Justin's note: As longtime readers know, owning gold for the long term is one of our core recommendations here at Casey Research. That’s why, today, I’m sharing this recent essay from International Man’s Jeff Thomas. It’s an important insight on the ultimate safe-haven asset…
By Jeff Thomas
For millennia, people believed that the sun revolved around the earth, appearing, as it did, on the eastern horizon in the morning and setting on the western horizon in the evening.
Greek astronomer Aristarchus of Samos is generally credited with the concept that the universe is heliocentric, with all the planets revolving around the sun. Yet it took a further eighteen centuries before Nicolaus Copernicus came along and convinced people that this was the case.
So, we can be forgiven if we educated modern-day people sometimes have difficulty in understanding that gold is the monetary sun.
Even those of us who have been tracking gold’s progress for decades frequently give in to the ease of quoting gold’s value in terms of fiat currency—most commonly in US dollars.
And yet, we have it the wrong way round. Gold is in fact the centre of the economic universe, and all the fiat currencies (including cryptocurrencies) revolve around gold.
But, isn’t this an exercise in hair-splitting? After all, does it really matter whether we acknowledge “orocentricity”? Doesn’t it amount to the same thing?
Well, no, it doesn’t. For those of us who deal frequently (or entirely) in US dollars, there would be an inclination to say that, for more than four years, gold has been essentially stagnant, varying no more than $200 an ounce. But, during that time, the US dollar has risen against major currencies. Although the price of gold has risen in this period, the US dollar has risen more.
More to the point, this has been no accident. A major effort has existed to repeatedly knock down the value of gold in relation to the dollar. This is only possible in an environment in which public faith in the banking system and the stock market remain high. As soon as those two confidence bubbles burst, the dollar will decline rapidly in relation to gold, and gold will once more return to its intrinsic value, just as it has done time and time again for over 5,000 years.
It’s interesting to note that, throughout history, banks and governments have fiddled with the value of currencies, from the devaluation of the denarius in ancient Rome, through the increased mixture of copper in the coins, to the successful introduction of paper currency in China in the seventh century. (The practice later took off in Europe in the seventeenth century and continues today.)
Over the millennia, mankind has used cattle, tobacco, seashells, even tulips as currency, yet each of these has failed at some point. More importantly, all paper currencies that have ever existed, except the current ones, have not only failed, but have gone to zero in worth.
Which brings us around to gold once more. The “barbarous relic,” as John Maynard Keynes called it, has easily outlived his opinion of it. But then, according to his contemporary, Friedrich Hayek, Mister Keynes was an exceptionally intelligent man who was so convinced of his superiority that he based all his economic theory on what he learned at Cambridge and never even bothered to attain a full education of Austrian economics, or even classical economics. Yet all world banks and governments today operate on the principles set down by the misinformed Mister Keynes.
Readers of this publication will be aware that the world is nearing an economic collapse of historic proportions. In attempting to understand the price of gold in the future, such notables as Eric Sprott, Peter Schiff, Jim Rickards, James Turk, Jim Sinclair, and many others have all predicted that gold would have risen to at least $5,000 by now. Conversely, deflationist Harry Dent predicted that gold would drop below $750 by 2015.
Are all of these men fools? Far from it. They’ve merely been premature. As Eric Sprott has repeatedly stated, “I tend to confuse inevitable with imminent.” Even Harry Dent could conceivably still prove to be correct. A crash in the markets is almost certain to create an immediate downward spike in the price of gold, prior to the creation of currency by the central banks that would immediately follow, sending gold, eventually, to an unprecedented high price. Such a crash would predictably cause a gold mania. $5,000 is in no way an unrealistic number.
Will it stop there? Well, in spite of the fact that virtually no one is even considering the possibility now, gold could conceivably go to $50,000, $500,000, $5,000,000, or beyond. Whilst this would appear to be an absolute absurdity to us at present, if hyperinflation kicks in, in the US, as it has in so many previous cases of currency collapses, there is literally no limit to how high the price can go. (I keep on my desk a $100,000,000,000,000 Zimbabwean bank note from 2008 as a reminder.)
If that’s the case, would it also be true that gold can’t be overpriced? In a word, no. Manias have a way of overshooting—creating prices that go far beyond common sense. In a mania, those who are knowledgeable keep their heads, whilst those who don’t understand the dramatic price rise tend to assume that there’s no limit as to how high it can go. They’re the creators of bubbles, and a bubble can exist in gold, as in any other investment.
But a gold bubble, like any other bubble, would be temporary. Eventually, gold would return to its intrinsic value. It’s been said that 2,000 years ago an ounce of gold could buy a good toga and a pair of sandals. Today, an ounce of gold will still buy a good suit and a pair of shoes. If gold were to go to, say, $10,000 soon, it would be in a bubble. But, if, with inflation, the price of a good suit with shoes were to rise to $10,000, then gold would be quite comfortable at that level.
If gold rises well beyond the price of a suit and shoes as a result of a mania, those who know precious metals well will be seen to sell, and move the proceeds into something that’s underpriced at the moment. Gold will once again settle at a natural level.
Long after fiat currencies like the dollar, the euro, the SDR, bitcoin, etc. have gone the way of the dodo, gold will still be around and will remain the centre of the economic universe.
Although gold will outlive us all, we can, by understanding “orocentricity,” provide ourselves with an insurance policy against the ravages of currency failure.
Justin’s note: We just released a new video that explains the secret strategy Doug Casey used to make millions in the gold market for more than 35 years. As you’ll see, 99% of investors don’t have what it takes to try this technique—but 2017 is shaping up to be the best time in history to use it…