Today's article is inspired by two other bloggers: FOFOA and "TwoShortPlanks". Here are the links:
(the title of my post tonight is inspired by FOFOA's recent post)
Both bloggers predict very large quantum leaps in the price of gold (the "reset"), FOFOA predicts on the order of $55,000 - $100,000 per physical ounce and TwoShortPlanks ("TSP") calls for $134,000 (these numbers are of course approximate). These numbers, as far as I can determine, are non-hyperinflated... If we have hyperinflation, those prices would be that much higher.
Disclosure: I definitely have a dog in this hunt, gold rising to $55,000 or more per oz would certainly make me smile...
Of course, no one really knows, and it would depend on a large number of hard to quantify variables. Jim Sinclair (jsminset.com) seems to be coming around to the Freegold idea as well, writing that $50,000 could be perfectly reasonable. It does appear that the very high numbers predicted by the above observers are becoming more frequent, which is an interesting notion just by itself...
It is NOT crystal-clear to me how we would arrive at those very high numbers, I recently did explore some scenarios that would be plausible (these are convincing enough to me to be plausible, and this does not include close followers of gold who know more than I do...):
If these numbers of $55,000 are even close to being correct (and I will accept as "correct" any price of gold
over $10,000 per oz), then I believe there would be a number of changes that are as yet unanticipated...
My best guess, apparently paralleling FOFOA, is that gold would take its place as the best Store of Value after the "reset". There are a number of reasons that FOFOA goes into, at length (!), but at such high numbers as over, say, $10,000 it is clear that spending gold might be just as clumsy as it would be today, perhaps more so. Imagine taking a 1 oz Gold Eagle to the grocery store...
Perhaps the biggest question would be the nature of society after such a reset. It is easy to imagine a "Mad Max" (TEOTWAWKI) set of scenarios, but that of course is not certain. FOFOA himself (in a private communication with me) said that a disastrous scenario is not necessary for Freegold to come about, but he is on record as saying that he thinks we will have a hyperinflation of some sort. As far I am concerned, a functioning society free of massive-scale unrest and criminality is really the most important result that I would want to see happen.
Easy to imagine in a post-reset would be the risk of theft/robbery of physical gold. If the amount of gold in a man's wedding ring (say, 1/20 of an oz) were to be worth some $2500 in today's money, I would certainly wonder about if almost ANY gold would be worn as jewelry. I would also imagine that jewelry store robberies as well as burglaries would rise, perhaps significantly. Because gold is easy to make into other forms (low melting point) -- hence making it liquid for thieves, I think this is an under-appreciated risk of holding gold after the reset. Security of guarding one's gold pile would become a much bigger issue IMO. Diversification (long-time readers of my blog know this is perhaps my favorite word...) of hiding places becomes more of a factor than it already is...
OK, how about starting a business that would store gold? One of FOFOA's followers asked that very question at his blog (comments section at http://fofoa.blogspot.com/2013/05/hold-on-to-those-gold-coins-and-bars.html). FOFOA's answer (short version, my words): the banks or Brink's (companies that already exist) would likely offer that service.
At $50,000 per oz, what about fake gold? Oh yes, that could be a big problem! Reports are out there about Silver Eagles already being counterfeited (by China, who else?), here is a link to some information on precious metal fakery now: http://www.tfmetalsreport.com/comment/316667#comment-316667. At that comment is a video of Mike Maloney and James Anderson (goldsilver.com) showing and testing a fake Silver Eagle alongside a real one as well as comments on fake gold as well. Right now, it is not really economic for counterfeiters (even in China) to be making counterfeit Gold Eagles (particularly in small sizes, say 1/4 oz) out of tungsten (the metal closest to gold in density) because tungsten is very hard to work with, it is very hard and has a very high melting point. There have been two notable cases of fake gold bars are a 500 gram bar and a 1 kg bar. But, at $50,000 per ounce, those economics change a lot, we should expect to see a huge amount of counterfeit gold in the market place...
OK, how about testing equipment for gold? Yes, testing and initial-stage reprocessing of gold (eg, melting scrap gold) becomes a more viable way to make a living (and probably big business as well). An "ultrasound thickness gauge" is a device that can measure sound velocity through metals (the sound velocity is much slower through gold than through tungsten). I am going to get one of these sometime... Amazon.com sells cheap-looking ones for some $350 or so, one that *looks* better to me is the "GemOro AuRACLE Electronic Tester" ($459 at roseco.com, 800 527 4490). Another angle on this would be the business (assayonwheels.com) I saw advertised in Barron's one weekend: http://robertmixblog.blogspot.com/2011_11_01_archive.html. This might be a fantastic business to be in in a post-reset world...
Um, those 20,000 tonnes + in India are going to make that country RICH! Well, yes. Luck happens... But, the gold is widely distributed among the people (gold is an "India Thing"), so not all that many new billionaires would arise from India.
There will be LOTS of undeserving people who get rich... Well, again, yes. Those with the foresight to have bought gold will do very well.
Silver is a hotly debated metal, and here I would like to mention its possible role in a future gold price reset. FOFOA believes that silver will not make the huge quantum leap in price that gold will. I agree, though I am not certain (smile).
It may come down to what kind of world we find ourselves in re silver. If things get very bad (TEOTWAWKI), then silver would become very useful for spending. Bullets and cigarettes too...
My skepticism about silver mostly rests on this: if silver were so rare and industrial users of silver so vulnerable to a physical shortage of silver (however brought about) then why are industrial users (like Apple) not stockpiling it?
Taxation / Confiscation after a Reset...
FOFOA mostly assuages these concerns as far as I am concerned. Much of his argument here that gold would NOT be confiscated or taxed very highly rests upon two ideas:
a) that gold "must flow", there are sound reasons he goes into that I will not here
b) gold would become the major source of capital for investment
He allows that the government might be irrational in the short-term (they may TRY to confiscate or tax it), but that would ultimately be shown to be unwise... (I would argue that the government might be more irrational than he apparently does, and for longer, but I still agree in the end)
Who wins? And who loses...?
I mentioned above that India and all other holders of physical gold would be winners. Who are these winners?
In India, gold is widely held, and yes, there will be many winners who own, say, 1 - 3 ounces. Their lives would change for the better. And in many cases, a lot better.
Here in the United States (and perhaps Europe and Japan might be similar, at least similar to the USA in scale even if holding gold is somewhat more popular in Europe), it is thought that only about 1% - 3% of people own any non-jewelry gold, and that 1% number I have seen more often and better-argued as well. TwoShortPlanks wrote the below in his latest piece (http://twoshortplanksunplugged.blogspot.com/2013/05/gold-going-goinggone-in-this-post-i.html):
6. Less than 1 in 1,000-5,000 people have any meaningful amount of Gold.
I do not know where he gets those numbers, I know two people (besides myself) who have "meaningful amounts of gold", and I know less than 1000 people (but maybe my friends & family are smarter than I thought...). Nor is "meaningful amount" defined. Nonetheless his point is correct, that only a small number of people would benefit meaningfully from a reset.
I would like to take a crack at that idea of a "meaningful amount" of gold, and I will write with an American perspective in mind, please allow me to engage in another "Thought Experiment" as I am so wont to do... Americans (Europeans, Australians, Japanese and so on count here) are perhaps "ten times" richer than the average person here on Earth, and so should perhaps own ten times as much gold as "average" (the average being just under one oz of gold per capita worldwide). OK, then each American (man, woman and child) should own 10 ounces, a family of three should have thirty ounces... If we say that a family of three actually DOES own 30 oz, well, that would without doubt count as "meaningful" to me... Further, if "TSP" is right in what will happen to gold's price, then such a family would then have approximately $4,000,000 worth of gold (using his price of about $130,000), a game-changer for most families...
Who are the losers? (And I do not discuss those who would lose in the almost inevitable decline in economic activity in such a transition -- which might be pretty rough and cause losses...)
If we wind up in a hyperinflation, then anyone without gold would lose! Those holding other hard assets would do, probably, "OK", but would not see the huge increase in wealth that gold owners would. In hyperinflation, hard assets will still be worth something, maybe even a little more than just "something".
If the reset does NOT happen in a hyperinflationary world (as FOFOA grants as possible, although he thinks hyperinflation is more likely), losers would include almost anyone who sells assets to those with gold... I am thinking, perhaps, of my county that might need capital and have to raise it by selling assets (a toll bridge for example) or possibly buying the two gas stations in my town on the cheap... Imagine! If by trading a (relatively) small amount of gold by today's standards that you wound up with a toll bridge or the only two gas stations in town... You would win, but someone else loses, at least relatively.
Finally I have not read anyone else's (even from the two bloggers) detailed explanation how we get to the seemingly astronomical numbers mentioned above... When I bumped into FOFOA's blog in 2009, what hooked me (of course!) was that radical prediction of $55,000 per ounce! What owner of physical gold could NOT be at least somewhat entranced by that? Easy money!
It took some time for me to understand the basics of Freegold, but I essentially believe that something like that will occur (on the other hand, I am ready and diversified in case it Freegold does not come about).
In both cases, I would like to see more of the calculations of each blogger in reaching their very high numbers. Hey! I took my shot recently at deriving high gold prices, I would like to see theirs, or anyone else's calculations who is more sure than I am about a quantum reset.