Dan Amoss

The global monetary system rests on a fragile foundation of trust. But thanks to the regrettable actions of central banks around the world, especially those of the Federal Reserve, that foundation of trust is rotting away beneath us.

All hope is not lost, however.

A golden “reset” button could strengthen the fragile global monetary system. It would require reintroducing some sort of gold standard. Holders of gold own the crucial ingredient for a reset. And holders of gold mining stocks own in-ground gold supplies that could form the foundation of a future monetary system.

Since the end of the gold standard, debt has skyrocketed. Public- and private-sector debts amount to tens of trillions of dollars. Debt weighs down the economy. Pushing interest rates down to zero for years and years is no real solution. Look at Japan! Its economy has been half-alive for 20 years.

Writing off debt is the only way to restore solvency. The economy would be unshackled from its burden of servicing debts. But there is a way to slash debt without resorting to a deflationary collapse. It involves restoring the gold standard at prices of $10,000, $20,000 or even higher.

In a recent investor letter, QB Asset Management explains how an inflationary reset button could slash the real value of the rapidly growing US national debt:

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-tenfold 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).

QB maintains a chart of the shadow gold price (SGP). The SGP uses the Bretton Woods calculation for determining the exchange rate linking gold to the US dollar. The calculation is base money divided by US official gold holdings. Here is QB’s latest chart. It includes projections of the base money supply through June 2015, assuming the Fed prints $85 billion per month. The SGP soars to $20,000 per ounce:

If the ratio between the SGP and actual gold prices stays constant, gold could be $3,400 per ounce by 2015!

If gold rallies anywhere close to $3,400 by 2015 (QB Asset Management’s scenario), quality gold mining stocks could rally by several hundred percent.

You could consider adding some of the midsized gold miners in the table below. The estimates are from RBC Capital Markets.

Investors will pay a premium for gold miners with consistent execution and low, stable cash costs. The companies in the table below, courtesy of RBC Capital Markets, have these qualities. Stable cash costs should translate into good stock price performance.

Let’s assume QB Asset Management’s scenario: a steady doubling in gold prices over the next three years. Most miners in this list would produce vast amounts of free cash flow in 2014. Any rise in gold prices above cash costs would flow straight to the bottom line. The most shareholder-friendly companies, like Agnico-Eagle Mines, for example, would probably return this cash to shareholders, rather than reinvest in the ground when project costs are too high.

Such a scenario would grab the attention of mainstream investors. Investors who now ignore gold stocks would fall in love with them. High-quality gold stocks remain very cheap and will one day become expensive. Meanwhile, dividend yields pay you to wait.

Regards,

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. Amoss is our macro strategist and guardian of The 5 Min. Forecast PRO.

Recent Articles

Why the Fed Will Launch Another Round of QE

Richard Duncan

Ben Bernanke introduced the world to the concept of "quantitative easing" back in 2002. It was an "unorthodox plan" to save the economy from the horrors of deflation. But the monstrous economy it has actually created is in some ways far worse. And as Richard Duncan explains, it's not going to end any time soon. Read on..


How to Safeguard Your Digital Currency

Dominic Frisby

While the technical details of Bitcoin may intimidate the novice, they shouldn’t keep him from getting in on a digital currency revolution that -- while taking different forms -- isn’t going away. How do you get the simplest, easiest-to-act-on tips about how to invest, safeguard and grow your digital wealth? Dominic Frisby has more…


Solar to Save the World, Ebola to Maim it

Chris Campbell

The duality is stark. In one hand, we have an energy renaissance underway, in the other, a virus is threatening to wreak havoc on the markets and, potentially, your life. Nothing we’re currently doing to fight the Ebola virus will work in 2014, say the researchers. Nothing we’re currently doing will beat it in 2015, either. We need a new game-plan. Read on…


How to Profit From the “Cycle of Hype”

Greg Guenthner

Lose your shirt in 3D printing stocks this year? Don’t kick yourself. You’re not alone. (Okay, kick yourself a little if it’ll make you feel better.) You need to make sure you don’t lose your 3D-printed shirt in the next tech craze. Because there will be a next time. Look, it’s really not your fault if you got taken for a ride on 3D stocks. Greg Guenthner has more...