GOLD – The Yellow Metal Is Closing in on $700. But It’s Still Cheap!
Gold’s Relentless Rise Is No Bubble. We Should Not Be Surprised.

The price action of gold has defied all the pundits and virtually all the gold bugs too. Gold should correct, we are told. On Saturday, April 21, at the Chicago Resource Conference, Joe Granville told us that gold was in a parabolic rise and that it would soon correct to $581. But rather than correct this past week, it started to close in on $700 per ounce. Joe may still be right. We could correct to $581. But then again, I’m not sure gold will correct to anything like normal technical analysis suggests it should.

One reason I believe normal technical analysis may be unusually worthless now for gold is because past manipulation of the gold price by the central banks and the bullion banks has so badly distorted gold to the downside that its current upward move is akin to the physics of a volcano breaking through the earth’s crust. Gold was held far below its equilibrium price for many years by an establishment that orchestrated a declining price to encourage the public to borrow and spend way beyond our means. As central banks around the world trashed the gold price by both announced and clandestine dishoarding of gold, the gold price declined way below its equilibrium price.

The lower gold prices orchestrated by central bankers were a key element behind the so-called “Clinton Strong Dollar Policy.” And I recall so clearly. The seeming dollar strength during those years, which saw the dollar gaining vis-à-vis gold and other currencies during the 1990s, caused people like Steve Forbes and Larry Kudlow to call for Alan Greenspan to print more and more money. Forbes and Kudlow were and still are totally clueless. They don’t really understand that gold and gold alone (with a partial exception of silver) is money. These Republicans along with Milton Friedman, who pretended to be a free market advocate, did more harm to our republic than any Democrat ever did! Greenspan did understand what printing money would do to our republic. But for the sake of self-aggrandizement, he printed and printed and printed, and his bosses, the invisible power behind the throne, rewarded him for it. Do you wonder why Mr. Greenspan was knighted by the Queen? Wonder no more!

“Helicopter Ben” Taking the Dollar Toward Zero Value Like All Fiat Currencies Before It

e line on the chart above represents the U.S. money supply as measured by M-3, from 1913 (when the Federal Reserve was forced on the American people) through to May 2006. (Please note that from March 2006, when the Fed stopped reporting M-3, your editor has imposed a growth rate of M-3 from that time forward equal to the rate of growth of the Global U.S. Dollar Liquidity statistic, which is one of seventeen items in our Inflation/Deflation Watch.)

The pink line shown on the chart above represents the market value of gold (measured in dollars) held by the Treasury. You can easily see that the amount of M-3 has skyrocketed, starting in the early 1970s when Nixon unilaterally caused the U.S. to default on its obligations to pay an ounce of gold for every $35 in paper money presented to the U.S. Treasury. When the global monetary system was no longer backed by gold, there was no longer any discipline built into the system that served to keep money supply growth within some reasonable rate of growth. At the same time, the politicians and bankers have not found a way to print gold. Gold must be won from the earth and as our readers know very well, mining gold is a very laborious and difficult task.

With politicians and central bankers having succeeded in giving themselves a legal right to steal, that is exactly what they have done by issuing huge amounts of money. What you need to realize is that gold, as well as all manner of other commodities, is not really rising in price. What is really happening is the dollar is declining in value because of the explosive increase in their supply, as noted in the chart above. As with any market, when the supply of the item in question rises dramatically, its price must plunge. The U.S. dollar enjoys a lot of advantages most currencies do not enjoy. But the dollar too has its limits. It cannot be printed in infinite quantities and remain of value. What is happening now as the world catches on to the fact that the dollar is heading toward its intrinsic value—zero—is that they are heading for real money, honest money—gold (and silver)—in an attempt to retain their wealth. With the exception of readers of this and other gold-oriented newsletters, most Americans are totally clueless about what this rise in the gold price is all about. Gold is money and it retains its value, while paper or fiat currencies always self-destruct. What I think we are seeing now is an acceleration of the destruction of the dollar.

The Fundamentals Suggest at Least $3,000 Gold

How high can gold go? That is a question that is being asked more frequently as gold continues to surprise on the upside. As one who is only one year away from my 60th birthday, I have been around markets long enough to know that a secular bull market like we are experiencing now in gold goes much further than most people think. And I also know that when we enter a secular bear market, the culmination of that bear market is much deeper than can be imagined at its top, which is why I think the equity market in the U.S. still has a long, long way to travel to the downside. But is there a rational way to judge how high the price of gold could rise? I think there is.

Rob McEwen recently noted on ROBTv that the U.S. was the only nation that did not sell any gold during the 1990s. That is the official “truth,” although there is reason to believe that the U.S. may also have sold or swapped a significant part of its gold hoard. We know, for example, that James Turk uncovered compelling evidence via the Internet several years back that the U.S. swapped ownership of some gold held at West Point to the Germans, who then sold their gold out into the market. That factor, which did not decrease the reports of gold holdings by our government, combined with the fact that there has not been an audit of our gold hoard since the Eisenhower Administration, causes me to suspect that the U.S. holds less gold than it claims to hold.

But for the sake of argument, I’m going to make a highly dubious assumption for the moment that the U.S. in fact has all the gold it says it has, as it reported every week by the Federal Reserve. If the Fed has all the gold it says it has, how high would the price of gold need to rise to restore a normal value of the U.S. money supply relative to gold? 4 In 1913, when we were on the gold standard and when the Fed was forced on the American people, the market value of gold held by the Fed was $1.63 billion. The Money Supply (M-3) was $20.4 billion. In other words, this measure of money supply had an average “backing” of 7.97%.

From 1913 until 1971 when Richard Nixon took us off the gold standard, the average backing of M-3 was 10.34%. However, that average was taken higher by a major flow of gold into the U.S. during the Second World War when the U.S. proved to be a safe haven, as it was out of harm’s way. Also at that time, the U.S. was a rising economic power as China is now and where gold is reportedly moving now.

Given that we had a 7.97% backing when the Fed came into being and during the period of time when the world was on a gold standard, I’m going to assume for the sake of this exercise that the U.S. would need an 8% gold cover of M-3 if the world demands a return to the gold standard. Also, the last time there was a dramatic vote of “no confidence” in the dollar, in 1980, the year-end ratio of the value of gold allegedly held by the U.S. to M-3 was 7.95%. I think it is also worth noting that the average market value of gold to M-3 since 1913 to present, including the last number of years when the ratio was between 1% and 2%, was 7.49%. By contrast, at present, the market value of the gold the Fed says the U.S. holds is just 1.70%.

The chart above, which takes into account the amount of gold the Fed claims the U.S. holds, the current supply of M-3 (adjusted by growth of Global U.S. Dollar Liquidity), and the current price of gold, shows that despite the rise in the price of gold to just under $700, we are a long way from a historical norm. To restore the historical ratio of the value of gold held by the U.S. to the U.S. dollar money supply, the following would need to take place: (1) the U.S. gold supply would have to increase significantly; (2) the Money Supply (M-3) would have to contract significantly; (3) the price of gold would have to rise significantly; or (4) a combination of these three changes would have to take place.

Since it is virtually impossible for the U.S. to increase its gold supply (given its huge trade deficits and declining standard of living), and since contracting the money supply would certainly throw our over indebted economy into a depression, the only likely way this ratio will be restored is by way of a higher gold price. That then begs the question: How high would the price of gold have to rise, given: (1) a constant money supply, and (2) a constant gold supply? Let’s assume for the moment that the gold supply will remain constant and that the money supply will also remain constant (which it won’t—it is growing “like weeds in the tropics”), the price of gold would have to rise to $3,196! But keep in mind that as the money supply grows—and it is growing at a rapid clip—this value for gold will also need to grow.

How likely is it that we the world will demand a return to the gold standard? I think that demand is now just beginning to be “heard.” The voice of the global market is just starting to express a declining confidence in the dollar but with a coverage of only 1.70% with gold selling at close to $700, I believe we are still in the very early stages of a major gold bull market. Will we see a correction? Most likely we will, but I’m not totally convinced we will see anything like Granville’s prediction of $581, though I don’t rule that out. What we need to do is keep our eyes on the fundamentals as outlined above.

What history tells us is that we can expect our policy makers to push their paper currency scam as far as they can, until we reach a breaking point. Then you can look for these folks to do whatever they need to do to save their position of power and privilege. In 1980, the dollar was saved with high interest rates but the cost of that was the steepest recession since the Great Depression. Now with the U.S. financial system in such an over indebted, precarious position, a similar tight monetary policy would in my view quickly usher in the freeze-up period of the Kondratieff winter and deflationary depression that could make the 1930s event look like child’s play.

This then begs another question: Would the Fed ever orchestrate a similar tight money policy this time around? I think they might possibly do so if the issue at hand is the survival of the dollar and the preservation of America’s power in the world. For either a continuation of inflation or deflation we want to be ready—hence our Inflation/Deflation Watch, which continues to point us toward accelerating inflation, at least for now.

FUEL FOR INFLATION - Fed Remains Behind the Curve

We think there is little danger of any tip over to deflation as long as the Fed remains behind the curve. What I mean by “remaining behind the curve” was spelled out I think very well by Marc Faber, who was on Bloomberg TV this past week. Marc noted that interest rates are way too low relative to inflation. In other words, despite rate hikes, monetary policy is really easy (Bernanke is actively running his helicopters), such that while rates are rising the money supply is rising much too rapidly and rates are still so low that it encourages overconsumption and under-saving. Faber noted that you cannot live by “core inflation” but that you have to at least live by headline inflation, and in his opinion, you really have to add another 2% on top of that to record the real inflation rate since the government so badly understates the actual rate of inflation.

T-Bills paying 4.5% are taxed at 28%, which leaves you with 3.24% after taxes. The admitted CPI is around 4%, so if you add 2%, the real cost of living is closer to 6% while the money you lend the government in T-bills gets you 3.24%. You lose 2.76% in real purchasing power. This is the kind of unhealthy monetary policy we had in the 1970s that led to double-digit inflation and finally the stringent Volcker tight money policy that was required to save the dollar. I see inflation building in much the same way now, though perhaps much more dramatically so than in the 1970s, given the global shift of wealth toward China and India. And we are now much further in debt, not only to ourselves, but to foreign nations as well. Given all that, the big question in my mind is whether the dollar can be saved when the next global monetary system breakdown arrives, and if it can be saved, whether anyone in America would have the courage or desire to carry out another monetary tightening that would most surely result in a more awful deflationary depression than our parents and grandparents suffered in the 1930s. I don’t know, which is why I’m watching and reporting to you each week on this very important issue.

WITH RICHARD RUSELL’S PERSPECITVE ON GOLD WE AGREE – Be Careful Trading Out Of This Market!

How many people do you know outside of a core group of friends who own gold or gold stocks? Although gold is rising in value, here in New York City, you would not find one person in 1,000 who really is bullish on gold. And I could not get over the fact that the anchor person on Bloomberg TV the other day who interviewed Marc Faber thought the S&P had been a better investment than gold since 2001.   

To set the record straight, The S&P was at 1320.28 on January 1, 2001. As of this past Friday, even with a 6+% rise so far this year, the S&P 500 was at 1325.76. That amounts to a gain of 0.39%. By contrast, gold sold at $272 on January 1, 2001. It closed this past week at $682.40, good for a 150.88% rise since January 1, 2001. That gold has risen by this magnitude and that an anchor person for an established media operation like Bloomberg Television thinks stocks have outperformed gold since 2001 is an exceedingly bullish indicator for gold. It tells me that very few people yet are awake to the fact that we are in a major bull market for gold. In other words, there is lots and lots of buying left for the yellow metal.

As noted above, last weekend at the Chicago Resource Conference Joe Granville talked about the parabolic move for gold and he suggested we should see a retreat to $581. I don’t want to rule out a move like that. I have been around markets too long to rule anything out. But I think Joe may not be understanding the powerful dynamics and short covering by some of the major players that is going on now and how because of the suppressive forces previously, how this market may not be subject to the same correction dynamics as are normal.

Here is what Richard Russell said on May 3rd in “Richard’s Remarks” about this parabolic move in gold.

“I might add that I've seen many parabolic rises in my lifetime. They are almost always accompanied by great excitement, wide publicity, elements of hysteria. Not so in the current gold rise. This rise seems strangely quiet, discreet, subdued. This is a new kind of rise. It's a day-afterday rise with little excitement or even interest on the part of the public.”

In that same letter Richard noted how all the technical analysts and even gold bugs have been missing this move, which is why I agree 100% with Richard in his buy and hold strategy regarding gold investments in a secular bull market.

“The current action of gold is remarkably persistent. I'm convinced that, in its own mysterious ways, gold is telling us something. The smartest people in the land have been warning day after day that gold is overbought. The gold-bugs of yesteryear, basing their actions on the wild and erratic gold bull market of the 1970s, have taken their profits and are on the sidelines. The technicians have warned of a parabolic rise in gold and they too are out and on the sidelines. The gold shares have not kept up with the metal -- a non-confirmation, warn the market experts, who are on the sidelines. Yet gold continues its stubborn, almost "shocking" rise.

“So who's been buying gold? I think it's been large interests, probably central banks who are "diversifying" out of dollars, plus possibly limited buying by hedge funds -- and, of course, the people of India and China and the Mideast.

“Besides a forecast of coming inflation, what could gold be telling us? The thought of a dollar devaluation comes to mind. The IMF wants a dollar devaluation. The G-7 ministers want a dollar devaluation. The world's central bankers want a dollar devaluation. Is that what's in the wind? Is the Chinese renminbi too cheap or is the dollar too expensive? One thing is clear -- the US's massive current account deficits cannot continue without bringing on trouble -- domestic and international trouble. This, I believe, may be what gold's relentless rise is telling us.”

And, one day earlier on May 2nd, Richard Russell said the following:

“This bull market in gold is different than the 1970s bull market, at least so far. The advance this time is more powerful, more insistent, no huge corrections so far. I believe this is a more international bull market in gold. And I believe it's a more fundamental and more powerful bull market in gold. Also, there's that shadow again -- possible nationalization. Is this the new international thesis, ‘To each his own?’”

I believe Richard is right. This is a different gold bull market and most bullish of all is that fact that this is still a stealth bull market. I like that because it indicates we have a long, long ways to go toward $3,000 and beyond.

J Taylor’s Gold & Technology Stocks is published monthly as a copyright publication of Taylor Hard Money Advisors, Inc. (THMA), Box 770871, Woodside, N.Y. Tel.: (718) 457-1426. Website: www.miningstocks.com. THMA provides investment advice solely on a paid subscription basis. Companies are selected for presentation in this publication strictly on the merits of the company. No fee is charged to the company for inclusion. The currency used in this publication is the U.S. dollar unless otherwise noted. The material contained herein is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. The information contained herein is based on sources, which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available information. Any opinions expressed are subject to change without notice. The editor, his family and associates and THMA are not responsible for errors or omissions. They may from time to time have a position in the securities of the companies mentioned herein. All such positions are denoted by an asterisk next to the name of the security in the chart above. No statement or expression of any opinions contained in this publication constitutes an offer to buy or sell the securities mentioned herein. Under copyright law, and upon request companies mentioned herein, from time to time pay THMA a fee of $250 per page for the right to reprint articles that are otherwise restricted for the benefit of paid subscribers. Subscription rates: One Year $123; Two Years - $219; Three Years $299. Foreign delivery postal system, add 25% to regular prices.