Dan Amoss

There’s a plausible path to $10,000 an ounce gold. And it doesn’t require a breakdown in civil society…

Speculators see central bankers as modern-day superheroes, able to push markets around with a single phrase. In the minds of most investors, Ben Bernanke, Mario Draghi and Masaaki Shirakawa might as well be wearing tights, masks and capes. These superhero central bankers continuously swoop down into the financial markets to defend them from downticks…and to insure that they always deliver capital gains.

The reality, of course, is that these superheroes are frauds. They have no superpowers…other than the power of mass delusion. The powers of Mario Draghi and the other central bankers in Europe are waning. Excess debt is like kryptonite: Each new wave of printing has less impact on markets. As the popular phrase goes: “This is a solvency problem, not a liquidity problem.”

In other words, new money supply cannot restore health to sick loans and government bonds. The only way to restore solvency to the system is to deflate the economy or slash the amount of debt in the system through mass bankruptcy.

Or is there another way? Is there a “reset button” that central bankers can push (with the approval of political leaders) that would restore balance to the system?

We know central bankers would never want to deflate the economy or crash the value of debt, which would destroy the banking system. So how about inflating the money supply to dilute the value of debt? All in one fell swoop?

Right now, central bankers are diluting the value of debt very slowly by pushing interest rates below the rate of inflation. Some call this “financial repression.” It’s an unspoken policy that has many negative consequences. What is an alternative, since all attempts to “fix” the current system with more borrowing and printing are failing?

How about the classical gold standard, which stands out as the least flawed of all the systems we’ve tried. Each nation could choose to peg its local currency to gold at a price that allows for enough growth in bank reserves to greatly reduce the burden of public- and private-sector debts.

Re-pegging a currency like the US dollar to gold at the current price (about $1,550) has its pitfalls. Most notably, it would not deleverage an overleveraged banking system. But re-pegging the dollar to something like $10,000 an ounce might do the trick.

Hedge fund managers Lee Quaintance and Paul Brodsky from QB Asset Management wrote a fascinating outline on the potential reintroduction of gold into the monetary system, while simultaneously implementing what one might consider a debt jubilee. I recommend reading the entire outline. Zero Hedge posted it at this link. QB explains the mechanics of how it could work in the US:

Using the US as an example, the Fed would purchase Treasury’s gold at a large and specified premium to its current spot valuation. The higher the price, the more base money would be created and the more public debt would be extinguished. An eight-to-10-fold increase in the gold price via this mechanism would fully reserve all existing US dollar-denominated bank deposits (a full deleveraging of the banking system).”

Below is what the remonetization of gold would look like in chart form. The yellow line would rapidly approach the blue line. And the blue line will keep rising as we see further growth in the money supply. QB’s “Shadow Gold Price” divides the US monetary base by official US gold holdings. Policymakers, who always feel the need to manage something, would appreciate that this is the same formula used during the Bretton Woods regime to peg the dollar at $35 per ounce. In other words, the Shadow Gold Price is the theoretical price of gold after the Fed inflated the supply of dollars to a level that would cover systemic bank liabilities and then re-pegged the dollar to gold. Behold the path to $10,000 gold:

Shadow Gold Price

This path would weaken the economy-sapping effects of debt created since President Nixon closed the gold window. It would transform a debt-based currency into an asset-backed currency. No longer would one ask the unpleasant question “What backs the dollar?” and come away with even more questions (and a headache). Right now, the dollar is backed by Treasuries held on the Fed’s balance sheet, which are in turn backed by dollars, which are in turn backed by faith in fiat money — i.e., nothing!

QB’s monetization scenario would impose losses on certain parties as the reset button is hit, but unlike most of the policy prescriptions we’ve seen lately, it seems to solve more problems than it creates. Most notably, politicians could argue that this reset would involve “migration of value, in real terms, from leveraged assets to unleveraged goods, services and assets.” Wage earners would be winners relative to asset owners, because “stable to higher nominal asset prices would require even higher nominal wage and consumable pricing looking forward.”

This scenario argues for holding some shares in producers of physical commodities (especially gold miners), even if it feels like we’re in a deflationary environment. A gold standard, after a one-time debt monetization, would make for a more-balanced, efficient global economy less prone to violent booms and busts.

As an added bonus: Central bankers would no longer be viewed as superheroes! Just meager servants, pegging the money supply to gold and letting the free market determine the price of money. After all, when in history has central planning worked better over time than the free market?

We can hope the central bankers of the world stumble their way to a solution like that proposed by QB Asset Management before they inflict even more damage to the foundation of the global economy. Unfortunately, conditions may have to get much worse in financial markets, banking systems and economies before such “outside the box” ideas are considered. A defensive portfolio with exposure to gold and other real assets seems like the right mix in today’s environment.


Dan Amoss
for The Daily Reckoning

Dan Amoss

Dan Amoss, CFA, is a student of the Austrian school of economics, a discipline that he uses to identify imbalances in specific sectors of the market. He tracks aggressive accounting and other red flags that the market typically misses. Amoss is a Maryland native, a graduate of Loyola University Maryland, and earned his CFA charter in 2005. In spring 2008, he recommended Lehman Brothers puts, advising readers to hold the position as the stock fell from $45 to $12.

  • http://thepeakoilpoet.blogspot.com/ The Peak Oil Poet

    if oil and gas productivity climbs substantially is it not likely that the gold price will do what it did after the oil shocks of the 70’s?

    Gold has been going nowhere for some time while the world tries to figure out if it global growth is constrained by energy availability

    the moment that the net belief is that growth is unconstrained for the foreseeable future gold is likely to crash to a 1/10th of its current price

    don’t you think?


  • Wags

    If the currency was tied to gold the government couldn’t print as much as it wanted. So don’t hold your breath. Hah!

  • Tony

    “It is very important to say that if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there is, I think, absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy.” – Ben Bernanke

  • Glenn

    Gold at one tenth its current price will never be seen again. And if it is it would only be in the manipulted paper markets and you couldnt get the physical metal anywhere near the fiat figure. Poet your kidding yourself.

  • Rusty Fish

    Trending .. inured to .. habit to culture. Let’s build castle in the beguiling air.

  • adane

    Oh, yeah, one more thing, the government confiscates all private gold. Now we have the perfect solution.

  • http://n/a Kangaroo

    History does not and has not changed in our time . There is a purpose in that and a greater power than we have met , behind it .So go with the flow as it is think sensably, and follow with your hard earned, good luck to all

  • reeyaz

    If the dollar was pegged to gold [as it was and should always be],how would we finance our empire with its wars all over the place? Only soldiers with an unshakable faith in God sacrifice their lives for no monetary gain.Which American soldier is willing to sacrifice his|her life for no monetary gain? They cannot see,though not blind,beyond the dollar.The dollar is running around like a wild animal with no master.Gold always was and will always be its Master.

  • jj

    so why not rack up twice as much debt and peg the dollar to $20,000 gold! where does this all stop?

  • imdaad

    $1 to the ounce, $1000 to the ounce,$10,000 to the ounce or even $20,000 to the ounce;it will remain one ounce.

  • FNES

    The fed already owns the gold. The Treasury, and hence the citizens, own zero gold. Look at the Feds balance sheet on their website.

  • CT

    More gold BS.

  • http://One D White

    Our society is becoming more trade and barter oreiented. When the day comes, and it will come, I would rather be tradeing gold and silver for food and water than cotton paper with a promise behind it.

  • Ames Gilbert

    The road to $10,000 gold will be lined with the 1% who had inside information before this scheme was implemented. Just like bank rescues, TARP, QE 1->>infinity, etc., etc. The rest of us will give up the last of our wealth to ensure they and their heirs are tops in the new feudal system. A well worthwhile sacrifice for our betters.
    Such a good idea!

  • Michael Cardoni

    I have invested inover 300k in gold bars, and am considering selling. Any advice to what is the best way to do so? Any suggestions would be greatly appreciated.
    Michael Cardoni

  • Michael Cardoni

    Michael Cardoni said
    I have invested inover 300k in gold bars, and am considering selling. Any advice to what is the best way to do so? Any suggestions would be greatly appreciated.
    Michael Cardoni

  • Keith Mc

    Michael Cardoni:

    Will you take a check? =]

  • Orren

    Could the world’s economy ever try honesty
    plain and simple?

  • http://livewest.ca Filip

    I like your comment Kangaroo. I believe we are just going through one of many phases to come in human evolution. This is the industrial boom phase coming to a close. What’s next? Only time will tell, but I don’t think for a minute that civilization will be wiped out by sovereign, or any other kind of monetary defaults.. that is absurd! No matter how bad the fallout, people will eventually reorganize and go into the next phase… this is just a ‘blip’ in the time-line of the human race no?

  • http://pennystockjournal.blogspot.ca/ Ace

    Very good comments particularly since we have seen a bit of a reversal off a bottom in gold.


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