Gold at $5000/oz – For Whom the Bell Tolls

Guest post from Shan N. originally posted on Dollarcollapse.com:

Before getting into what a $5000/ oz gold price means for the society around us, it is probably useful to explain where gold prices are headed over the next 3 to 4 years. As I have written earlier, gold prices are on course to reach at least $24,000/oz before the end of this decade. In this article, we will see why this $24,000/oz estimate could well be a very conservative projection.

Gold going to $5000/ oz is very different from, say, Bitcoin going to $100,000. The latter is just statistics, and, as time will prove, just a historical aberration. The former, however, indicates something very profound from the perspective of economics and individual liberty. What rising gold prices indicate is that gold is regaining its rightful monetary status – a position most undeservingly usurped by the US Dollar in 1971. The restoration of gold would bring about a much-needed restraining force on Government power. This works at two levels – the first is more well understand and that is the US Government’s (mis)use of the US Dollar’s reserve currency status to further its political machinations. The second restraint, and one much less understood and perhaps more important, would be on the use of Central Banks to redistribute wealth through monetary inflation without explicit taxation.

In 1933, at the depth of the Great Depression, FDR confiscated the gold held by US citizens using Executive Order 6102. “Never let a crisis go to waste” has been the SOP for politicians worldwide, and I am sure the crisis ahead will witness much greater infringement on our civil liberties than in 1933.

The one beacon of hope against US tyranny extending worldwide, and it is quite unfortunate that it has come to this, is China. That a country with a communist political system is the antidote to a supposedly free/capitalistic country, the USA, is indeed a might fall for a country that was founded on the principles of rugged individualism. Mamdani’s quote to “replace the frigidity of rugged individualism with the warmth of collectivism” must be making the founding fathers turn in their graves.  The unfortunate part is that Mamdani is not an exception – Trump’s proposal to cap the credit card rates is as much “the warmth of collectivism” as the ideas of Mamdani are. When will the world learn that socialism fails because it is inevitable and not because it was not implemented correctly?

1.0 Where are gold prices headed?

The thesis as to why gold prices are headed to $24,000/oz follows the rationale below:

1. The monetary inflation following the 2008 GFC has been qualitatively different compared to the monetary inflation of the preceding decades. The National debt has almost quadrupled to nearly $40 trillion today, as compared to the $10 trillion back then.
2. This monetary inflation has inflated a series of asset bubbles – the AI Bubble, Housing Bubble 2.0, private credit bubble, the crypto-bubble, and the mother of all bubbles – the USD Bond bubble.
3. The bursting of these bubbles will plunge the US economy into a very deep recession comparable to the Great Depression that started in 1929. Without a doubt, the US Fed would respond with QE that would make the post-2008 QEs tiny in comparison. $5 trillion deficits might well become the norm post the Global Currency Crisis.
4. Given the precarious state of the US Dollar, this would plunge the US into high (hyper) inflationary depression, and the only solution to restore stability to the US Dollar would be to return to some form of the Gold Standard.

The calculations for the $24,000/oz are based on the supposition of returning to the Gold Standard by backing 100% of the M0 component with gold and are shown below.

People who understand fractional reserve banking will know that backing M0 with gold wouldn’t withstand market scrutiny. Using sports metaphors from my era, this would be the equivalent of asking Ganguly to open in a test match at Perth, or asking Luc Longley to defend the mailman. The contest would be over in 5 minutes. In a similar vein, Fort Knox would be emptied of the gold reserves within 5 minutes of opening the Gold Window with a “M0” backing.

The correct money supply component to back with gold would be “M2” and even if we assume 50% backing by gold (though that would be inconsistent with the basics), if we factor in the expected growth in M2 as mentioned in point 3 above, a 6-figure gold price would be well within the realms of possibilities. At the bare minimum, even with very optimistic assumptions about the future direction of the US economy, we will have a $50,000/oz target for the gold price. Therefore, a price well above $24,000/oz is pretty much a given. This, of course, does not take into account the hyperinflation scenario alluded to earlier.

For those who think that Gold Silver prices are a bubble, the message is that the bubble is in the fiat currencies in general, and the US Dollar in particular.

2.0 The Return of Gold as Money

The steep rise in gold prices over the last 3 years has forced the mainstream media to start questioning the unstated assumptions about gold and currency that have been considered axioms for the last several decades. Though the media is nowhere close to discussing the real causes (the usual suspects offered as the reasons for the increase in gold prices, such as geopolitics, economic uncertainty, etc., are just filibuster arguments), at least the topic of gold is being discussed and is no longer considered an anathema.

The primary reason is, of course, that equating currencies with money is a very flawed economic proposition, and that assumption of treating currencies as money is unravelling. The economic axiom is that only gold/silver is money, and currencies (notes issued by the Central Banks) derive value because they are backed by and convertible into money. For example, the US Dollar was defined as 1/20^th of an ounce of gold between 1789 and 1933 under the “Free Banking” era. This implies that private banks were free to issue U.S. dollar notes as long as they were convertible into gold at the predefined rate. In the absence of backing by money (also known as fiat currency), the intrinsic value of currencies is ZERO. The historical probability of unbacked/fiat currencies reaching their intrinsic worth of zero is “1”. There has been no exception to this.

While the return to a system where currencies are backed by money is not an event for today/tomorrow, it is for sure in the pipeline for this decade. To that extent, the aggressive buying of gold and silver by the central banks will continue with even greater fervour in the years ahead.

The first implication is the end of the US Dollar as the world’s reserve asset, with Gold returning to its rightful place. What this indicates is that the US would have to pay for its imports through exports of goods/services rather than inflation (i.e., sending US Dollars created out of thin air abroad that came right back to the US as investments in US treasuries). This has several implications as listed below:

1. A much lower standard of living for the average US citizen, as the US Dollar would considerably weaken against its trading partners. The DXY could easily decline by more than 50%, and so imports into the US would literally collapse.
2. The end of US military adventurism, and this is good for all countries, including the US itself. The only constituent that would be negatively affected would be the US Military-Industrial Complex. It was the closure of the Gold Window that allowed the US Government to move away from Jefferson’s foreign policy of “Peace, commerce, and honest friendship with all nations, entangling alliances with none”.
3. Balancing the budgets – this is where it would hurt the US citizens the most, as the promised benefits of Social Security as well as Medicare would have to be reduced by 80 to 90% on average. This is the price to pay for trusting governments, and the US citizens have nobody to blame but themselves. Military adventurism, as well as Socialism through the Federal Reserve, has been a bipartisan policy, and it was this political consensus that the citizens voted for, which has led to the situation.

Notwithstanding the near-term hardships, a return to the gold standard portends a bright future not only for the US but also for other countries. We need the next generation and other countries to draw inspiration from and aspire to become a free society and a capitalistic economy. Not merely an economically prosperous one.

For the other nations, the changes ought to be even more profound, especially for the developing countries. A monetary system based on the gold standard at the country level (hopefully in conjunction with massive deregulation) ensures the unleashing of the productive forces that have been hitherto held back for decades by the Neokeynesian hurdles.

So, definitely yes, a few tumultuous years ahead. But a change towards sound money and limited government promises a future that has hitherto been seen only on television by the billions living in developing economies. The salvation for these socieites lies truly within.

About the Author

Shanmuganathan N (aka Shan) is an Economist based in India and can be contacted at [email protected]