Gold at Fahrenheit 451

By: Richard Greene | Wed, Jan 11, 2006
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Some of you may remember the book by Ray Bradbury entitled "Fahrenheit 451." The significance of that temperature is that it represents the kindling level of paper. With the temperature rapidly rising, more and more are opting for gold rather than paper money. There is little doubt that an excursion to paper money can lead to a period of rapid growth and advancement for the economy and society for a period of time. The big problem comes to a head when paper money is abused without limit. There are mounting signs that we have come to that point and that the temperature in the oven is in the range of 430-450 degrees.

As it is clear we have transformed to a debt-based monetary system, it should also be clear that an economy fueled by debt must continually increase supply since interest is always adding to the total obligation owed. When debt grows in excess of the rate of the economy which it is currently doing by several times, interest charges will consume the economy itself, particularly if interest rates are rising. Could this be why M3 money growth has taken on growth rates over the past two months that could only be termed hyperinflationary if they persist? No wonder the Fed plans to stop releasing this number in the near future. We may have reached the point where the only way to fund shortfalls in capital is to flat out print it. Gold moves up when this becomes feared. Among other concerns that are worrisome are: an oil exchange soon to open in Iran that will offer the sale of oil in euros decreasing the demand for dollars; and ongoing resignations at the Fed including the retirement of Alan Greenspan. Could these ultimate insiders in the money game be bailing out of a hopeless situation so as not to be directly associated with the implosion of the financial system? You would not have this impression if you tuned in to Bubblevision on CNBC, where everything is perceived as just great as long as the stock market stays up and the economic statistics can be tortured into admitting anything the masses wish to hear. As long as the money expansion continues at its recent pace it will be difficult for the major stock averages to move much lower since the currency, (or measuring weight) is on a constant debasement.

Some signs that gold, silver, oil, and all real things are the place to be include the high level of deliveries being exercised on the COMEX recently in both gold and silver trading. Investors may finally be wising up to the fallacy of depending on paper claims to hard assets as opposed to the assets themselves. Jimmy Rogers manages one of the biggest commodity funds and had the research dead right but is learning the hard way about paper claims through the defaults at Refco. If you own futures and the demand for the physical soars you get on line and hope you get filled with something other than more paper. Those that get caught in that dilemma have not completed their homework or understand a big part of the reason for owning gold and silver in the first place.

So how do we know when that time has come when paper promises are no good and when we go to the bank to get our money it is not really there? How do we know when the next dollar printed will tip the boat and lose the confidence of the people and lead to massive losses in purchasing power? I for one do not know exactly when that time will come, however, I can see quite clearly today that the risk of a problem runs quite high right now and has for some time. I only know that as far as confidence in money goes the limit for additional dollars can only be described as "one dollar too much." It should make one shudder to consider the outcome. Yet, if you asked 100 people to name the ten smartest people they know, I would bet that considerably less than 100 of that 1000 would have any exposure to precious metals at all. For some reason, the threat posed by the current financial system can not be grasped or confronted by the vast majority of people and the subject is absolutely vital. If the financial system goes which if you understand its true mechanics it is destined to, the move to gold and silver will be as instinctual as it has every other time paper money has failed. If this is so then we can have some idea of what the potential range for where gold could trade.

The current value of all the gold in the world approximates $2.5 trillion. US gold which is supposed to approximate 261 million ounces is worth roughly $135 billion. We say "supposed to" because the gold hasn't been audited for a very long time and with all the gold leasing that has gone on over the past 20 years it is very unlikely that everyone is still holding the gold they claim. Comparing this with the US only M3 money supply - $10 trillion and the world bond market - $35 trillion, and gold would have to appreciate over 18 times or $9306 per ounce. Using only these two components should provide a very conservative estimate of what we could expect. However, let's take into account that a lot of debt would just disappear due to cascading defaults and discount that number by 80% and we get $1861 per ounce. Jason Hommel of uses the M3 figure of $10 trillion and divides it by the 261 million ounces and comes up with $38,314 per ounce which I believe will ultimately be closer than my two conservative targets. Another important consideration is the terrible fundamentals and deficits affecting the US dollar which would most likely shift the results back up in favor of a higher US dollar price of gold. While it is clearly a moving target it is a pretty good risk to reward bet that the additional investment demand for gold and silver just as supply is falling off will provide a strong upward catalyst over the next few years. As the heat is turned up on the US paper shuffling economy and the temperature approaches Fahrenheit 451 you will be glad to have your wealth in gold rather than paper which can be expected to kindle into nothingness.


Richard Greene

Author: Richard Greene

Richard J. Greene CFA
Thunder Capital Management

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