GOLD UPTREND RESUMES / MACLEOD FINANCE

Gold’s uptrend resumes

Traders are not in tune with gold, at best seeing it as something to be bought and sold. They fail to understand where the risk exists. This is a big mistake which they will likely regret.

ALASDAIR MACLEOD

Not one in a million understand money…

Clearly, the mainstream media in the West thinks gold is a hangover from the past, no more than a rock to which a few investors still emotionally cling. 

And it is a fair bet that most emotionally attached investors are looking to profit from a rising price. 

In other words, they look to buy gold with a view to selling it at a higher price. But this contradicts an important fact: gold is the money, and your currency is not.

Profit seekers have it the wrong way round. 

They should be getting out of currencies altogether because they are credit. 

And it is increasingly obvious even to the financially impaired that credit risk is now escalating.

Before Bretton Woods was suspended in 1971, currencies were always priced in grains of gold, because gold is the money, and currencies are credit issued by governments. 

Currencies operated as gold substitutes, being exchangeable for gold. 

Admittedly, exchange for gold became increasingly tenuous as governments interfered in economic activities from the 1920s onwards expanding their debt in the process. 

But the fact that gold is the money and all else is credit has never altered.

For evidence that this is so, central banks which are the ultimate insiders have been selling government currencies and their bonds for gold, noticeably in the last four years which is also reflected in the drawdown of foreign custody holdings at the Fed. 

The drawdown in US Treasuries over the last four years if reinvested in gold was probably the equivalent of acquiring over 5,000 tonnes:  

This is evident from official statistics, but faith in the US dollar diminishing at an accelerating rate is not. 

But erosion of faith in the currency is leading to a funding crisis, as the US government’s outstanding debt has accelerated to over $40 trillion. 

And there are few things scarier to markets than a big figure change in the wrong direction.

The cost of interest payments is already $1.25 trillion out of a total US budget deficit estimated at $2.1 trillion for the current fiscal year. 

60% of the deficit is debt financing costs. 

With bond yields threatening to rise from here and a stagnant economy, it will increase even more.

As a consequence of the US’s war in the Middle East, we can see further trouble for the dollar. 

A US domestic and G7 economic slump coupled with adverse geopolitical factors loom, now visibly undermining the dollar’s relationship with money. 

In these febrile times, the chart below is the most important you will ever see, and should be borne in mind at all times:

Note that even with a log scale, the monetary values of these currencies are declining at an accelerating rate, despite the six-month countertrend correction which now appears to be finished.

So-called inflation is set to rocket as a result of the Persian Gulf war debacle and the inevitable economic consequences giving governments no option but to increase their budget deficits and corresponding debt even further. 

It points to end-of-life for the dollar and the entire dollar-based fiat currency system. The question arises as to how long have they got?

The next chart is of the dollar priced in gold grains, with trend projections as a rough guide of likely outcomes. 

It suggests that the dollar will fall to 0.05 grains sometime between this December and May next year. 

That’s the equivalent of $9600 for an ounce of gold.

Profiteers should note that the higher the gold price goes, the worse the dollar’s prospects. 

It mirrors the maths of a debt trap: the higher the cost of funding for a zombie nation goes, the less attractive its bonds become. 

When traders take profits, they will be buying into a collapsing currency, which is senseless. 

They will miss the fact that gold is money, currencies are no more than ephemeral credit, and they should be seeking to protect what wealth they have from an exponential deterioration of financial values.

The collapse in the dollar’s value will accelerate downwards from our 0.05-grains target in the chart above towards zero, which can only be stopped by the US Treasury reintroducing a credible gold standard. 

And if it introduces economic policies and fiscal disciplines which guarantee the dollar’s status as a gold substitute, the Treasury will be rewarded with far lower borrowing costs for their maturing debt.

For now, any such move appears extremely unlikely, and we must assume the dollar as we know it will become valueless more rapidly than anyone might think likely.