Letters by a modern St. Ferdinand III about cults

$1600 per oz for Gold will be considered cheap in 3 years. Many disagree, but it is hard to see the logic of their position. Soros' massive fund just sold nearly $1 billion of gold, indicating that he believes that the metal is in a bubble. Smart Marxist though he might be, Soros is completely wrong. You don't have to be a gold 'bull', or a fanatic about the yellow metal to appreciate why the value of circa $1600 is low. In the US for example, the 10.000 tonnes of gold reserves is nowhere near enough to guarantee the $60 Trillion of true US national, state and local debt, which includes off the balance sheet future liabilities for the next 30 years [socialized systems, health, pensions etc]. Putting these real debts off the balance sheet would result in jail time for a private enterprise director or CEO. Not so for the politicians and bureaucrats. One set of laws for the great and good. And another set for the peasantry. In any event the 10.000 tonnes of US gold means that for every ounce of gold in reserve, there is $6 billion in debt. Not a healthy relationship. As US debt rises and its currency is devalued the disconnect between the real value of gold, when compared to obligations will become even more pronounced.

In and of itself gold is not an elixir of the monied economy, nor is it a totally useful substance. It is however an objective measurement of value and has been forever. Paper money by contrast is quite useless because it is entirely subjective. You can color some paper, print it, and announce it as a currency. The subjective setting of a currency's worth is due to many factors. But the key aspect is that there is some mass faith in the paper currency's utility. This is mystical. At least with gold you can bite it, chew it, pound it, and throw it. The value of a paper currency is a psychological phenomenon premised on your trust in the government which issued it, that it has value, and that the government will redeem it at that value. As currencies tumble now and in the future, this trust will be tested.

The prevalent economic issue, besides bankruptcy, is future inflation. Central banks with some exceptions are largely political tools. The US Fed can't raise rates because it has borrowed from the US banks in the short term, and lent out at the long term. Once rates rise its balance sheet will be destroyed as its asset values plunge. It is caught. As real interest rates stay negative and more paper is printed the U$ has to decline [and so too will the Euro]. Real inflation is already 5% or more, so gold will benefit as investors leave equities and hedge inflation. If the Fed does raise rates this will only accelerate the process out of equities since the Fed will be admitting that there actually is inflation. At some point the equity markets will tumble and precious metals prices will increase.

Market Watch:

“Where is everyone going to flee for safety? To gold, of course.

As rates start to rise, and fighting inflation becomes the main task of central bankers rather than warding off another great depression, the price of the precious metal will soar.

That will be the blow-out phase of the 12-year bull market.

It might happen next year, or it might be 2013. And gold might hit $2,500 an ounce or $3,000. Or even more. No one really knows. Once a market reaches its final buying frenzy, the price can go anywhere, as anyone who remembers the Nikkei hitting 38,000 will attest.

That will be the time to get out. And for that reason, Soros has got his timing wrong this time. There will be a moment to sell gold — but it is still at least a year away.”

Gold will likely go above $3000. At that point it might be a bubble, but will depend on the circumstances at that point in time. If nation states do go bankrupt – a likely scenario – than gold passing through $3000 per oz is certainly possible. In any case gold at around $1600 per oz, is still a good buy.