Second, they are not programmed to take historical spread relationships into account. In other words, they will push a spread to the point that it is so far out of the historical norm that the markets are continually entering unchartered territory.

    This process ends up forcing many of the spreaders out of the trade which then pushes the spread to a point of greater disequilibrium. The only way to describe this type of market action is surreal and extremely violent.

    The volatility and the instability of the markets is a mirror image of the current monetary system. At some point the sheer volume of debt will carry us to a day of reckoning which is going to bring the system to its knees.”

  15. Rogue Government Traders

    Any of this sound familiar? Yes of course it does. Unfortunately for
    all of us, the story of Barings bank and Nick Leeson is merely
    happening on a global scale. However, rather than one trader making
    bad bets what we are dealing with is a gigantic credit bubble ponzi
    scheme created by TBTF banks, or as Bill Black more appropriately
    refers to them, Systemically Dangerous Institutions (SDIs) that now
    needs to be covered up. This ponzi first started unraveling back in
    2008 and rather than deal with it the best we could, global “leaders”
    decided to bail them out with taxpayer money and guarantees. What did
    we get for this act of kindness? A dead economy, monstrous
    unemployment, 15% of Americans on food stamps and a frightening
    reality that shows Americans are having a much harder time than the
    Chinese putting food on the table. See this article
    Meanwhile, what did the banksters get? They consolidated even more
    power over their Washington D.C. puppets because now establishment
    politicians are “in” the doubled down Nick Leeson bet with Wall Street
    and of course they got record bonuses and no one was prosecuted.

    This is how a nation descends from one of productivity and innovation
    to ruthless, corrupt feudalism in a very short period of time. My
    message for Americans follows up from my email of two weeks ago. The
    reason the liberal mainstream corporate media demonized the Tea Party
    is because it threatens the status quo. The reason the conservative
    corporate mainstream media demonizes Occupy Wall Street is because it
    threatens the status quo. These are textbook divide and conquer
    strategies being used on the American people. Do not fall for it.

  16. London Trader - China Bought Massive Amount of Gold Today

    “What we are seeing now is this consolidation pattern where the commercials are getting out of their short positions whenever possible. All the while they are squeezing fresh shorts. They take the metals down, make the charts look bearish to bring in fresh shorts and later they squeeze them out of their positions on a rally and pocket the money.

    As I said earlier, we had a major physical buy order today. The Chinese bought a massive amount of physical today at the lows and that is why the market turned where it did because of the intensity of Chinese buying.

    Having said that, most of the physical orders are sitting under the market now. There are major buy orders that did not get triggered yet and they sit between $1,585 and $1,605. We are talking about massive tonnage.”

  17. Hope everyone is 99% long gold........

    To Be With the 99%, President Obama Must Fire Tim Geithner
    October 20, 2011

    In my last piece, I talked about how Tim Geithner’s job over the past five years has been to (a) print money, (b) give it to rich friends, and (c) deny everyone else legal and financial rights. This shows up everywhere, from the 0% you get on your savings account versus the insider information the rich get, to your lack of access to the Fed discount window. It’s a symptom of bought government, which I try to expose on our show every day. (You can help by signing our petition at )

    I find it laughable to hear President Obama’s spokesperson talking about how his campaign represents the 99%. For starters He’d have to fire Geithner, to prove he’s not the leader of a bought government. After all, it is Geithner who took a system indirectly rigged to profit the 1% at the expense of everyone else, and institutionalized and formalized it during a crisis.

    The reaction to my piece was explosive – I’ve rarely gotten so many comments, thoughts, and questions on a single topic. So I think it’s worth addressing some of them.

    Here are some of your questions and comments, as well as my responses.

  18. I think the first country to revalue gold will be the US. Largest reported gold reserves (if they are real or not is another debate), world reserve status already in place and well established, and the people currently in control of the financial system stay in control. Whoever is left holding US debt will get the royal screw treatment but the reins of power will remain the same. They will keep control at all costs. Revaluing gold will tie their hands somewhat but they will attempt to keep their control. The revaluation will be enough to cover all known outstanding US debt.

  19. YouTube - Massive Put Options Purchased on the S&P 500 Indicating a Year End Crash?

  20. This is important. It seems Zerohedge can create the incorrect headline and with that fear.

    The FT Deutschland article about the Deutschmark was obviously not read by them, perhaps they cannot understand German.

    If any of you can read it - here is the last paragh...

    "Zugegeben, angesichts dieser Summen wird einem schwindelig. Der Billionenschutzwall ist ein großes Experiment, das schiefgehen kann. Deutschland wirft mindestens zehn Prozent seiner Wirtschaftsleistung an die Front. Die Alternative aber, nichts zu tun oder gar die D-Mark wieder einzuführen, wäre für Deutschland die eigentlich große Katastrophe."

    In which it says that the sums being chucked around to "save" the Euro are a big experiment but doing nothing or even bringing back the Deutschmark will be a bigger catastroph.

    So basically its the Henk Paulson moment. Doing the deed is less bad than doing nothing!!!!

  21. I guess we're getting more spending, 1 way(QE)or another(war)? All to hide banker failures...un friggin believable!

    'Dictator' Putin May Be Nervous After Qaddafi Death, McCain Says

    Read more:

  22. Judge Napolitano on the “Folly Of The Fed”

    Must-watch clip from the only news/opinion show I try to catch every night, Judge Napolitano’s Freedom Watch on Fox Biz. Mr. Napolitano does a great job explaining the fundamental flaws with the current banking system.

  23. I have been trying to know why the dollar rate is rising and why is the rupee value falling? When will all these get over and India will have a better economy? Please share your ideas with me if you are aware of it.