Friday 20 December 2013

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 1/330th or so of a CRB basket. Today we can see that the dollar is valued at 1/280th 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.


edwardo_62 said...

I actually think that a reval is not only fairly close at hand, but we can put a time frame on it based on what is happening in the mining space. As you know, gold mining provides most of what passes for the physical gold flow. Now that the paper gold price is trading below the cost of production, at least by most metrics. we have a sense of how much time must pass before production gets massively curtailed. To cut to the chase, it looks like twelve to eighteen months before the production from mines falls off the proverbial cliff. I don't by any means think " the world" is going to wait for that condition to fully manifest before it responds in dramatic fashion. It's 1999 redux, except the condition of the world vis a vis the $IMFS is, of course, vastly different.

DP said...

Agreed. But isn't "vastly", slightly understating the precariousness of the situation? :D

edwardo_62 said...

Yes, a lamentable penchant for understatement got the best of me. Now, in the meantime as I work on that flaw, I was wondering if you are at all interested in making the trip to Edinburgh-I wouldn't blame you one bit if not- as I will be here with me brood until Friday and I would be delighted to spring for lunch if you have the time and inclination to get together. Drop me a note at and pardon my paranoia, but please erase this note on the off chance some troll might latch on to it.

Ein Gast said...

"If physical gold trading were to break free of derivatives,..."

that IF reminds me pretty much of Charlie Munger's "even IF it works..."

1.) seriously, why ever should it? Or what circumtances would enforce it to? IMHO, the only possibility is that future/derivative trading would be abandoned by worldwide legislation of the CB that would take over as exclusive market makers. Is that realistic? Just as realistic than tomorrow aliens land in your front lawn.
2.) A serious question to you personally: Would you buy an ounce of gold at "55000 of todays dollars", whereas it can be pulled out of the ground at the same time at "<<1500 of todays dollars"?
Happy holidays&Greets, AD

DP said...

1) I think would if/when the derivative instruments that people currently believe to be "as good as gold", prove to be far short of that. OK so you're saying "but the Western traders don't want gold, only price exposure to gold". But if the instruments you buy to get this exposure demonstrably fail to deliver to the physical buyers… the price of them will melt away to nothing, since the physical buyers will walk away to obtain what they want some other way.

2) I don't subscribe to Marx's labour theory of value. A thing is worth only as much as someone, somewhere, is prepared to pay for it.

Happy 2014 to you too.

DP said...

Example: iPad Air

Ein Gast said...

1.) Exactly, looks like people dont want gold just for it's physical form, since you can not drink it, drive it, nor surf on the internet with it. Some/most(?) want it to hoard it and maybe later sell it for cash again. So they buy it with paper to sell it for paper. There is simply nothing to argue about that. And lots of people just dont want to go through the "physical" process. Will there ever be a paradigm shift in people minds? NO!!!!1111 If the last five years of financial and political turmoil hasnt changed a thing IMHO nothing can. And even if: Let's assume all paper holders will be told: "Piss off, you are getting nothing!" That does not change "the value" of the remaining physical at all. Happend troughout history of hard goldstandard that banks go bust, still gold wasnt valued higher afterwards magically. Just think of somebody selling you forrest land in china on a nice paper certificate, but somehow it turns out that it is a scam, you got nada. Why the hell do you think that therefore forrest land in china is suddenly worth more?
2.) That's why I dont use Apple. Simple as that. But seriously: Look at it like that, just because some dumbass burns millions on some ugly balloon dogs, does not make them a store of value, that I would buy those from him, in fact, I wouldnt even spend a penny on a ballon dog, not even the yellow one ;)
Greets, AD

DP said...

+1 for "balloon dog? WTF?"

As long as Europe is far from energy self-sufficient, I can see them finding any way they can to ensure their supply lines will not be cut off.

While $IMFS can deliver gold for USD where it's needed, great. If/when that ceases to be the case, I am confident they will come up with a way.

Ein Gast said...

that gold<=>oil/energy passes no reality check at all as well anyway.

If anything about that Oil-Gold-Illuminati Eurogold stuff would be true, why on earth would Mrs.Merkel shut down all nuclear power suddenly (while smart Hollande keeps them running)?

"can deliver gold for USD where it's needed"
than tell me, who's stacking the gold for all that oil? Without any trace! And if these illuminati arent stacking, why bother with gold at all in the first place?

DP said...

Tradition. :)

Ein Gast said...

next attempt: Would you buy an ounce of gold at "55000 of todays dollars", whereas it can be pulled out of the ground at the same time at "<<1500 of todays dollars"?

DP said...

I still don't subscribe to Marx's labour theory of value.

But will buy 1/36th oz … which will have the same value.

Ein Gast said...

Marx labour theory of value is indeed not some universal scientific law.

When you wanna sell something, it is worth whatever somebody is willing to pay for. But in case you are not providing something unique, there is always somebody that will compete in terms of attempting to providing it cheaper in order to get the deal, and miners (as well as some weak hands, desperate housewifes...) are simply part of the game, even if you refuse to acknowledge. And when it comes to mining we are getting much closer to your dismissed labour theory.

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