With the world re-entering a period of greater economic instability, with the central banks painted into a corner, with global stocks looking weaker by the day, the price of gold is starting to shine again.
The yellow metal has recently hit all-time highs priced in a number of world currencies (the dollar not among them…yet).
Is this a short-term result of ‘risk-off’ fever as the markets have stumbled, to be undone during the next rally in stocks? Or are we seeing the beginnings of a more fundamental re-pricing of gold (and silver), as investors wake up to the currency risks created by more than quintupling the world money supply within less than a decade while simultaneously buring the economy under trillions of newly-minted debt?
Craig Hemke, better known by his nom-de-plume, Turd Ferguson, explains why gold looks like it finally has a brighter future ahead:
Gold and silver aren’t priced through the Exchange of Physical Metal, but through the Exchange of Derivatives. They really have no link to physical metal.
People are puzzled all the time about how in the world can the ratio of the price of gold to silver be 90 to 1, when historically it has always been anywhere from 10 to 15 to 1 based on the amount of physical silver allegedly in the ground versus physical gold. I will tell you why it is 90 to 1: it’s because you’re not pricing it off of the physical supply anymore. You’re pricing it off the supply of these derivative contracts instead.
If anything demonstrates how perverted the system has become, it’s the gold and silver ratio.
Our expectation – and we continue to wait for it – is a breaking point with all of the leverage, the re-leverage, the re-hypothecated, the unallocated accounts, all the alchemy that has been done by the banks to create all these different exposures and forms of exposure to a market rather than the market itself. Once that finally is forced to unwind, that’s when things are going to get really interesting.
In the meantime, everybody that bought physical gold and silver — myself included – in 2010, 2011, 2012, the conditions that led us to think precious metals were great hedge have not changed. In fact, as you and I have discussed, conditions have only gotten worse. The systemic imbalances have only become more extreme. Yet, because the price has gone sideways for gold for the last six years — admittedly there has been a stinging opportunity cost for the cash you put in gold and silver over the last seven or eight years. But the conditions that led you to buy them have not changed.
Now that we are at the point where we are today, when the tide of confidence in the Central Banks is ebbing, we may see a runup in the dollar price of gold and silver again pretty soon. Look at other currencies around the world like the Australian dollar, Canadian dollar, the Indian rupee, the Turkish lira. The all-time highs for gold priced in those currencies are being made now. It’s just not happening in the dollar. Yet.
But it will be the dollar’s turn soon enough. That is what I keep trying to remind people of. To keep reiterating that nothing has changed macroeconomically, or from a financial system standpoint. The reasons that you bought gold and silver in the first place have not changed.
Click the play button below to listen to Chris’ interview with Craig Hemke (47m:35s).