Four-Digit Gold Sets a New World Order March 17,2008
Well nobody who’s been a believer in gold prior to 2002 is surprised that gold has finally poked through the $1,000 mark, with futures now fetching $1007 today. It's more than just a psychological barrier that has been breached. Gold measured in four digits is going to have wide-ranging effects on many aspects of the global economy.
What’s surprising is that it took so long. But given the artifice and subterfuge brought to bear on the appearance of value these days, it's probably equally surprising that it ever broke $300.
But that’s what is so profoundly clear about gold.
Gold is not a commodity at all. Gold is the doctor called upon to diagnose imbalances and artificial valuations among asset classes. By that I mean, the only way to truly assess the value of any given paper currency is in terms of how much gold it can obtain. Gold is the standard by which currencies are measured, Bretton Woods notwithstanding.
Gold shines the unflinching glow of truth upon the fiat paper to which it is compared.
Throughout recorded history, increased demand for gold expressed as a higher price has always been symptomatic of larger fundamental problems at the basic level of economy and politics. With that in mind, the price of gold now would seem to indicate something is horribly wrong with the world. I wonder what it could be?
The most superficial and visible effect that gold valued in thousands is going to have is that we will become even more immune to daily price fluctuations of $20 or more. When gold first started to run in 2002, the bigger price swings up to $10 had the phone lines and forums humming with the “How ‘bout that!” disbelief that was the default reaction.
Then as it piled on value, I remember how annoyed I would get when a day’s $12 gain would be cancelled by a sell-off. I think it was Brien Lundin I first saw warn of the rising tide missed by a fixation on the bobbing cork.
Now that gold’s value is expressed in four digits, imagine how inconsequential those price fluctuations will become. And there again, gold reveals itself as the Great Equalizer. It's not the inherent value of gold that is skyrocketing, it’s the absence of value in currencies being illuminated.
Today, hedge funds are defaulting, banks are near collapse, China is shooting its stolen citizens, Iraq is quicksand for the American soul, and $1,000 gold is here.
With all the chaos in the world, a step back to consider the implications of $1,000 plus gold both geo-politically and economically is in order.
The big mining companies are strategizing attacks on one another, Sure Vale [CVRD] (RIO) has officially bowed out of its intention to acquire Xstrata, but they’ll be back. BHP Billiton (BHP) will not swallow Rio Tinto (RTP) for now, nor will Chinalco (ACH).
But the effect that $1,000 gold is going to have on the top of the financial food chain can already be discerned by the machinations of sovereign and large private wealth in the background. Through unique and innovative debt structures, these groups increasingly seek to obtain a stake in large quality resource assets. Gold topped $1,000 easily, in the long term sense, because it's being taken out of circulation faster than it can be taken out of the ground.
Ten million ounce plus deposits are going to become increasingly rare in the decades ahead, which will spur panic-driven acquisition, which in turn will fuel demand, which will continue to pressure the price of gold upward, which will attract more speculators, who will in turn induce more panic.
And while other metals have mostly emulated gold’s ascendancy over the last 5 years, the disconnect between gold and metallic commodities will become greater as the situation progresses.
The question that should now be foremost in the minds of contrarians, is, “Will the infrastructure build-outs in China and India now consuming all these raw materials be derailed as the United States leads the other G7 economies deeper into recession?”
If that happens, there’s the point at which the disconnect will become an amputation, as base metals will plummet, while panic-driven buying of gold will continue.
And the emphasis now should be on the word “panic”. The main symptom of humanity going forward, and indicated by $1,000 gold, is panic.
We have reached a point in our evolution as a species where supply is starting to fall permanently short in key areas, such as energy, raw materials, and food. The real estate bubble illuminates the panic that ensues when there is a broad perception that we’re running out of land.
We can’t run out of land, because land is not something we consume. It is, however, something we transform by our economic activity, and that process means the supply of desirable land diminishes in step with the rate at which we convert the earth’s materials into products for consumption.
The macro view from 10,000 feet, backed by World Bank reports, suggests that we are never going to overcome the twin perils of hunger and poverty. As the gulf between poverty and affluence widens, so the panic that may soon engulf cities will manifest itself first in the poorest regions. Evidence of that panic is apparent in poor governments, who make desperate grabs at mineral assets being developed by foreign companies before they’ve even started production, as in Mongolia.
Another emerging reality of which $1,000 gold is a clear symptom is the increasing distrust citizens harbor towards the global financial system. When even the banks start abandoning each other in times of crisis, and when governments have to start emptying their coffers of counterfeit currency to stave off total collapse, it becomes evident that a global vote of no confidence is being expressed.
Gold enforces discipline in financial markets. By attracting increasing sums of investment from other asset classes, such as asset-backed securities and other credit-supported issues, it transmits the absence of trust and the decline of those markets to its membership, causing a reordering of that universe to reflect an improved allocation of risk to such entities.
Gold needs no “ratings agency” to clarify its value.
But most important to small investors and speculators in junior mining stocks, $1,000 gold means that lower grade deposits which have suffered an absence of exploration due to low grades from prior work are going to be the recipients of attention again. With gold at $1,000 per ounce and climbing, sub-1 gram per tonne gold deposits can still be viable, if they are close to infrastructure and not excessively deep to reach.
The juniors have suffered since August because, as one of the few asset classes representative of real value, it was one of the few places hedge funds, banks and other institutions could extract capital to cover their bad credit bets. As the smoke clears from the collapse, expect a new world, in which miners and mining companies are recognized as one of the last remaining bastions of real value, and are priced accordingly.
While Barrick Gold (ABX), Newmont (NEM), Goldcorp (GG), Anglogold Ashanti (AU), and other major produces continue to set records for earnings, juniors with emerging deposits are gong to start disappearing in greater quantity, and at earlier stages of exploration, as soon it appears an economic gold deposit is likely.
If you don't trust G