Editors Note: I have tremendous respect for J.C. Collins. However, in regards to his adamant conclusions on the subject, I would be remiss not to note, that despite a considerable market correction, Gold remains the best performing asset class of the New Monetized Millennium, by a country mile. J.C. can be the first to call me when that changes.
Submitted by J.C. Collins – philosophyofmetrics
As the price of gold continues to get hammered the purveyors of fear porn have become acutely quiet on the reasons for the collapse. The script of $10,000/oz gold has likely ran its course as the larger segment of the population no longer believes the grandiose script of imminent dollar collapse and the end of the financial world as we know it. The losses which have accumulated since 2011 for those heavily invested in gold are massive and the wealth bleed continues every day and week.
As of this writing the price of gold is $1077/oz and dropping. The last high was in August of 2011 when gold was $1900/oz. That is a 17% drop in the price of gold in just 4 years. Keep in mind that this drop in price has transpired at the same time that so many alternative analysts and fear based writers have been telling you that gold will skyrocket into the atmosphere.
So how did so many get it so wrong?
Whether the fear based promotion of huge price increases was an honest mistake or outright propaganda to sell precious metals is somewhat irrelevant at this point. The reality is that the price of gold is collapsing and astute investors would do well to get out now and only get back in when the market is near a bottom.
There are many reasons why the price of gold will continue its downward trajectory. The most obvious is that the expected inflation from QE never materialized and the purpose of using gold as a hedge against inflation has become somewhat redundant and non-consequential in the existing deflationary environment.
The other argument was that the US dollar was going to collapse and precious metals would act as the only vehicle by which wealth could be retained. The fact that gold has been achieving the opposite of wealth retention for investors is lost on the promotors of faulty analysis, as well as many who refuse to believe that they have been subjected to a narrow minded and often contradictory script of irrational fear.
The often cited effects of emerging market gold purchases have been grossly overstated. Not to mention that the selling of gold by emerging markets is usually ignored by the same writers and analysts. The same can be said for the relationship between the price of gold and the cost of production mining. These factors are minimal at best, as the last 4 years have categorically proven.
These same writers and analysts also promoted the idea that the Federal Reserve could never end QE. The fact that QE ended is ignored and tossed in the dustbin of history, much like the old news stories were discarded by the character Winston in Orwell’s 1984. The same will soon apply to interest rates when the Fed embarks on the first interest rate increases in a decade.
The two biggest factors which have been used to promote absurd gold valuations have been all but rendered irrelevant as the markets are already pricing in interest rate increases. The strengthening US dollar is a testament to this financial reality. As are the effects it is having on the price of gold.
Outside of inflation hedging, gold has been used when interest rates are low and the returns on bank accounts and bonds are low. The coming increase in interest rates will shift more wealth back into USD denominated assets, as the current market adjustments are suggesting.
The other big factor which is going to affect the price of gold has to with the entrance of the Chinese renminbi into the SDR basket. This will elevate the RMB to reserve currency status and it is expected that half a trillion dollars’ worth of renminbi will be created overnight. See post Renminbi Demand is About to Explode.
Over the last two years I have written about this dramatic change to the international monetary system. At the time there was very little discussion around the SDR and the Chinese currency being added. Many of the same purveyors of fear and faulty precious metals analysis stated that the Chinese would never want their currency added to the SDR. The script suggested that China would overthrow the western bankers and intentionally crash the dollar.
The fact that the Chinese are heavily invested in the US dollar, and would suffer huge losses on their investment (an investment which overshadows any gold accumulation), was completely ignored.
The inclusion of the RMB into the SDR will also lead to a massive diversification of foreign exchange reserves, as the shift from USD denominated reserves into RMB denominated reserves begins to take place. This rebalancing of reserves will allow for the dollar to depreciate and help America expand domestic production and create jobs through an increase in exports.
Cheaper dollar means cheaper goods.
The effect this will have is that the US debt-to-GDP ratio will drop and make debt management more tangible in the years to come. While many companies will fall under increasing interest rates, companies which have very little debt with thrive and see revenues and profits explode under a cheaper dollar.
Such companies will be great investment vehicles as their stocks soar.
The internationalization of the renminbi, and its upcoming elevation to reserve currency status, will facilitate the massive infrastructure investment in emerging economies which will take place through the BRICS Development Bank and the Asian Infrastructure Investment Bank. Why else to you think most of America’s strategic partners signed on to the AIIB? There will be huge profits to be made as emerging and developing countries become developed countries. See post The Coming Commodities Boom.
This large infrastructure development and funding will cause commodities, such as copper, iron/ore, zinc, etc., to all increase in value over the coming years. The demand for commodities will see multiple returns for investors as wealth shifts around the world.
It is important to clarify that the US dollar will not collapse when this shifting of reserves occurs. The dollar will remain as the strongest reserve currency for many years to come, and the bottom in gold has not been reached.
Between the years 1934 and 1970 the price of gold declined overall. This drop over 36 years corresponded with relative stability in the international monetary system as the USD based Bretton Woods system functioned. After the collapse of Bretton Woods in 1971 the price of gold increased. This appreciation occurred over 10 years, from 1970 to 1980. This was due once again to instability in the international monetary system.
A sense of stability returned and from 1980 to 2001, a period of 21 years, the price of gold collapsed from $2073/oz in January of 1980, to $350/oz in April of 2001.
This international stability came into question again after the attacks on September 11thand the price of gold began to increase again for a period of 10 years. By August of 2011 the price of gold was back up to $1900/oz.
Note: All valuations referenced above, and in chart below, have been adjusted for inflation.
Since 2011 the international monetary system has been quietly building an alternative system which is intended to rebalance wealth and elevate the Chinese currency to the status of reserve currency. As stated above, the changes to the international monetary system will be dramatic and will cause a massive shift in wealth and alternative to the USD.
Supporting this thesis is the fact that the price of gold has been declining since the high of 2011. The 17% drop from $1900/oz to $1077/oz (as of this writing) is only the beginning. The bottom for gold could very well reach $800/oz, and I wouldn’t be surprised if it went even lower. Some have predicted that we could see $350/oz in the coming years. Though I find that number unrealistic, many thought $35 crude was impossible. The fact that we now stand on the verge of $35 crude is testament to the reality that anything can happen.
The usual comments will come forth that I’m an idiot and don’t understand the fundamentals of precious metals and fiat currency. Blah, blah, blah, and so one.
The fact remains that for two years I have been writing that the price of gold was going to go down for the reasons explained above. And it has.
The fact remains that for two years I have been writing about the end of QE and the increase of interest rates. One has already happened and the other is about too.
The fact remains that for two years I have been writing about the inclusion of the RMB into the SDR. It will be announced on November 30th. See post IMF Confirms RMB Meets Criteria for SDR Inclusion.
And the fact remains that for two years I have been writing that the USD would not collapse and that the dollar would be re-engineered to fit within a more diversified reserve framework. This is being negotiated and will start to become more obvious in the coming months. See post The Case for Increasing Interest Rates and Depreciating the Dollar.
The Chinese have no secret plans to replace the dollar and overturn the apple cart, or re-price gold at hundreds of multiples higher. They have been very clear about their intentions to join the larger monetary system and expand renminbi liquidity. The Chinese accumulation of gold helps support the internationalization of the renminbi. There are no mysteries here, only spin by certain interests.
A clear record of my thesis is available here on Philosophy of Metrics for all to read and revisit. The amount of time and energy I spend on research and writing is obvious in the accuracy of the information which has been presented here. I use a fact based approach which is devoid of emotion and fear based conclusions.
Based on the above, and the vast amount of information which is available on the POM site, the best approach for investing in gold is to sell now, while it’s still somewhat high, and buy into commodities while they are low. A few years from now commodities will be high and can be sold, at which time wealth can be re-invested back into gold when it is low. The multi-currency reserve system and SDR framework will be abused, as all systems are, and gold will increase once again on the back of that monetary instability. It always good to retain some gold but be diversified. The approach explained here offers the best return for precious metals investors over the next 5 years. – JC