On reflection

Consumer prices are not a global constant, but a reflection of the current state within each economy.

When an economy flags, consumer demand is tepid and, conversely, boom brings high demand.

Given they are managed with the goal of price stability, currencies also measure economic state.

Objective comparison of economic state (via currency proxies) requires a universal unit of account.

In the real world: consumer goods demand changes; currency values adjust; gold remains constant.

You may say gold demand changes, and I'd agree. That is a reflection of demand for other things.


^{Protect me from what I want}

Default?

US Constitution, 14th Amendment, Section 4: The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

The issue for the US government is not whether it can and will repay its current debts, which it absolutely must according to the Constitution as we see above, but only whether or not it can continue to increase its level of indebtedness without sacrificing the exchange value of its currency.

US government default, in nominal terms, is out of the question. It would be illegal.

55,000 dollars

For years, Freegolders have maintained "gold will reach 55,000 dollars in todays dollars".

What has not been said is "gold will reach 55,000 dollars".

Taking the CRB index as a (somewhat imperfect, but sufficient for our purposes here) proxy for the representation of what "todays dollar" is valued at — how much "real stuff" it can buy in the real (non-financial) economy — on any given day in the course of the last three years, the data charts like this:

What's my cost of living today?

i.e.: on this day three years ago, the dollar was valued at 1/330^th or so of a CRB basket. Today we can see that the dollar is valued at 1/280^th or so of a CRB basket.

Taking this view, of the CRB basket being a baseline of "real value" that we can measure things by to get an objective real world valuation of them, we can spin our view of the world upside down and see what the value of "todays dollar" was on each day of the last three years:

What's my dollar worth today?

Many people see the prices of "things" fluctuating in terms of a stable dollar that prices them all. We, however, can choose to see, as here, that after all it is really the value of a dollar that fluctuates — this is merely a matter of ones chosen perspective.

We can also look at the real world value of "todays gold" on each of those days:

What's my gold worth today?

What this shows us is that, yes, gold not only fluctuates in terms of its dollar price, but also in terms of its real world value… its purchasing power in terms of "other stuff" (rather than dollars). But, I hope you will agree with my assessment, the fluctuation is not wild over the years. In fact, if we happen to compare gold's purchasing power today with its purchasing power three years ago… it turns out to be broadly the same. You may at this point decide to go back and review the "What's my dollar worth today?" chart, above. If so, perhaps you were surprised, or maybe not, to realise that it turns out the same is not true for the dollar — its purchasing power today is such that it will buy more than it would three years ago… either in terms of gold or in terms of "stuff". Perhaps this is no surprise though, given, as we just established, gold's purchasing power has been essentially stable over the period… even as the world and his wife has watched the price of gold tumble.

Go dollar! No wonder "nobody wants gold", eh? But, getting back to the point of this post for now, rather than dwell on the fact that there has been deflation, despite all of Ben Bernanke's best efforts at making sure IT doesn't happen here…

What about "gold will reach 55,000 dollars in todays dollars"? Well, I think we can all agree that, according to the publicly available data as charted above, three years ago $1 would have bought roughly the same amount of gold as it would today. And three years ago that same amount of gold would have roughly the same amount of purchasing power in terms of CRB baskets that it would today. If physical gold trading were to break free of derivatives, to go through a reset in its perceived value due to derivatives failing to deliver physical gold to anyone and everyone who demands it, today… to the equivalent purchasing power of "$55,000 just before Christmas in 2011"… the third chart above, plotted on Monday when the closing data was in, may have to look quite a lot more akin to something like… this?

Happy Holidays?
Depends how you're positioned right now.

… The only problem being, the data in this chart is from the market for gold derivatives. The value of which will be going the opposite way. Oops!

Perhaps this helps clarify for some that Freegolders are not trying to put a specific future dollar price on physical gold, but rather attempting to convey the magnitude of the revaluation, in real terms, that gold must go through as it breaks free of derivative trading.

When the predominantly-derivative gold market of today will fail to deliver as promised, who knows? We may indeed be all long dead… or, just perhaps, it may be sooner than that.