Can somebody articulate the steps of how a revaluation of Gold to 5000 inflates everything?

barrynilsen
By barrynilsen on Thu, May 19, 2016 - 12:15am

First post ever.  Thank you all for your education.

I follow James Rickards and he makes sense to me with his explanation of the inflation-deflation debate.  He recognizes the facts and proven logic of the deflationists like Lacey Hunt or Mish, but at the same time seems to acknowledge the inflationists mantra that all fiat inevitably seems to inflate, and the elites will ultimately get their inflation one way or another in the "tug-of-war", and inevitably it will take some sort of extreme form of Helicopter money outside normal credit creation attempts to inflate.  Ok, that's sorta like the "Ka-Boom" theory I've heard Chris talk about before.

In Rickard's latest post from yesterday:     

 

http://dailyreckoning.com/elites-master-plan-global-inflation-part-ii/     

Rickards says:

"But that doesn’t tell the whole story. Gold will have increased dramatically in nominal terms. If gold goes from $1,000 an ounce to $5,000 an ounce, most people would say that’s a 400% increase in the price of gold.

But it’s really an 80% devaluation of the dollar. That 80% dollar devaluation leads to a world of $5,000 gold. But it also leads to a world of $400 per barrel and $10.00 gas."

Can somebody walk me through the sequence of steps of how this reset of  Gold ripples through to cause the massive ("also leads to a world of $400 per barrel gas") inflation?  If it's true that 99% of folks own zero PMs, then where do those folks get their $10.00 to buy a gallon of gas, or their 20th gallon at that price for their truck?  Or put another way, if hypothetically I had my little stack of PMs, I would have gained a lot of nominal wealth, but I'm not sure I'd rush out and spend it on frivolous stuff to increase the Velocity of money, and I get the feeling that most PM stacker folks are conservative and somewhat disciplined to avoid a spending spree.  So how does this "devaluation" actually work  through  and cause the inflation.  I hope I've made the question clear.

4 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5061
gold revaluation

barry-

Here's my sense of the mechanics.  I have a better handle on the prices & markets than the other stuff.

So the only way gold can be "revalued" is by (more or less) going onto a gold standard.  How does a gold standard work?  The government issues a statement: they stand ready to buy (or sell) gold at a fixed price: in this case, $5000/oz.

The day of this announcement, Treasury would receive some large number of gold ounces, and they'd issue a very large amount of new money.

Could gold be revalued to $5k/oz and the prices of everything else remain the same?  No.  Goldbugs might hold onto their gold expecting another massive jump in prices, but nobody else would.

All (non-goldbug) traders who bought GLD would sell, swapping their gold for other stuff which was still trading at a massive discount.  GLD just had its fourbagger - now its time to swap your gold for something that has yet to revalue, while you still can, before the inflation you know is coming will hit.  You're a trader, that's what you do - gold after the reset is just dead money, same as cash.  Likely, gold plays this trick only once per lifetime.  Time to move on.  Traders will do this math in about five seconds.

And that's why a move in one commodity tends to drive movements in other commodities.  If I saw gold at $5k with silver at $17, I'd blow out of gold and buy as much silver as they would sell me at $17.  Wouldn't you?  Same with oil, platinum, palladium, or anything else.  All the money that used to be in gold would be multiplied by four, and it would rapidly look for a new home.  That's about 7 trillion in gold worldwide that suddenly became 28 trillion.

Commodities exist in a web of pricing relationships.  For instance, the gold/silver ratio moves in a range of 16:1 to 80:1, so gold hitting $5k means silver is a buy anywhere below $62.50.  Same thing with oil.  There would be a massive rush by traders to buy commodities before the price resets happen - which will of course cause the price reset.  Shorts panic out, buyers race in, etc.

Likewise all hard assets whose price is derived from real stuff.  Would you sell your house at the price you were quoted prior to the reset?  Probably not, since it will end up costing perhaps 3x more to build in the new environment once all the prices settle down.  They would rise but with more of a delay.

Wages would reset too.  My guess is, they would lag, and wouldn't keep up with the commodity inflation - maybe everyone eventually gets a 100% pay raise, which isn't nearly enough to deal with a 300% increase in prices.  Maybe it would be better than that, its hard to know.

The only thing that wouldn't reset is debt.  Creditors would be hosed.  Debtors win big time.  US is a big debtor nation.  Maybe that's why China is buying so much gold.

I personally don't see why the people who own all the (private) debt would want to see this happen.  They'd be big losers, and they seem to be in complete control of policy right now.  In some sense, an explicit gold revaluation would end up being a debt jubilee, both private and public.

But you weren't asking about likelihood, you were asking about dynamics.

KennethPollinger's picture
KennethPollinger
Status: Platinum Member (Offline)
Joined: Sep 22 2010
Posts: 653
Am I missing something?

Dave stated:

The only thing that wouldn't reset is debt.  Creditors would be hosed.  Debtors win big time.  US is a big debtor nation.  Maybe that's why China is buying so much gold.

I personally don't see why the people who own all the (private) debt would want to see this happen.  They'd be big losers, and they seem to be in complete control of policy right now.  In some sense, an explicit gold revaluation would end up being a debt jubilee, both private and public.

 

The first sentence says that debtors would win big time.  The second sentence says that they'd be big losers.

I do not understand. And please say more about China buying so much gold.  Won't they also stand to lose?? UNLESS they buy other assets BEFORE the general reset in prices?

And thanks, Barry, for the important question.

 

Oliveoilguy's picture
Oliveoilguy
Status: Platinum Member (Offline)
Joined: Jun 29 2012
Posts: 578
Can Free Markets work?

Great Discussion Dave.

You say "So the only way gold can be "revalued" is by (more or less) going onto a gold standard." Is there another pathway to revaluation where the people manipulating the paper gold market cease their nefarious activities and the free market kicks in allowing gold to find its real price?  In other words could price discovery without government intervention allow an adjustment to $5k or whatever the honest value of gold might be?

You also said  "I personally don't see why the people who own all the (private) debt would want to see this happen."      Is there any difference between Private Debt and Public Debt as relates to this scenario?

davefairtex's picture
davefairtex
Status: Diamond Member (Online)
Joined: Sep 3 2008
Posts: 5061
gold's real price

OOG-

You say "So the only way gold can be "revalued" is by (more or less) going onto a gold standard." Is there another pathway to revaluation where the people manipulating the paper gold market cease their nefarious activities and the free market kicks in allowing gold to find its real price?  In other words could price discovery without government intervention allow an adjustment to $5k or whatever the honest value of gold might be?

It all depends on your worldview.  If you feel the only thing standing between gold $5000 are these nefarious activities, you have to ask yourself, what specific events would have to happen for these nefarious activities to cease holding such incredible power over the gold price?  I think the mainstream goldbug analysis is seriously flawed, and that largely the last 4 year gold bear market was because western gold buyers have been uninterested in buying because the goldbug-promised hyperinflation stemming from the big jump in base money just never happened.

As I've said a number of times, I think the impact of the nefarious activites on long term price is grossly overstated by the mainstream goldbugs.  They have this "quantity of money" theory that states every $ of increase in base money must be met with a 1:1 increase in the price of gold - and if that doesn't happen, the only possible reason is a successful manipulation of the gold price.  Me?  I think their theory is one-dimensional, and most likely wrong.  If you print a bunch of money and stuff it in the basement, no inflation results.  In this case, "Excess Reserves" = the basement.

I think gold can hit $5000 without a specific revaluation plan by the government.  If confidence in the central planners snaps, gold will get there all on its own.  There is a huge amount of money that will flee sovereign debt, and it would not take all that much to make gold jump.  Quantity of money will remain exactly the same, just that where it wants to hide will change.  What we've seen over the past few months will be just a down payment on that.  Especially if something bad happens in the EU or Japan.

All that said, I was just responding to the poster's question about the mechanics of a specific revaluation via policy.

What's the difference between a gold spike high to $5000, and a government revaluation?  Only a few people are likely to sell at the top of a market-driven gold $5000 move.  If that spike is caused by government, everyone can exit their positions and collect the payday; literally the whole world could convert their gold into brand new cash.   If you follow the money, the mechanics really do look quite different.  The deliberate revaluation is much more inflationary (from a causal point of view) than one that happens as a spike in the marketplace.

Think of it this way.  Instead of silver spiking to $50 for a few days back in 1980 and then falling, silver spikes to $50 and stays there in perpetuity, with the Treasury providing cash to every miner that pulls silver from the ground.  Unintended consequence: everyone becomes a silver miner, Treasury owns a huge vast new supply of silver, ever-growing, and inflation results from the huge profits from mining silver that are then spent right into the economy.  Its money printing in a different form.

A gold standard = government price support for gold.   If you pick a high price, it ends up being very inflationary.

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