Demolishing Three Common Arguments against Gold

Gold Chart 4

Recent history has been a long and volatile ride for gold investors.

Starting from a low of about US$250 per ounce in mid-1999, gold staged a spectacular rally of over 600%, to about US$1,900 per ounce, by August 2011. Unfortunately, that rally looked increasingly unstable toward the end.

Gold was about US$1,400 per ounce as late as January 2011. Almost US$500 per ounce of the overall rally occurred in just the last seven months before the peak. That kind of hyperbolic growth is almost always unsustainable.

Sure enough, gold fell sharply from that peak to below US$1,100 per ounce by July 2015. It still shows a gain of about 350% over 15 years. But gold’s lost nearly 40% over the past four years. Those who invested during the 2011 rally are underwater, and many have given up on gold in disgust.

For long-time observers of gold markets, sentiment has been the worst they’ve ever seen.

Yet it’s in times of extreme bearish sentiment that outstanding investments can be found — if you know how and where to look. There’s already been a change in the winds for gold so far this year.

And using complex dynamic systems analysis, a trusted colleague of mine and I have developed a new thesis and strategy for profiting in the gold market.

The takeaway? Do not buy another ounce of gold until you read the three main arguments mainstream economists make against gold…and why they’re dead wrong.

I want to refute some of the more common arguments against gold. Mainstream economists make them all the time.

Because I write about gold and talk about it in TV interviews, I’m constantly hearing these anti-gold arguments. The time has come to shoot them down once and for all.

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Three Common Arguments against Gold

What are some of the main arguments against gold? The first one you may have heard many times. ‘Experts’ say there’s not enough gold to support a global financial system. Gold can’t support the entire world’s paper money, its assets and liabilities, its expanded balance sheets of all the banks and the financial institutions in the world.

They say there’s not enough gold to support that money supply, that the money supply is too large. That argument is complete nonsense. It’s true that there’s a limited quantity of gold. But more importantly, there’s always enough gold to support the financial system. But it’s also important to set its price correctly.

It is true that, at today’s price of about US$1,315 an ounce, if you had to scale down the money supply to equal the physical gold times 1,315, that would be a great reduction of the money supply. That would indeed lead to deflation. But to avoid that, all we have to do is increase the gold price. In other words, take the amount of existing gold, place it at, say, US$10,000 dollars an ounce, and there’s plenty of gold to support the money supply.

In other words, a certain amount of gold can always support any amount of money supply if its price is set properly. There can be a debate about the proper gold price, but there’s no real debate that we have enough gold to support the monetary system.

Someone who says there’s not enough gold hasn’t thought about the problem, because there’s always enough gold. You just need to get the price right. I’ve done that calculation and it’s fairly simple. It’s not complicated mathematics.

Just take the amount of money supply in the world, the amount of physical gold in the world, divide one by the other, and there’s the gold price.

You do have to make some assumptions, however. For example, do you want the money supply backed 100% by gold, or is a 40% standard sufficient? Or maybe 20%? Those are legitimate policy issues that can be debated. I’ve done the calculations for all of them. I assumed a 40% gold backing. Some economists say it should be higher, but I think 40% is reasonable.

That number is US$10,000 an ounce. In other words, the amount of money supplied given the amount of gold if you value the gold at 10,000 dollars an ounce is enough to back up 40% of the money supply. That is a substantial gold backing.

To go from today’s price of about US$1,315 to US$10,000 would be a 700% devaluation of the dollar. I’ll admit that sounds extreme.

More likely, the Fed could carry out an 80% devaluation to start, announcing that gold will be US$5,000 per ounce. Then, it could do a second devaluation from US$5,000 to US$10,000 per ounce.

But if you want to back up 100% of the money supply, that number is US$50,000 an ounce. I’m not predicting US$50,000 gold. But I am forecasting US$10,000 gold, a significant increase from where we are today.

But again, it’s important to realise that there’s always enough gold to meet the needs of the financial system. You just need to get the price right.


Jim Rickards,
Strategist, Strategic Intelligence

Editor’s Note: This article was originally published in Money Morning.

Jim Rickards
James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Port Phillip Publishing. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.

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