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‘Unsinkable’ Gold

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Ever since the tragic sinking of the Titanic on her maiden voyage, the word “unsinkable” has acquired a very cynical connotation in our society. Rather than representing unsurpassed seaworthiness, it has come to represent the arrogance and folly of believing one’s self to be beyond risk.

With a new tidal-wave of “gold bubble” propaganda having swept through the mainstream media as gold made its latest surge, quite obviously many market sheep have been duped into viewing gold as the new ‘Titanic’. Yet as we watched gold getting “torpedoed” last week still another time by the banking cabal there is only one word we could use in describing the performance of the yellow metal: buoyant.

The bankers (and their minions in the media) were positively giddy as they proclaimed mid-week that gold had suffered “its worst three-day plunge since 1980”. These deceitful bears were markedly less-exuberant as gold roared back with one of, if not the biggest two-day rally in its trading history – totally negating the significance of the prior plunge. It was a performance which could only be envied by the builders of the Titanic.

Readers are right in being skeptical about merely the “chart strength” which gold has demonstrated, however. As I continually remind people “technical analysis” is the least significant aspect of market analysis. This will naturally enrage the “T/A jockeys”, who like to pretend that technical analysis is all-powerful – simply because it is fast and easy, and requires no genuine comprehension, other than the ability to spot patterns in pictures.

This complete reliance upon charts rather than fundamentals is more than merely simplistic, it is dangerous. This is due to the fact that all technical analysis is based upon a long list of assumptions – all of which must be true, or all statistical validity of such analysis instantly evaporates. Thus the appropriate way to demonstrate the “unsinkable” status of gold is through fundamentals-based analysis rather than statistical “hocus pocus”. It is here that gold shines even brighter.

Ironically, gold’s remarkable buoyancy is a subject of great interest to silver-bulls. Why? Because of the gold/silver price ratio. Knowledgeable silver investors know that not only will the gold/silver ratio narrow to at least its historical average of 15:1, but because of the complete destruction of silver inventories (thanks to decades of bankster shorting) the ratio will likely narrow ever further than 15:1.

Given these parameters, cautious silver investors naturally have one burning question in their minds: why am I (and other silver-bulls) absolutely confident that the price of silver will rise up dramatically to close the gap in this ratio rather than the price of gold falling down to that price level?  Thus gold’s “unsinkable” fundamentals are every bit as important to silver investors as gold investors themselves.

Naturally the most important of these fundamentals is currency dilution. The equation is very simple. We have one form of currency (beautiful, durable, and precious) whose supply is increasing by roughly 2% per year. Stacked against that we have an assortment of paper currencies being diluted by double-digit amounts every year. Worse still, there is absolutely nothing “backing” this paper, and most of the nations issuing these currencies are rapidly progressing from mere insolvency to outright bankruptcy.

As I have pointed out on several previous occasions, un-backed paper currencies are literally nothing more than unsecured “IOU’s” of the governments issuing these currencies. It is a tautology that the “value” of an (unsecured) IOU from an insolvent debtor is zero – or nearly so. Conversely, gold is a currency which is not only free from any claims of debt but possesses its own intrinsic value (as a superior form of “money”).

Such a comparison is no comparison at all. We have more than a thousand years of history of “fiat currencies” (i.e. money backed by nothing) being inflicted upon various populations again and again – always with the same result: the paper currency system collapses. Meanwhile, gold has not only “stood the test of time” in being universally regarded as “good money” for nearly 5,000 years, but it has perfectly preserved its value over those millennia.

This is but one of gold’s impressive fundamentals. Also very important is that gold continues to become relatively more “precious” every year. What do I mean by this? Putting aside the reckless money-printing of bankers (which in no way represents “wealth”), the world is getting “wealthier” each year. While the industrialized West rots in its own decay, the more populous East is experiencing a genuine economic Renaissance.

Total global wealth is rising, and we can calculate that changing wealth by multiplying the percentage increase in the global population by the percentage increase in per capita income. With the global population increasing by nearly the same rate as the supply of gold, this means that any/every year that there is any significant increase in per capita incomes that gold is becoming relatively more scarce in relation to total global wealth. In short, gold becomes relatively “more valuable” almost every year.

These two fundamentals are conclusive demonstrations of both gold’s obvious superiority as money/currency and its scarcity/value. However, day after day we watch the market lemmings stampede in one direction one day only to stampede in the opposite direction the next day. Clearly (at least over the short term) “rationality” has little to do with investor sentiment. Rather, the lemming-stampede in one direction is based upon greed, while their stampedes in the opposite direction are based upon fear. In the jargon of the mainstream media, greed is referred to as “the risk trade”, or simply “worries over inflation”. Conversely, fear is continually mischaracterized as a “fear of deflation”.

As we have already seen throughout this 10+ year bull market, gold’s relative scarcity has made it the superior asset class (second only to silver?) with respect to “worries over inflation”. Despite this, we cannot forget the “psychological” aspect of markets and rely completely upon arithmetic-based arguments. What we have now also seen in recent years, however, is that gold has once again asserted itself as the “go-to” asset class in the fear-trade – often referred to as “a safe haven”.

Here is where the mainstream media (either deliberately or negligently) continually engages in its most shoddy analysis. It regularly refers to other “deflationary periods” and then claims that our current (massive) fiscal woes are somehow comparable to those previous periods. They aren’t.

For the first time in the entire economic history of our civilization we see most of the world’s major economies simultaneously insolvent (or close to it). There are absolutely no similarities between a mere deflation and a “solvency crisis”. In an ordinary deflation, an economy sinks (i.e. contracts) as a minority of over-extended asset-holders default on their debts. This “purges” the economy of this unhealthy debt, and allows the economy to bounce-back (generally stronger than ever).

A solvency crisis is an economic nightmare several orders of magnitude worse than a mere deflation. In a solvency crisis, “deflation” implies nothing less than bankruptcy.  This is why our intellectually-bankrupt central bankers have refused to allow deflation to take hold in our economies. Our economies are saturated with “bad debt”, and when this bad debt is eventually purged from our economies our economies will default on their debts. Period.

In this scenario, deflation directly implies default (i.e. bankruptcy). And as I already discussed previously, the value of un-backed paper currencies in a default scenario is zero (or near-zero) just like the bonds issued by these deadbeat debtors. This is what makes our “default scenario” of today entirely different from any deflationary episode in our prior history.

In an ordinary deflation, “cash is king” (even arguably worthless paper currencies). However, in a solvency crisis “cash is trash” unless that cash is directly backed with precious metals.

We are currently living through a period of unparallelled economic crisis – the direct consequence of putting the global economy in the hands of a group of rapacious bankers. We are facing (simultaneously) the most extreme inflationary fears in history and the most extreme deflationary fears (i.e. a solvency crisis). And as John Williams of Shadowstats.com has been writing for close to a decade, there is strong risk that we will simultaneously experience the worst deflationary collapse in our history combined with hyperinflation.

As I have detailed in this commentary, gold is the only asset class capable of outperforming other asset classes in either an “inflationary” or “solvency” crisis. Obviously this means it is the only asset class capable of protecting us from these simultaneous economic calamities. And that is what makes gold “unsinkable”.

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Jeff Nielson
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written by Jeff Nielson, September 07, 2011
Hi Surfeit. Like most mainstream analysis, this piece is LOADED with severe flaws in its assumptions and facts which render the analysis worthless.

While there are many mistakes to choose from, I'll highlight one:

"To keep domestic workers employed and the domestic politics/economy stable, advanced nations must produce a surplus that is sold in some other market. This requires they run structural export/trade surpluses."

This is nothing but 21st century revisionist nonsense. In FACT, domestic workers have been "kept employed" for the last 200 years by steadily reducing the length of the work week.

The original work week (at the "Dawn of the Industrial Revolution") was 80+ hours/week. Today we are at 40 hours/week. How did we get here?

Even more obviously it is a matter of the simplest arithmetic that "everyone" could NOT have maintained prosperity by all SIMULTANEOUSLY increasing their exports.

Indeed, it is largely BECAUSE of this economic idiocy/mythology that we have almost all of our governments TRYING to accomplish the impossible - by all destroying their currencies as fast as they can.

There is just too much else wrong with this piece to describe all of the rest of the problems.
0
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written by surfeit, September 07, 2011
Hi Jeff, FYI, here's and interesting take http://www.oftwominds.com/blog...d9-11.html I'd be interested to hear your comments.
Cheers, Surfeit
Earl
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written by Earl, August 31, 2011
Jeff,

Your last line, "boomerang", was what I see from a dirty road, a 1/2 mile off highway 6.

A thief has a way of :

-making opportunity
-taking advantage of "ANY" opportunity

We are dealing with "thieves".

I must remember who taught me this, and I will never be able to "Thank You" enough for the education.

I'm not finished learning.

Please, never give up teaching.

Thank You
Earl
Jeff Nielson
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written by Jeff Nielson, August 31, 2011
Earl, it's a matter of both TIMING and dramatically different circumstances.

First of all, the banksters have ZERO chance of pushing gold or silver down by 30% in the FALL - when the buying STARTS to heat up. Even with all of their $TRILLIONS of Bernanke-bills to burn they are simply AFRAID of trying anything nearly that ambitious/aggressive at this time of year.

The other important point is that $50/oz is still a MAJOR "resistance level" for silver - the 1980 high. It's MUCH more significant than the $2000/oz barrier for gold.

Thus the GAME in May was for the banksters to DELIBERATELY run-up the price to just under $50 - so they could PRETEND that some "major top" had occurred in the market.

Finally, the other nations of the world (who are big GOLD holders) simply would not ALLOW any similar take-down in the gold market.

IF gold EVER got anywhere near $1500 you would have so many central banks LINING UP TO BUY that the price would IMMEDIATELY boomerang to $3000 (which is a mere DOUBLING in price from $1500).
Earl
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written by Earl, August 31, 2011
Jeff,

The "wip-saw", silver take down; anatomy of a crime.

Why will "gold" be different ?

I believe we are in for a huge/big dip.

I value you optimism, and facts.

But if history is out the door, then recent history says there's more paper gold than ever and when that paper is taken away, bye any means, the "serfs" (who bought bullion to high/peak) and the "lemmings" (who hold paper for safety) will all be taught a lesson. In the eyes of these thieves.

After the silver "crime" was a purchase opportunity.

Gold may be "unsinkable", but the boats gonna ROCK.

Just my input on a very well written piece.
Look forward to your input.

Thank You
Earl
Jeff Nielson
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written by Jeff Nielson, August 31, 2011
Mathnerd, unfortunately I think we can throw that old data out the window.

The psychopath bankers have now destroyed so much of our economies and THEIR old business that about the only way they can make money these days is by "whip-sawing" the market back and forth on these swing-trades.

Certainly the NEXT injection of Bernanke money-printing will cause another temporary spike in equities - and then we're back to just more lemming-stampedes again...
mathnerd
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written by mathnerd, August 30, 2011
One other thing Jeff.

Some people would say that yes, cash is trash in a solvency crisis, but that you should hold shares of a large company with a stable share price. The sort of thing you typically get from a large-cap company.

Sometime last year Adrian Douglas at marketforceanalysis.com decided to test this theory. He used the DJIA as a proxy for large-cap companies traded in North America, and compared it to gold (as real money).

He took note of the daily closing price of each going back something like 15 or 20 years. Then he calculated the statistical volatility of each and compared the results.

It turned out (by calculation, NOT OPINION) that gold was more stable with about 10% less volatility as compared to its 200-day moving average than the Dow.

Thanks to Douglas and you, we can thus say gold is better than both cash and large-cap stocks in today's market climate.
Jeff Nielson
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written by Jeff Nielson, August 29, 2011
Thanks Pointview.

We certainly appreciate the exposure we get from Bill Murphy there, and are glad we can contribute to that dialogue.
pointview
...
written by pointview, August 29, 2011
saw this on the Cafe, again, great work Jeff

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