Thursday, October 7, 2010
A Note on the Recent Increases in the Spot Price of Gold
Saying that high prices constitute inflation is like calling downed trees a hurricane. Hurricanes *cause* downed trees, but in and of themselves, downed trees do not constitute a weather event.
...Same with rising prices. There is a cause for rising prices, and it is called inflation. Inflation, as the name suggests, involves an increase — in this case, in the number of currency units in circulation.
Here's a personal and timely example: when I moved to my current residence some five years ago, I was delighted to find a Wendy's a mile or so away. For me, that was a near annual "treat" (more accurately, a not entirely unpleasant convenience), and the possibility of making it bi-annual was seen as a reasonable alternative for those evenings involving the odious prospect of cooking a meal after 9p. At that time, a half-pounder with cheese was a little over $4.50 including fries and a medium beverage. The other day it was almost $7.80 for the same item. Same burger. Same cheese. Same bun. Same fries. Same cup. Same diet soda.
There is an enormous amount of additional dollars now in circulation that were issued in 2007, 2008 and 2009 that are finally reaching the consumer marketplace. Initially intended to bail out (i.e., indemnify) the bad loans and faulty reasoning of politically-connected bankers, this money is now swirling around like leaves in a windstorm.
Our central bank, the Federal Reserve, controls the amount of units in circulation at any given time; its decision-making process is quintessentially political. So to provide the "illusion of affluence," greater money in circulation enables people to experience a false sense of security and a false sense of wealth, because they measure wealth by counting single units. (I will not get into the reality that the Federal Reserve is a private corporation functioning as a government-backed industry cartel for now.)
Friedrich von Hayek won the 1974 Nobel Prize in Economics for demonstrating the political foundations of the business cycle in central banking practices.
If you want to see what happens when this situation picks up pace, when the political pressures to make "payments" is seen as a "solution" to a political problem, you can read about what transpired in 1922-1923 during the Weimar Republic (as well as in the new Austrian Republic during the same years)...
OR you can sit down and open up your Monopoly game.
Instead of issuing everyone the amount of money stipulated by the rules, divide up the ENTIRE bank, and then start playing.
What happens is the almost immediate appearance of a feeding frenzy — players feel rich and ready to assume risk. The prices on the board were established to work with a fixed amount of money. Once players realize that they have to buy everything they land on, if only for defensive purposes, you begin to see how things devolve. This is a rough approximation of the current reigning mentality among flush investment pros, hedge fund managers, and bankers.
As the game unfolds, luck determines who lands on premium properties and when they can accumulate houses and hotels. It also determines who falls through the cracks. Pretty soon, all it takes is one or two "visits" to a property with a hotel, and one player is wiped out. The inevitable end is a WEALTH TRANSFER. And it is a wealth transfer that punishes thrift, industry, and all the virtues that make a close-knit, loving family hard to keep together.
Right now, our bipartisan ruling class is effectively running a wealth transfer game, and political clout up for sale to the highest bidder: you can rig your own market by writing the "regulation" and pretending it is for "socially responsible" causes (such as race, health care, gender, environment, whatever...).
There is no "luck" to this game. It is rigged by the exchange of favors, and cheap money for power. And as we have seen, year after year, generation after generation, politicians are had for pennies on the dollar. They can be had super-cheap! And the great thing is, they "sell" the rigging as a "liberal" benefit! That is, it is all done in the name of "the people."
The cynicism is so awful that it sours my stomach just to listen to the neo-Dickensian idiots complaining about "the rich." It is not a class warfare that is going on — it is a political élite that has written the rules to suit it's own agenda. While extolling the needs for a generous and prosperous middle class, our statist élites are systematically demolishing the working classes of this country through the strangulation of regulatory legislation.
To return to the main point of this exercise, the primary reason why gold and silver are rising in price is that it has become painfully evident to those same élites that there is a precipitous rupture in the purchasing power of each unit of money, and that gold — precisely because it can NOT be inflated (there is an objective, geological as opposed to political reality that obtains with precious metals) — can allow them to hold on to what they own and not let the wind blow away their leaves. Gold has returned to its 6,000 year role as a stable fixture on the shifting landscape of exchange — a repository of value.
THAT is what money IS.
Or what it is supposed to be.
Our currency is no longer money. The dollar is a "money coupon" — you can buy money with our currency, but you can buy less and less as time goes on, and the Fed's dollar Ponzi scheme unwinds.
Wealth WILL be transferred to people who own commodities that either maintain value through sustained demand (oil, wheat) or through limited supply (gold, silver, uranium). You still have a small choice in this matter, believe it or not.
My personal guess is that gold will sling up to its inflation adjusted price of the previous historic price high (ca. 1980), which is around $2,400 in no time at all, perhaps a year or two. Perhaps sooner.
If you want to imagine related future scenarios that make this look mild, Google the ERISA laws and contemplate how a legally mandated Boomer selling frenzy of 401k's starting in 2016 will impact commodity prices.
Here's why I am such an ardent proponent of a gold-backed money supply: only such a system offers us protection from the political manipulation of the symbol of our labors, our time, our sweat, our efforts, our planning, our self-sacrifice, our love for our children, our concern and respect for our parents, and our care for our own physical selves.
Money is a symbol of everything we value in life — and we have outsourced our money since 1913, and lost over 97% of the value of what our ancestors enjoyed.
Just some thoughts about our politically-contrived wealth destruction machine in Washington.
Contributed by Iconologist 2010