THE HANDSTAND

april 2005


Golden Escape Pods

 
Edgar J. Steele
March 25, 2005

 
 "By this means (fractional reserve banking) government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft."
  ---The Economic Consequences of the Peace, John Maynard Keynes (the father of Keynesian Economics) (1920)

What is gold really worth today? While the accurate answer simply is whatever someone will pay for it, there are historical measures which indicate that it is seriously undervalued. Could it stay that way? Only if the central bankers are correct in what they tell you about gold and also are correct that economic depression and monetary hyperinflation are things of the past. Even so, the gold market will require ongoing rigging, because there are a great many people around the world who quite simply don't believe the central bankers - and with good reason.

I'm going to go through a quick analysis of the value of gold, one of many ways in which a value can be derived, I might add. It almost certainly will require you to read through it a few times to get the rift, because it is not the point of this article to be an exhaustive treatise on gold or investing, after all. Rather, I wish only to construct an argument for gold being used as a defense against the economic war being waged against us.

By 1945, 63,570 tons of gold had been discovered and mined, worldwide. In 2003, 144,092 tons existed, a 127% increase. Very little gold actually is used industrially or otherwise (as in dental work), unlike so many other precious metals, so most of the gold ever discovered still exists and is sitting in someone's vault.

In 1945, 68% of all gold was in central bank vaults. In 2003, 12% of all gold was in Central Bank vaults.

The total outstanding value of gold outside bank vaults in 2003 was about 100 times the total outstanding value of gold outside bank vaults in 1945.

In 1945, the total money in circulation throughout the world was about $300 billion. In 2003, the total money in circulation throughout the world was about $30 trillion, a one-hundredfold increase, which itself suggests a proper price for gold in the area of $3,500 per ounce (100 x $35).

Expressed as a pro-rata portion of the total money in circulation in 1945, each ounce of gold then in existence accounted for $147.48. Expressed as a pro-rata portion of the total money in circulation in 2003, each and every ounce of gold then in existence accounted for $6,506.26.

Some would call the analysis done at this point and claim that gold is worth between $3,500 and $6,506 per ounce. I am not one of those, some of whom use alternate analyses to derive values of up to $20,000 per ounce.

By the way, some actually suggest that the correct analysis is to divide the total money supply by the number of ounces of gold in central bank vaults, since that represents the extent to which outstanding money is "backed" by gold. In that case, the per-ounce value of gold turns out to be an incredible $54,218.94. However, this neglects to calculate a similar figure for each country with money outstanding, then weight each result appropriately. Some countries, such as America, reportedly have almost no gold left in central bank vaults, though none will allow inspections.

America's Consumer Price Index (CPI) in 1945 was 18. The CPI in 2003 was 183, representing a 10X increase.

America's Gross Domestic Product (GDP) increased by 9X from 1945 to 2003, after adjustment for inflation (CPI).

The world's money supply, expressed in dollars, increased 100X from 1945 to 2003. America's broadest definition of money, M3, increased by about 36X during the same period.

Note that the money supply increased significantly faster than did either GDP or the CPI or, for that matter, America's population, which has doubled.

The Dow increased by 10X during the same period, too.

While American post-WWII productivity increased by about 3X on a per-capita basis, the money supply (M3) increased beyond productivity by a factor of ten, which squares with the CPI increase. When I was a child, those purple first-class postage stamps cost 3 cents, but today they are more than ten times that amount, an external validation of our statistical analysis. I recall today's $1 ice cream cones costing but a nickel a scoop.

In other words, our money has been robbed of 90% of its value in the last fifty years by excessive expansions of the money supply, with most of the loss taking place in just the last 30 years. Meanwhile, the per-capita supply of gold actually has declined by about 40%. What's the problem,
you might ask - after all, gold went up from $35 to $330 in the same time period, approximately the amount of inflation. Here's the problem: at both points, the price of gold was being artificially constrained by the central bank, both directly and through its surrogate, the American government.

The real question is what happens to the price of gold if the bank loses control of it and, particularly, if the dollar swoons significantly, as seems to be occurring at the time of this writing.

Executive Summary
Yes, this is the way financial analysis is done. Assemble all the relevant statistics, analyze them with statistical devices like regression analysis, adjusting for extraordinary events and external manipulation. Move them around on the table before you, trying the pieces in different positions, like a jigsaw puzzle. Eventually, a picture emerges. Only then is a rationale developed to fit the result that one thereby intuits.

What I have done herein is a very clumsy approximation of that procedure, if indeed it can be dignified with so organized a word as "procedure." Nevertheless, a picture has emerged and I am pretty confident of its parameters.

Clearly, the current price of gold represents about the lowest it ever has been, when adjusted for the various factors we have considered. Therefore, it represents an eminently safe vehicle for getting through the coming economic meltdown. The wild card is its up side, which could be significant. It seems safe to say that gold will see some serious swings, but that they will be upwards and almost certainly never again below the current value.

In Roman times, an ounce of gold could buy you a good suit of clothes, it is said. The same was true in 1929. Today, a good man's suit will cost between $1,000 and $2,000. By the "suit theory" alone, gold has a long way to go.

If gold were to take over the job of money in today's economy, all other things being equal, its value most assuredly would go to somewhere between $6,000 and $10,000 per ounce. However, there are other vehicles of value that would also pick up the slack, such as silver and platinum and backhoes and seed corn and...well, you get the idea. But gold needn't step into the breach; the dollar need merely abdicate its position as the world's reserve currency, as now seems inevitable. Gold will be revalued to the levels that it would assume if it and the other precious metals were the only medium of exchange, even though some form of fiat money inevitably will be thrown into the breach.

I spent a lot of time in my earlier life analyzing stock and bond price movements, then financial statements from both a corporate treasury standpoint and that of a bookkeeper and an auditor. I learned that, like everything else, accounting and finance is an art. I cannot articulate precisely how I calculate the ultimate value for gold that I have, but Ifeel pretty good about its validity. The danger of exact formulae is in the likelihood of error creeping in. Broad-brush analysis, such as this, keeps the entire forest firmly in view at all times. Yes, I could throw some calculations down here and derive the very numbers I am about to give you, but in honesty that would be contrived. Contrived, that is, as in precisely how financial analysts always have plied their trade.

I believe that gold will spike to as much as 3 or 4 thousand dollars per ounce in terms of today's dollar, no later than 2010 and probably much sooner, then settle in at around $1500, in terms of the dollar's 2005 purchasing power. I see $1000 as the likely bottom of gold's ultimate range, which itself provides a profit potential in excess of 100% over today's price.

Checking Our Work
A "sanity check" of my valuation can be made by updating the price of gold from some past point in time to today, using something that reflects the general decline in the purchasing power of the dollar. The problem is in getting accurate figures. Roosevelt pegged gold at $35 in the 1930s and kept it there through the end of the war. Many believed that to be a fair price at the time. If so, then simply multiplying $35 by the 36X increase in the M3 money supply yields $1,260 per ounce. Pretty close.

Another "sanity check" can be derived from the price of gold in the mid 1970s, which ranged around $150 per ounce, probably a pretty good free-market-driven price from just prior to the massive inflation of modern times. The Dow-Jones Average bottomed out in 1974 at about 575 and
likewise probably was a pretty good derivation of free market forces. Today's Dow is hopelessly bloated by the monetary inflation of the past several years, so cannot be used directly. Fundamentals dictate, via traditional price-earnings ratios, a proper level today for the Dow of about 4,500. This can quickly be calculated simply by dividing the historical "square-up" corporate stock price-earnings ratio of 12 by today's average price-earnings ratio of about 28, then applying the resultant fraction to today's Dow.

Fundamentals, remember, are what square up stocks with other forms of investments. Applying our adjusted increase in the Dow of 683 percent to the 1973 gold price of $150 yields $1,025, a conservative figure in that the earlier period's bottom for the Dow is used in the calculation. Using other Dow figures from the 1970s produce today's gold value as ranging up to around $2,000 per ounce.

Since gold will, as pointed out above, likely spike well above $1,200, if one chose to bail out at, say, $3,000, then real estate likely will be the safest transition investment at that point, particularly if real estate values continue with the very recent deflation which now seems to be taking hold. If the stock market has crashed, as in 1932, then buying a bundle of penny Blue Chips could prove to be very advantageous in the long run. Staying in gold, of course, is the sure bet, just as always.

The Real Allure of Gold
Is gold safe? You bet. In fact, it looks to be one of the best investments around just now, with silver's fundamentals even better. But the central bankers don't want you to know that.

This becomes even more urgent if one takes the view, as do I, that we have seen America's "last hurrah," with other nations, particularly China, assuming the ascendancy in world financial affairs as we move into the future. Stripped of its value, the dollar likely never will recover. An emergency "escape pod" from the trap that the American economic system is becoming is a necessity today. Gold can serve as that escape pod.

(Excerpted from "Defensive Racism" (ISBN 0-9761259-0-0, ProPer Press, 2004) a book by Edgar J. Steele, who, in a former life, earned a BA in Finance, an MBA in Accounting and worked for a time as a Financial Analyst for a major firm.)


Copyright ©2005, Edgar J. Steele

 
Friday, March 18, 2005, 11:42:00 PM EST
Gold and Dollar Market Summary

    
Author: Jim Sinclair

Dear CIGA:
 
You can't fool Mother Nature and there are certain immutable truths in this world that you just can't talk your way out of. One of those truisms is that gravity will always bring you down. Gravity in this case takes the form of the systemic weakness of the US dollar. Talking your way out of a systemic weakness is the process of "spin" which this country has taken to a new level.
 
The question begs to be asked: Am I or other commentators smarter than the policy makers? Do we know something that major policy makers do not? Ego would like to say yes but reason argues for no. Therefore, it is reasonable to assume that those in charge know exactly what they are doing, why they are doing it, and what will be the end result of these actions.
 
I am convinced that we are in a major transition from one form of government and economics to another. To argue the merit of this transition produces no gain. So it's better to observe what is happening and adjust to this new environment in order to gain.
 
We know who the monied interests are in this world. History attests to the fact that major wealth is rarely separated from its roots. Wealth may decide to become less conspicuous but it usually increases rather than decreases. Do not believe for a moment -with the exception of a few rare cases - that huge fortunes are left to halfwits. The wits usually know which family members are halfwits and do not enrich them as a rule. They may be well cared for but the halfwits become "trust-a-farians." They can look at significant funds but can't touch them. The real money finds its way to those who will continue the line and that is not necessarily the family line.
 
So where is this all going? This analysis is an attempt to define the logical path that has been set in motion towards the new system of "Authoritarian Free Enterprise."
 
Spreading democracy around the globe is a laudable goal, assuming that one can find democrats to spread it to. The laudable premise requires trillions of dollars to be spent as well as many lives, but should it really occur the world will be changed forever.
 
But how you ask? My answer is a new world of Authoritarian Free Enterprise in which the rich get richer than Crosous, the Roman real estate operator, the Donald Trump of his time .
 
The US dollar is a technical  disaster regardless of any short covering rallies that occur from time to time. It is headed quite a bit lower and gold significantly higher for defined purposes.
 
I believe that when a dollar crisis is recognized universally sometime between 2006 and 2008 two things will occur that are foundational to the system of Authoritarian Free Enterprise.
 
1. All government entitlement costs will be reviewed and cut sharply - if not eliminated.
2. Gold will return to the world monetary stage via a form of Federal Reserve Gold Certificate Ratio - not tied to interest rates but to liquidity.
 
It is my opinion that Bernanke has set the stage for both number one and number two.
 
Reduction and practical elimination of entitlements will be one of the policies that will be seen as a means of shifting the triple deficits back to surplus. Gold in its role as a control item over world liquidity will be the second dollar-positive policy to sustain the gains of a US Federal Budget  as wars end and spending drops dynamically.
 
The question that should be asked is whether the conclusion takes place in 2008 or 2012? I favor crisis conditions first and a conclusion four years later.
 
Putin seized on the school crisis in Beslan to turn back the hands of time and implement his own agenda as a form of Authoritarian Free Enterprise. The former head of the successor to the KGB , now president of Russia, has no interest in acquiring land by force, but rather huge amounts of money by stealth.
 
The KGB operatives who stayed loyal to their boss are the mayors, governors and legislators now in Russia. The purpose of Yukos was to bring the Robber Barons in Russia back into line. Fear is the key to keeping the troops in line during this transition. Who knows what is next, maybe Spooky Molder and Hanger 51?
 
The conclusion to all this is simple. Gold is going to $1650 and the US dollar as measured by the USDX to .5200. Therefore, where gold is concerned continue to sell 1/3 into strength and buy it back on weakness. The opposite is, IMO, the most successful way to deal in the US dollar. You need only learn how to use a straight edge ruler in order to prosper with that strategy.
 
Jim Sinclair's Commentary:
 
Will this initiative constitute the beginning of the review and elimination of entitlements?

Greenspan Says Not Enough Is Known About How Well Development Initiatives Work
By JEANNINE AVERSA
The Associated Press


Mar. 19, 2005 - Better research is needed to gauge the success of programs that aim to lift communities out of poverty and improve housing for the poor, Federal Reserve Chairman Alan Greenspan said Friday.

Despite nearly four decades of federal and other programs to bring this about, there is a dearth of data on what strategies have and haven't worked, the Fed chief told a community development conference meeting in Washington.

"If communities are going to be empowered, they need hard evidence of their successes and, yes, hard evidence of their failures, which, as you know, can point the way toward success," Greenspan said in prepared remarks.

More...

Jim Sinclair's Commentary:
 
A price crisis is when the price moves so high as to impact the living standards of the many. A supply crisis exists when the lines to the gas pumps go around the block. This is a price crisis, not a supply crisis.

Gasoline prices hit nationwide record Fri Mar 18, 6:13 AM ET
By James R. Healey and Barbara Hagenbaugh, USA TODAY


Gasoline hit a record nationwide average price of $2.055 a gallon, motorist club AAA reported Thursday, creeping up 0.2 of a cent overnight to eclipse the previous high of $2.054 last May.

Brace for another 20-cent rise in the next 75 days, says Tom Kloza, senior analyst at Oil Price Information Service, reflecting the opinion of other analysts.

"We haven't seen the top. Sometimes I get two price-change alerts a day" from his fuel supplier, says Sam Turner, who operates 134 convenience-store gas stations in Georgia, Tennessee and Alabama.

The zooming price of crude oil, from which gas is made, and the switch to costlier summer-blend gas are behind the bad news.

More....

Jim Sinclair's Commentary:

When a price crisis occurs rather than a supply crisis in energy, the rich get richer than Crosus, and the poor have their gene pool culled.

Today's market in Gold and the US dollar
 
Click here to see the USDX dollar action today.(Sorry about this I have not got the hyperlinks, ed.J.Braddell). Take careful note of how the USDX has traded since rallying off the new line in the sand of .8150. Note how early US strength has been sold every day.
 
What you are seeing is the continued diversification out of the US dollar. This type of action makes my point that all dollar shorts covering rallies will fall short of their potential price objective and collapse back into a bear market well ahead of projected time series. All that is due to the awful fundamental conditions brought on by the triple deficits.
 
Gold dutifully mirrored the US dollar, weakening as the dollar improved and strengthening as the dollar was sold later each day.
 
Click here to see RGLD(Sorry about this I have not got the hyperlinks, ed.J.Braddell).
 
Royal Gold, whose business plan makes money from day one, is beginning to reflect the superiority of the royalty concept as oppossed to any other way of doing business in the gold world. I say this because cash flow is the bottom line of any business.

Yes, ounce counting will benefit the percentage juniors and junior producers but that requires an acceptance of the reality of significant inflation sure to come. The major producers who have hedged continue to do so if their development loans are non-recourse. The only difference between what was and what is, is that the stockholders no longer see the derivative. That is because the derivative is embedded in the loan agreement for the development of the new production.  So it is not on the books of the major gold producer.

Juniors doing percentage deals with majors who  finance operations this way have a derivative risk particular to the jointly owned property under development. At $1650 gold, this is going to be really bad news.
 
Royal Gold is free of such concerns. Who cares who owns the mine because royalties are still flowing to the royalty company which has no responsibility towards the development loan or is the banker who ends up owning the production and plant anyway.
 
RGLD, which lead all the gold shares in the past, will in time do so
again. 


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