Against Irredeemable Paper, Report 23 July 2017

Something needs to be said. We are against the existence of irredeemable paper currency, central banking and central planning, cronyism, socialized losses and privatized gains, counterfeit credit, wealth transfers and bailouts, and welfare both corporate and personal.

When we write to debunk the conspiracy theories that say manipulation is keeping gold from hitting $5,000 (one speaker here at FreedomFest claimed gold will go to $65,000), we are not trying to defend the Fed. When we discuss the flaws in predicting that kind of price, and the error in expecting to profit from it, we are not expressing a pro irredeemable dollar view.

We are saying there are good arguments against the regime of irredeemable paper currency—but this is not one of them. Irredeemable currency has two fatal flaws. One is the interest rate is unhinged. It can skyrocket as it did from the end of WWII through 1980, or collapse as it has been doing since then. Two is there is no extinguisher of debt. Debt grows—must necessarily grow—exponentially. As it has been doing for many decades.

The antidote to this poisonous system is the gold standard. However, it must be said that no gold price will cause the metal to circulate in the economy. It did not circulate when it was “cheap” 20 years ago. It did not circulate when it was “expensive” 6 years ago. It does not circulate now. It will not circulate even if it hits any of the gold bug price targets (if anything, a rapid price rise will be a powerful force keeping it out of circulation, as most people would have large taxable capital gains).

The one thing that can make gold circulate is interest.

For two weeks, we have been talking about a potential capitulation. The gold price has risen about $40 since then, and that of silver 85 cents.

Will the bounce continue? Have the fundamentals firmed up?

We will show graphs of the true measure of the fundamentals. But first charts of their prices and the gold-silver ratio.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. The ratio moved down this week.

In this graph, we show both bid and offer prices for the gold-silver ratio. If you were to sell gold on the bid and buy silver at the ask, that is the lower bid price. Conversely, if you sold silver on the bid and bought gold at the offer, that is the higher offer price.

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

We have switched to the October contract, as the August is nearing expiry and under selling pressure.

The dollar fell this week (the mirror image of the rising price of gold). As the dollar fell, the cobasis fell—gold became less scarce.

Our calculated gold fundamental price fell a few bucks (chart here).

Now let’s look at silver.

As the dollar has dropped, the cobasis has come down (though still backwardated). Our calculated silver fundamental fell 25 cents to $17.59.

© 2017 Monetary Metals

1 reply
  1. JTRIndustries says:

    I don’t think that the paper currency will disappear tomorrow. I suspect we will see it change its form in the next several years. In my lifetime, I have seen the $100 bill change its appearance four times. Now, we’re just beginning to see hints of the next evolution in currency exchange. Have you noticed that many toll roads no longer accept cash? Isn’t the dollar “legal tender for all debts public and private”? Well, that was then and this is now.

    Another change that I noticed was more subtle. Cash seems to have slowly evolved from a tangible asset to an intangible asset. Probably, you used to fantasize about finding stacks of $100 bills in an attic or in a field somewhere. When was the last time you thought about that? It’s more likely that you will fantasize about finding gold coins buried in your back yard, or on a sunken ship. Now that’s something tangible. You still are likely to have some cash in your wallet, but credit and debit cards are definitely taking over. If this seems true to you, then you may agree with my hypothesis:

    I believe the U.S. dollar will simply become digital currency. Bit Coin and the others are making progress. It seems as if they’re working out the bugs in the system. I don’t think it will take the government long to simply push them out the way and take over the game. They certainly won’t want to lose any tax revenue.

    I agree that physical gold is not likely to be circulated in the future. Maybe some intangible form of gold would work. “Goldbits”?

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