COMMENT: What if the gold megabulls are right?

The economic conditions that would precipitate the massive jump in the gold price that many of the megabulls are predicting could be horrendous, but perhaps the politicians can carry on muddling through and keep up perception that all is well.

Author: Lawrence Williams
Posted: Thursday , 31 May 2012

LONDON (MINEWEB) -

There is a strong element, even among the respected gold bulls, which is not looking for, say, gold at $2,000 an ounce (more of a mainstream view supported by many banks) but continually preaches a much greater price for gold some as high even as$10,000 an ounce plus - and sooner rather than later.

Far be it from us to deride this position, although deep down we think it could be a step too far - primarily because the factors that could drive gold to this kind of level in the short term are almost too horrific to contemplate - but what if they are right?

After all, it was only a few short years ago that $1,000 gold was considered totally unrealistic by the mainstream and here we are now with gold more than 50% higher than that level - and this in a downturn for precious metals.

$10,000 gold short term can only come about through total currency collapse - a possible scenario which must give the politicians of this world nightmares, not least because we are so awfully close to such a situation occurring. Global economies are poised on a knife-edge. Logically we are in a situation where continual money printing by the world's Central Banks, or Quantitative Easing as it has popularly become known, should be debasing currencies to a huge extent. Any study of economics tells us that the enormous increases in money supply of the type we have been seeing over the past few decades is, in effect, currency debasement - indeed there are plenty of studies out there that show that what appears at the moment to be the world's strong currency - the mighty U.S. dollar - has lost more than 90% of its purchasing power in a couple of generations. This applies to most other major currencies too - to a greater or lesser extent.

Now, as long as earnings and investment - across the board - keep up with this debasement, most people in the mainstream remain happy - indeed appear to be far better off as improvements in technology and manufacturing bring all kinds of unforeseen luxuries into a relatively low-cost bracket, although the essentials like housing, food, metals and materials etc. keep on going up in price almost regardless. The occasional crash in some sector or another is the exception that proves the rule!

Gold is unpopular in the political and banking environment because its overall increase in value over the same couple of generations is about the one overt indicator that is a true pointer to how far the purchasing power of currencies has collapsed. But, because virtually all currencies have been falling in value too, the relative situation as far as the man-in-the-street is concerned looks relatively stable. It is not.

So back to $10,000 gold short term. If this does come about those who invest directly in the precious metal - and indeed in gold stocks - will see huge financial returns, but at the expense of the global economy collapsing around them. Hyperinflation would most likely come to the fore in many nations and the potential for enormous unrest and anarchy among the 99.9% or more of the global population who are not invested in precious metals.

Be careful what you wish for

I remember Ian McAvity in a presentation in New York spelling this out to a gold-friendly audience in spelling and then saying - "be careful what you wish for". The trigger which rapidly sends gold to this kind of level would be an indicator of a collapse of the whole monetary system as we know it. Maybe we would muddle through, but the likelihood would be that the fallout, as people turn to support extremist elements which always come to the fore in such circumstances - think the rise of the German Nazi party after the hyperinflation horrors of the Weimar Republic - would be scary.

Europe is the current trigger zone and whether the Eurozone can sort its problems out over the next year (perhaps in some form of compromise) will be critical. It can withstand the Greek problem - Greece is too small an economy to have a serious impact and if the Euro nations pull together can be rescued again - and again. But the possible next in line - Spain - is another question altogether. It is just too big to be rescued. The combined European nations don't have the wherewithal to bail Spain out from its enormous debt problems exacerbated by nearly 25% of its population being out of work. How can Spain possibly implement further austerity measures to allay its debt problems when a quarter of its people (and nearly 50% of its youth) are already unemployed?

There is talk of Greece pulling out of the Eurozone - or being forced out - but in reality Spain is perhaps more vulnerable still. There's a fascinating, and compelling, article by Matthew Lynn published on MarketWatch entitled 6 Reasons Spain will leave the Euro first which spells out the options in this respect and is well worth reading as this is the way the Euro single currency experiment could be brought to an untimely end. If this does occur there could be several years of debilitating economic turmoil in Europe as the remains of the Eurozone is either unwound or reformulated and with the huge interlinking of the global banking system this wouldn't just affect Europe, but the whole of the developed world.

That is the kind of trigger that could push gold rapidly to around the $10,000 mark as those with wealth scramble to try and find something that can protect their assets against global banking collapse - the kind of which we have not seen before except in very limited geographical areas. The politicians may find ways of propping up the banks and economies with quick fixes, but the perception that all is well, which is keeping most global economies afloat, will have perhaps dissipated forever. We would be in a new world order.

We are in a situation where much of the above scenario seems more and more likely - the question is whether it can be managed in an orderly fashion or not. Do not, however, underestimate the politicians' ability to muddle through by manipulating public opinion, massaging, and downright falsifying, economic statistics etc. As we've said here before, perception is everything. If the population can be convinced that things are alright, a semblance of stability can remain.

But we are getting awfully close to a breakdown - at least in some nations. We have already seen bank runs in Greece and they are beginning in Spain. Any exit from the Euro would mean a return to a country's old currency and inevitable devaluation - maybe by up to 50%, and who wants to keep savings in an institution where such a fall in value is seen as possible? There is thus beginning a flight to safe havens - and at the moment this is mostly benefiting the dollar, U.S. Treasuries and German bonds.

But are even these safe in a global banking crisis which could be imminent? At some stage the flow will return to gold and perhaps silver, boosting their prices - but to where? $2,000 gold or $10,000 gold, or more? One thing you can bank on is that Central Banks - and the U.S. Fed in particular - will do their utmost to manage currencies (and in this one has to include gold as a currency) to create the perception that all is not doom and gloom ahead. If they fail in that purpose then gold could easily hit the higher levels - but do you want to live in a society where economic survival of any kind for the masses would be as precarious as such a scenario might suggest?

It is this commentator's hope is that $10,000 gold can be avoided in the short term. Maybe over time, yes it can reach that level, as currencies carry on being debased in an orderly manner and the so-called bull market in gold continues. Or perhaps the reality is that we are in a bear market in global currencies with gold the only true constant?