Does either of the above preclude the other? In other words, if we expect gold to reach $7000 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700 per ounce? Conversely, if we are predicting or expecting gold to continue its current decline, and even breach $1000 per ounce on the downside, can $7000 per ounce, or anything even remotely close to that number, be a reasonable possibility?
I do not think either one precludes the other. In fact, I think it is entirely possible that we can see both figures. And not necessarily spread over an inordinately long period of time, either.
Here is a possible scenario that would allow that to happen.
As the US dollar continues to strengthen, the US dollar price of gold continues to decline. This is clearly evident in the price action of gold since its high point of approximately $1900 in 2011. There is no way to know for certain how long the current dollar strength will last. At some specific price point the two (US dollar, gold) will find equilibrium. And it is reasonable that if ongoing dollar strength takes gold below $1000, it might come to rest somewhere between $860 – 890. In January, 1980, gold peaked at $850. Revisiting that number is plausible, and well within the realm of realistic speculation. And, yes, there are technical indicators that point to a gold price of as low as $680-700.
But what type of economic conditions might accompany the reality of that price projection?
I think the consensus is that an ongoing stronger US dollar would be accompanied by a stronger economy. That makes sense. But what if it doesn’t happen that way? What if the economy continues to struggle even more? Remember, we have been subjected to huge creations of money and credit over the past eight years. And that is on top of similar policies and actions by the Federal Reserve over the past one hundred years. Is our economy strong enough to weather the effects of attempted normalization/withdrawal? And, furthermore, have we already ‘killed the patient’?
I believe that is exactly the question that is plaguing the Federal Reserve. And the very reason they have struggled with firm decisions on altering their accommodative expansion of money and credit. This is most obvious in their lack of decisiveness regarding interest rates.
Regardless of that, whatever the Federal Reserve has done – or hasn’t done – since 2011 (when Gold peaked at $1900) has been interpreted positively, generally. At least as far as the US dollar is concerned. Otherwise, we would not have seen the US dollar price of gold drop over that time to its current level of $1170.
But even with a stronger US dollar, the economy still struggles. And there are indications that it could get worse. Regardless of the Fed’s attempts to avoid it, deflation is a very real possibility. An implosion of the debt pyramid and a destruction of credit would cause a settling of price levels for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than currently. It would translate to a very strong US dollar. And a much lower gold price.
Those who hold US dollars would find that their purchasing power had increased. The US dollar would actually buy more, not less. But the supply of US dollars would be significantly less. This is true deflation, and it is the exact opposite of inflation. Of course, this would be accompanied by a complete collapse of any and all forms of real estate, commodities, stocks, etc. – pretty much any asset or item denominated in US dollars.
The most severe effects would be felt in the credit markets and in any assets whose value is primarily determined and supported by the supply of credit available. Things would be much worse than what we experienced in 2008-12. The biggest difference would be that the changes would result in depression-like conditions on a scale most of us can’t even imagine. And the depression would likely last for years, maybe even decades.
Imagine, if you will, that groceries, gasoline, and house rent cost half of what you now spend. Whatever cash you have, or is available to you, would buy twice as much. And you would have money available for other things. Deflation, in and of itself, is NOT a bad thing. Unfortunately, you might not have a job. Or you might live in an area which experiences social unrest. Also, there could be disruptions in transportation and the orderly supply and delivery of various goods and services.
As far as gold is concerned, its value will be determined by seeking a level that is inversely in accordance with whatever level of strength the dollar achieves. For example, if purchasing power of the US dollar increases by one hundred percent, generally speaking, then we can expect a fifty percent decrease in the US dollar price of gold.
It is quite reasonable to expect any and all of the things mentioned above.
What will make things worse will be intervention and interference by government.
Government hates deflation. And not because of any perceived negative effects on its citizens. It is because the government loses control over the system which supports its own ability to function. Inflation, fractional-reserve banking, enhanced supplies of money and credit are intentional creations of government. They are used to fund and reinforce the operation and grandiose plans of government.
Hence, we can expect government to respond decisively to any series of events which resemble those previously described. Their intentions would be clear. All efforts would be focused similarly to those employed in our previous brush with financial disaster just a few years ago. But don’t expect similar results.
The events themselves are a logical end result of a financial system which has overdosed on artificial stimulation; not entirely dissimilar to an addict’s reactions to long-term drug abuse.
Since each successive financial ‘fix’ requires a stronger dose to maintain the expected results, and since the ongoing systemic damage is cumulative, we reach a point that demands recognition of the problem, and then painful steps to resolve it successfully. The government and the Federal Reserve will not ever acknowledge the harm their policies have caused. And they will never take the steps necessary to ‘save the patient’.
And even if the attempt were made, the shock to the system would likely ‘kill the patient’ at this point. At best, they might be able to postpone the inevitable rejection.
What government definitely will do is ANYTHING AND EVERYTHING that they think will minimize, end, and reverse events which would bring about deflation.
Which is exactly what they did eight years ago. And they succeeded temporarily in keeping the patient alive. But we don’t really know how much systemic damage was done (i.e. exactly how much money and credit were created, how big is the Fed’s balance sheet and how badly inflated are the numbers, how under-capitalized are the banks). I assure you, it is much worse than anything we have been told.
Similar events today would bring about the price collapse in various markets which we discussed, as well as usher in deflation and a full-scale depression. All of this would be resisted on every front by government and the Federal Reserve. They would literally launch an all-out financial war (and maybe another real war, too) by opening the money and credit spigots full force in a futile attempt to reverse the credit implosion and negative price action of critical assets.
In effect, their efforts and intentions would be similar to those observed during the Great Depression of the thirties. The results, at best, would be similar (not productive), too. The depression in our scenario would also last much longer than needed. And the price declines which are necessary to correct the excesses of the past and cleanse the system would be countered every step of the way by regulations and programs of dubious value. The efforts of government would actually worsen things and prolong the suffering.
It is more likely, though, that the results would be much worse than anything we could expect. Even a relatively strong US dollar would be unable to survive the onslaught. In their efforts to ‘save the patient’, the government would ‘kill’ the dollar. We would likely find ourselves awash in money and credit created without regard to potential damage. All in order to stave off the inevitable results while ignoring their curing effects on a very ill economy.
As the reality of the ‘new’ Depression sets in, the failure of initial efforts by government will be seen more clearly. They will then step up their efforts. Damage to the US dollar would be reflected in the US dollar price of gold which could easily go from $700 to $7000 in months, maybe weeks.
By that time, the US dollar price of gold will be meaningless. What will be more important is owning physical gold. The turmoil, social unrest, and economic upheaval that accompanies a complete repudiation of the US dollar will probably set us back 50-60 years – or more – on a lifestyle basis.
So, if you are one of those who thinks that $7000 gold is right around the corner, better plan accordingly.