People Talking About $32,567/oz

Silver Stock Report, by Jason Hommel, January 10, 2003

My previous article, “Why no talk of $32,567/oz ?” was so well received and people were so enthusiastic and encouraging I’m overjoyed. I received 110 letters in two days, 180 in the last week, and I responded to nearly every one of the first hundred letters. It was exhausting but stimulating work. I know those responses were but a tiny fraction of the over-all impact of the article, as now receives up to 164,000 visitors a day. If there was little talk, or thought, about $32,000/oz. gold before, there certainly is now, and I’m sure there will be in the future. About 90% of the letters were in agreement and/or were supportive of my article’s conclusions. About 25% had an argument with a point or two, or had a question about the way I reasoned things.

I divided M3 ($8.5 Trillion) by U.S. gold (261 million oz.) to arrive at the figure of $32,567/oz.

A few people asked why I used M3, and not some other measure of dollars or other fiat currencies, and a few others asked why I used U.S. official gold holdings, and not all gold in the world, or silver or other assets, and I will address those concerns in this article.

But first I want to address a more important and larger issue. Several people expressed concern about the future economic outlook if we went back to a gold standard, as was suggested by the idea of $32,567/oz. gold. Some thought it would be difficult to find food. Others thought that crime would be rampant. Others said that they would rather be dead. I found this gloomy outlook to be both perplexing, and unsubstantiated, and I do not share that view.

I am extremely optimistic about the future and I am looking forward to a bright economic future of peace and prosperity upon a return to the world using gold as money. A gold standard brings peace and wealth, not economic hardship, and the reasons for that are extremely basic and fundamental to economic theory. Read the first 30 pages or so of “The Wealth of Nations” by Adam Smith.

Why is gold money? Because barter is not very efficient, and because gold is a much more efficient medium of exchange–the most efficient, which is why it is money. Gold, when used as money in economic transactions, encourages and facilitates trade. Gold makes trade easier than barter. (Silver is useful for making small change and daily personal trades.) Trade, in turn, encourages and facilitates the division of labor. The division of labor encourages specialization, which, in turn encourages efficiency and increases productivity. With productivity up, wealth goes up, and there is plenty for everybody. It’s as simple as that.

Now, is the dollar an efficient medium of exchange that encourages and facilitates trade? Not at all! With the dollar, especially electronic bank deposit dollars, there is tracking of your money, which is accompanied by excessively burdensome taxes and regulations. Income taxes, and sales taxes, and unemployment insurance, and social security for wage earners, capital gains taxes, and many more taxes all discourage economic transactions and discourage trade. Thus, the economic system of the dollar within the United States does not efficiently promote trade, and the division of labor, and productivity at all. And I have not even started on the crushing effects that debt has on the economy.

Compared to how using gold as money could be, (and I believe it will be in the future), I believe we are living in relative poverty and in a relative economic dark age.

Furthermore, my positive outlook is not a “pie in the sky” fantasy view that I have, it is based on reality. A pivotal year in world history was 1913. Before that, there was much more peace and prosperity in the world and the optimistic outlook was incredible, and the world was not exactly using gold as money, but it was close; there was a gold standard. Since World War I, the world has been in a constant state of war in some part of the globe. What happened? The founding of the Federal Reserve in 1913. I strongly suggest reading “The Creature from Jekyll Island” for an overview of the monetary history of the United States since then.

Why do so many of you out there have such an unfounded fear of the gold standard? Why is there this dread among so many that it will be like “Mad Max” in a post-nuclear holocaust world? I cannot answer that, because I don’t have and don’t share that view. I suspect that so many have this fear because it is a media myth. I suppose it is one of those things that we are taught from our education, from the media, from the Universities, and from the economists. They continually say things like gold going up is bad for the economy.

I suppose people envision something like the Great Depression of the 1930’s, but worse. But the Great Depression was a result of abandoning the use of gold as money, it was not a result of using gold as money.

Let’s examine who will be hurt by a return to using gold as money. It won’t hurt the masses who have nothing and live paycheck to paycheck, since they have nothing to lose as it is. Zero, minus zero, is still zero. If you have less than $100 in your the bank account, what do you care if the banks fail–as long as there are jobs and food, you are just fine.

It won’t hurt the middle class who are in debt in dollars, and have car payments and house payments. If the dollar continues to inflate its way to zero, all who are in debt will find immediate debt relief.

It won’t hurt the corporations who are drowning in debt, and need some relief.

It will hurt primarily bond holders, and foreign bond holders. But bonds are false wealth anyway. So who is hurt? Only the ones who let themselves be deceived by the fraud inherent in the current dollar system.

Real wealth, gold and silver, will not be destroyed at all.

Who else would be hurt? Those on fixed income retirement plans, social security recipients, all recipients of government handouts, and probably the government itself. The moochers and looters will be hurt the worst, not those who are productive and create wealth through their labor.

You would think that the Democratic Party, with their intense hatred for the wealthy class in America, would be champions of the gold standard. You would think that Republicans, as they supposedly champion business and free enterprise, would be advocates of a return to the gold standard. But alas, both political parties, like most people, are too ignorant, or deceived, to know what the main problem is. The problem is the fraud of dollars, and excessive taxation and regulation, which hurt everybody by restricting trade, which damages the potential wealth of everyone in society.

Gold is good for trade. It’s better than barter. And it’s why gold is money.

I’ll admit, I voted for Ross Perot. Twice. He was against NAFTA, and his arguments seemed to make a lot of sense at the time. So, for a long time, I was confused about the issue of free trade, and whether it is good for society or not. Now, I’m fairly familiar with the arguments, pro and con. Here’s how I simplify the issue. Freedom is good. Economic freedom is good. It is self evident that I, as an individual, would be much better off being able to buy goods from anywhere in the world that I can find them the cheapest and best quality. My family, in turn, is also better off with the same right. My town, likewise, is also better off with the same right. And therefore, so is my nation. Yes, it really is that simple.

But what about that Chinese laborer who labors for a comparative 3 cents per hour? How can we be expected to compete? What about my job, which will be eliminated?

There are many false assumptions that are made in those objections to free trade. First of all, the biggest reason why labor is so differently priced between nations at the present time is that there are so many different fiat currencies. The dollar is too strong. If all people in all nations were working for gold or silver, it would be easier to compare wages.

So, what if the Chinese laborer is willing to work for much less gold? Then that means he values gold more, and thus, he is deserving of his wages, and he deserves to accumulate gold. And as gold would be drained from the nation that didn’t value it, people would have to begin to value the gold more as it increased in scarcity, thus balancing things out naturally.

The false assumption is that the displaced worker, the less competitive American worker (who expects to be paid more gold for his labor), whether his job is displaced by a foreign worker or a machine, will not be able to find another job. I have run several businesses, and there is one thing I know about work. There is an infinite amount of work available in the world to do. There will always remain something that you can do to improve the world in which you live. The difficulty lies in figuring out how to spend your time in the most effective and efficient manner possible to improve your life and the lives of other people.

I’m sure the people who used to go to the mountains to get ice felt threatened by the technology of the automatic ice-making machine. And the same thing could be said about a lot of other jobs eliminated by machines and technology. But guess what? Those tools improve our lives, otherwise we would not use them. I’m glad people don’t have to waste their time in unproductive jobs that waste time and energy. Aren’t you?

Free trade and free market capitalism create the competition which rewards efficiency. This does people a favor when their jobs are displaced, because it puts inefficient workers out of business. This frees them up to pursue other, more efficient, more specialized, more productive careers, while the most efficient workers end up serving the particular needs of society. Therefore, society is better off.

I did not intend to write so much about trade. The point is that using gold as money facilitates trade and increases wealth, and that the world will not become an economic waste-land when gold is used as money again.

Now, why did I look at M3 and U.S. gold, and not other measures of money?

When looking at M3, we have to realize that it is a measure of the potential dollar purchasing power that lies within the banks that report to the Fed. Although all banks tend to create money with their fractional reserve lending practices, they do this as agents, or at the permission, of the Fed, who stands ready as a lender (of paper) of last resort.

My calculation imagines that all of M3 could be spent on U.S. gold all at once, and only once. It assumes that the gold available could be spread out to back all deposits and end fractional reserve lending, backing 100% with gold every dollar that people imagine is theirs to spend, and give every depositor full satisfaction and real payment in full. It represents a complete restoration of a bankrupt and fraudulent system.

True, I do not expect all depositors to buy gold all at once. And I certainly do not expect the U.S. to use its gold in that way. I do not even expect that the gold is there!

I am not expecting government action to push the gold price up to $32,000 or so dollars per ounce. If the government offered gold at $30,000/oz. today, I’m sure there would be no takers. Rather, I’m looking at the figures in such a way that suggests the government could limit, or cap the gold price at that level, and that the government could theoretically stop a runaway gold price that was heading to infinity dollars per ounce.

But this brings me to why I don’t use all the gold in all the world to make the calculation in my prior article. If I spend my dollars on gold today, buying gold that the Fed (or government) does not own, my purchase tends to push up the price of gold. And what happened to my dollars that I spent on gold? They get deposited into the gold dealer’s bank account. The dollars remain as M3! Therefore, an infinite number of gold purchases could be made by the general public for gold, and the gold price could skyrocket up to well beyond $100,000/oz., and M3 would remain at the monstrously high 8.5 Trillion (and most likely continue to increase as it always does). And why? Because the money simply circulates back into other people’s bank accounts ready to be spent again.

So, why did I use M3 as an absolute measure, as if it were something that could be spent once? Dollars have a source. They are created by the Fed (or the banking system that exists at the permission of the Fed) when the Fed makes loans to the government, or when banks make loans to people. When the government repays bonds back to the Fed, the dollars disappear back into the abomination from whence they came. There are two primary ways dollars currently disappear and go back to the Fed. The first is when the government repays a bond back to the Fed. The second is when an investor buys a bond from the Fed.

The other way dollars disappear is my hypothetical scenario where M3 is used to buy gold from the U.S. government. This does not happen today, but if it did, then the dollars would disappear from circulation just the same. They would be spent once, and be gone. This is why I look at the total of M3, and divide it by U.S. gold. The source is essentially the same, and I realize that I’m mixing together the U.S. Treasury’s gold with the Federal Reserve, looking at them as if they are a single entity (the U.S. government), which is not literally correct. But close enough.

So, why didn’t I look at Cash in Circulation? A few wrote to say that only physical paper cash could buy gold. This is not correct. You can write your gold dealer a check. You can take a bank check to your local gold dealer. Or a postal money order for cash.

A few suggested that “the powers that be” would never allow M3 to buy gold, that they would stop it in order to “maintain the system”. Well, if they tried to do that, it would actually destroy the system. The system is only maintained when people are free to access and spend their bank balances on the things they wish to buy, such as gold. If they can’t do that, then the system will have collapsed.

There is no point in looking at all the gold in all the world, which is estimated at about 130,000 tonnes as if they backed the dollar. The reason, as I showed, is that the gold of the world does not back the dollar. It does not matter how much or how little other gold is out there. M3 is not destroyed when it buys things that the Fed does not own. It is only when we take the currency back to the one who issued the currency that it disappears from circulation when it is spent. Therefore, again, people can continue to spend M3 on “non Fed gold” over and over again an infinite number of times, pushing the gold price to sky high levels well beyond $32,000/oz., without reducing the level of M3.

Now this brings me to why I didn’t look at all world fiat currencies. The primary reason I didn’t do that was because I do not have a source for that level. Some suggest it might be the dollar equivalent to around 30 to 35 Trillion dollars, but I simply don’t know, and I don’t have a source. And if we did, then we still can’t divide by all the gold in the world, again, for the same reasons. Instead, we would divide by official gold levels held by the central banks, which is much less, at about 29,000 tonnes. But the actual gold held by Central Banks, as shown by GATA research, is probably down to only 14,000 tonnes or less due to leasing. $30 Trillion / 14,000 tonnes or 450 million ounces, gives us $66,666/oz.. This means the nations of the world have created a U.S. dollar equivalent of over 66 thousand dollars for every ounce of gold they still have left.
Now, this brings me to why I did not look at silver, in addition to gold. A few wrote that all the fiat M3 would go to buy both gold and silver. I agree. And it will. But remember, when silver is purchased that is not owned by the Fed, the M3 dollar is not destroyed, it remains to buy more silver.

The other reason I didn’t look at silver is that the relative amount is tiny. Just for fun, let’s assume that the Fed owned the remaining 150 million ounces of silver. At the current prices, it would not significantly change the calculation. Let’s assume that silver would be used at a 15:1 silver to gold ratio to back M3. The 150 million ounces would be the equivalent of 10 million ounce of gold. That is insignificant compared to the 261 million ounces of official gold. The numbers change to 8.5 Trillion / 271 million oz. Gold = $31,365.

So, why not look at other assets, such as land, oil, antiques, and other hard goods? Again, we are only looking at what the issuer of the currency has to back the currency in the event it begins to fail when people come to their senses and refuse to save and invest in the dollar, which is fraud.

Think about it. When excess dollars are created, the price of all things goes up at once. The existence of other things that are available to buy with the dollars does not put a limit on price inflation. Price inflation is tied directly to the excess dollars created.

But also, other assets simply are not money. Gold is money. Other hard goods lack the necessary properties to be useful as money. They fail to be a convenient medium of exchange. Selling land can be difficult; it is costly, time consuming and inefficient. In today’s over-regulated world, it requires a real estate broker, and land title agency.

Like silver, other commodities do not represent significant stores of wealth compared to gold. For gold, world levels of gold equate to a 50-year annual mine supply. No other commodity above ground is held in such quantity. For more reasons why gold is money, see my website.

Several people suggested that the M3 level in 1980 might be a clue as to the price level that gold will reach this time. That is, they agreed that M3 increases are inflationary, and thus, they believed that a rational price prediction might best be achieved by looking at the 1980 levels of M3. As M3 was 1.8 Trillion in 1980, and M3 is 8.5 Trillion today, or 4.7 times higher, they assume gold might reach 4.7 times the 1980 gold price of $850, or $4013/oz.

Two years ago, I thought that might be a reasonable way to look at things. As I have learned more since then, I see several problems with that view now. First of all, there is no rational reason that I can see for the top of the gold market in 1980. I don’t see why the gold price should rise to a level where U.S. gold backing is only 10-15% of M3.

Before I continue further, I need to discuss who, precisely, controls the price of gold. The people who control the price of gold are the people who own gold, and have it available to sell it. I am not speaking of the thousands of coin dealers across the United States and around the world.

I’m speaking of five men, who operate in secret, and who fix the price of gold twice every day. These five men gather together all the large buy and sell orders from around the world, and go into a private room, and decide what the gold price is going to be. Some believe this twice-daily price fixing no longer takes place. I believe it still does. A few people have emailed me and spoken to me about it, and they wanted to make sure that I knew about it, so that I could write about it in my articles.

The only real way they can put a limit on the gold price is if they have the extra gold to supply to the market to meet any shortage of supply and excess demand. If they run out of gold to supply to the market, or if they decide that the gap between supply and demand is too large them to meet, or if they decide it is no longer in their best interests to meet the excess demand, then the price must rise sharply.

Back in 1980, they stopped the rise in the gold price using three ways that I can see. First, they used the futures market to divert investment demand away from buying physical gold. Second, they used bonds paying very high interest rates to divert investment demand away from physical gold. Third, they actually supplied physical gold to the remaining investors who wanted it.

In the near future however, as the gold price rises, we will see the default of the futures markets. Therefore, they will lose that as a price-capping mechanism. Second, the default of the futures market will occur when they run out of gold to supply to the market at the margin to cap the price.

Third, bond holders and holders of cash will be the hardest hit as the gold price continues to climb. Therefore, they will lose and badly discredit the idea of holding bonds during the entire time the gold price rises in the immediate future. So they will lose all three of their primary methods for controlling the gold price.

I’ve written on futures before, and I urge my readers to go back and re-read my two essays, “Impending Gold Futures Default” and “Controlling Gold with Paper”, if you are not familiar with those concepts.

The most important aspect about the way they control the gold price today is that they seek to keep gold at a level where there is the least demand for actual physical gold, whether that is a higher price or a lower price. They control the price by supplying actual gold at the margin of demand, because price is always determined at the margin, but they simply cannot stand too much actual physical demand for gold. And why not? Because if they gave up all their gold, they would lose their power.

Now some people buy more when the price is low, and some avoid buying when the price is high. But gold is unique. It is also an investment. Gold is money! Therefore, others tend to buy more as the price rises, creating even more demand!

Right now, they are in a catch-22, and there is no way out. As they have kept the price low, physical demand has increased. So they have recently let gold rise to stem that demand. But it has not worked, and new investor demand for gold (and monetary demand) will continue to increase as the gold price continues to increase, as dollar holders will seek to preserve their monetary buying power by buying gold. Remember, if 1% of M3 seeks to take part in the primary rising market in the world, the gold market, that equates to over 7000 tonnes of physical gold, which will swamp the gold market with unsurpassed demand. One person asked me, “Which government agency will control the price of gold after the default.” Well, after they run out of gold, they will not be able to control the price at all! He who has the gold sets the price and makes the rules.

A fourth method they use to cap the gold price is through intimidation and the threat of the use of physical force. It is axiomatic to owning wealth that you must be able to protect and defend your wealth with physical force (or hide it), otherwise, it is available to any and all thieves and robbers.

A fifth method they use to cap the gold price is psychological warfare; the propaganda of lies and misinformation about gold that circulates among the people as popular myths. See my essays “Myths about Gold”

In the end, the new owners of gold will be able to dictate new rules for the economy. Gold investors should have enormous political power in the future. Gold owners will be able to demand, “If you want me to invest my hard earned gold in the economy, then change the rules to reduce regulation and increase freedom”.

If workers can change things by going on strike, think how powerful it will be when capital goes on strike, and decides to park itself in gold until things change for the better. Disclaimer: I am not a licensed investment adviser. I am not a broker. I hold positions in precious metals and mining stocks, which are subject to change without notice. I am biased against what I consider to be the fraud of fiat money, which are false weights and measures, and an abomination. I am biased against the fraudulent practice of creating money out of nothing. I am biased against debt: particularly when money is lent at any interest rate whatsoever, a practice called usury.