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Letter Re: The Precious Metals Bull Charges Onward

Jim-
You noted gold reaching an all-time high on Wednesday the 2nd of January. But this writer says: "I'm not really sure how all the 'Gold at 27-year high' headlines came to be, but my own calculations tell me that gold would have to break at least $2,400 an ounce [adjusted for inflation] to break its supposed 27-year high."

If that argument is accurate, perhaps it is not yet time to think about getting out of gold 20% at a time just yet. - Robert B.

JWR Replies: The "adjusted for inflation" calculations on the real value of gold are indeed valid, but those folks seem to assume that there are free markets. Sadly, there aren't--they are unfortunately manipulated in a number of ways. The missing variables in calculating the next likely market tops for silver and gold are A.) market regulation, and B.) central bank metals selling and leasing. If The Powers That Be (TPTB) decide that the prices of gold and silver are getting "inflated" then they can either change the trading rules--like the CBOT and COMEX did in 1980, when they drastically raised the margin requirements on silver futures contracts and capped silver futures contract holdings, to stop the Hunt Brothers silver rally--or they can simply announce that there will be some big government gold sales. (Sales of hundred of tons of gold are commonplace.) Either of those would crash the relatively thin metals market. I believe that manipulators will start making such moves when they start to feel discomfort as rising precious metals prices reveal the real value of the fire kindling that they call "money". I predict that this discomfort will reach painful proportions once the price of gold passes €1,000 Euros per ounce. The emperor cannot afford to be seen sans-culottes. If and when TPTB want to push down the price of metals, they will. I am merely recommending that SurvivalBlog readers conservatively unwind the speculative side of of their metals portfolios before this happens. I recommend that take your profit and reinvest your capital in other tangibles such as productive farm land.

An aside: The whole concept of the gold price being "inflated" is laughable, since it is the un-backed paper currencies that have been unbridled, while the metals have effectively been stable. There is only a limited supply of gold in the world, but a virtually unlimited supply of paper and ink. Understanding the "price" versus "value" of precious metals is all a matter of perspective. As economist Howard J. Ruff pointed out three decades ago: An ounce of gold would buy a nice man's suit a century ago, and one ounce will still buy a nice suit today. It is not the value of gold that has changed, but rather it is the value of the fiat paper currencies that has changed. They have all been destroyed by inflation at various rates

There is one other factor that makes metals market predictions almost impossible: the small size of both the "above ground" precious metals market and the market for mining shares. Both of these are so small compared to the global "digits" economy, which--even without derivatives--is measured in trillions. The capitalization of all of the mining companies in the world combined is smaller than the capitalization of the Big Three auto makers. The metals markets are so thin that they are quite vulnerable to manipulation.

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