Gold Special Report: Erste Group Says Foundation Of A Return To Sound Money Has Been Laid, Expects Gold To Hit $2,300

Tyler Durden's picture

Erste Group's Ronald Stoeferle has released another must read report on gold, recapping all the recent developments in the space, and more importantly putting the recent price moves in context. While there are numerous key observations which we leave to readers to uncover on their own, arguably the key fact is the following: "The possession of gold is tantamount to pure ownership without liabilities. This also explains why it does not pay any ongoing interest: it does not contain any counterpart risk. Along with the International Exchange and the Chicago Mercantile Exchange, JPMorgan now also accepts gold as collateral. The European Commission for Economic and Monetary Affairs has also decided to accept the gold reserves of its member states as additionally lodged collateral. We also regard the most recent initiatives in Utah and in numerous other States as well as in Malaysia, and the planned remonaterisation of silver in Mexico as a clear sign of the times. The foundation of a return to “sound money” seems to have been laid." And as the currency basket vs gold since 1999 chart below demonstrates, the key feature of fiat money is that is most certainly has liabilities, paradoxically in the form of central bank assets which collateralize it. The more worthless "assets" that are taken up by central banks to match the balance sheet expansion, the more worthless the actual currency in the form of actual circulating paper and reserves. As such it is not so much the actual dilution of fiat paper that devalues it: it is the increasingly less valuable available collateral that supports it. As for the future: one of Erste's scarier hypotheticals is that should the US lose control of its monetary base, leading to a 1000% jump in said monetary metric, the shadow price of gold assuming 40% backing of gold, would be $99,419. Frankly we have yet to hear even some of the most undaunted gold bulls throw this number around.

Probably the most important chart which each and every report on modern monetary analysis should include is the following: the one showing the relative value of gold versus a basket of currencies. While it is true that within the closed system of fiat currencies, where the devaluation of one leads explicitly to the revaluation of another (or others), the ceaseless dilution of all ultimately leads to an absolute loss in credibility and value relative to hard assets. Per Erste:

The following chart also shows the clearly intact downward trend of most currencies vis-à-vis gold. The equally weighted currency basket consists of US dollar, euro, Swiss franc, yuan, Indian rupee, British pound, and Australian dollar. The downward trend is intact and is at the moment only marginally above the trend line. We have little reason to believe that the downward trend should subside in the foreseeable future, which is why we stick to our positive assessment of the future gold price development.

And some more observations on the central bank-FX-gold interplay:

We underestimated the supply of “digital printing ink” by the Fed and the relentless deficit spending. In June 2010 we had not expected the US central bank to attach as little importance to monetary stability as it ended up doing. We believe that the “Bernanke put” is the main reason for the rising prices in the commodity segment. The Fed has repeatedly referred to the positive effects of higher share prices. Gold also benefits from the decrease in risk aversion, as the following chart clearly illustrates. The higher correlation between the equity market and many commodities can hardly be explained by traditional supply/demand structures; in fact, the monetary policy seems to have turned into the most important determinant of the financial markets.

Other key highlights in the report focus on why excessive structural debt suggest much more future appreciation in the price of gold, why negative real eates have been a boon to gold price increase, the dead end of debt saturation which means that soon baseless currency destruction will be the only outcome of further monetary and fiscal easing, on gold and silver as official means of payment versus Gresham's law, on why money is now gold according to the regression theorem, and much more.

Probably one of the most curious observations in the report goes to the gold stock-to-flow ratio.

The most important feature of gold is definitely its extremely high stock-to-flow ratio. The aggregate volume of all the gold ever produced comes to about 170,000 tonnes. This is the stock. Annual production was 2,586 tonnes in 2010 according to the World Gold Council. That is the flow. Dividing the former by the latter, we receive the stock-to-flow ratio of 65 years.

Stock-to-flow as most important reason for the monetary relevance of gold and silver Paradoxically, gold is not scarce – the opposite is the case: it is one of the most widely dispersed goods in the world. Given that its industrial use is limited, the majority of all gold ever produced is still available. The recycling of existing gold accounts for a much larger share of supply than for other commodities. This is also why any significant production expansions or disruptions can be absorbed more easily. We therefore believe that gold is not that precious because it is extremely scarce, but because the opposite is true: gold is considered that precious because the annual production is so low relative to the stock. This feature has been acquired in the course of centuries and cannot be undone anymore.

Global gold reserves grow by an annual 1.5% and thus at a much slower rate than all the other money supply aggregates around the globe. The growth rate is vaguely in line with population growth. The trust in the current and future purchase power of money or any means of payment not only depends on how much is available now, but also on how the quantity will change over time. If mining production were to increase by 50% (which is highly unlikely), this would only translate into an annual increase of 3%. This fact creates a sense of security as far as the availability is concerned and prevents natural inflation. If production were down for a year, this would also have little effect on the overall situation. On the other hand, if the copper production were to be disrupted for an extended period of time, the stocks would be exhausted after about 30 days. For example, if a huge new mine were to come online and supply doubled, this would come with huge repercussions for the copper price, but with hardly any for gold. This stability and safety is a crucial prerequisite for the creation of trust. And it is what differentiates gold and silver as monetary metals clearly from commodities and the other precious metals. Commodities are consumed, whereas gold is hoarded. This also explains why traditional supply/demand models are only of limited use for the gold market.

Due to the high stock-to-flow ratio gold tends to be traded in contango. This means that the futures price is above the spot price. The last backwardation in gold dates back to2008, while silver was traded in backwardation in January 2011. In the case of backwardation, the market sends a signal as a result of which demand all of a sudden increases, and it makes no sense anymore from an economic point of view to bet on a later delivery date, given that the costs of storage, financing, and insurance would be higher. Backwardation is a clear sign of supply shortages.

What are the implications - enter the Shadow Gold Price:

In 2008 we set our long-term price target of USD 2,300 for the first time. We continue to expect the gold price to rise at least to the inflation-adjusted all-time-high of USD 2,300/ounce (dating from 1980) at the end of the bull market. Some historical comparisons suggest even higher spheres. When we compare the pinnacle of the previous gold bull market with the closing prices of 2010, we find that gold had increased only marginally in relation to the S&P index, the money supply, debt, or even the US dollar reserves.

QB Asset Management calculates the so-called "Shadow Gold Price” (“SGP”). It divides the US Monetary Base by U.S. official gold holdings, the same formula actually used during the Bretton Woods regime to fix the exchange value of the dollar at USD 35.00/ounce. It would be the theoretical price of gold today were the Fed to depreciate the USD to a level that would cover systemic bank liabilities (transform a debt-based into a asset backed currency). The current Shadow Gold Price would be just under USD 10,000. This figure illustrates the magnitude of monetary inflation already embedded into the system, sitting latent and threatening to increase the general price level.

The following table shows the theoretical Shadow Gold Price in different base-money supply scenarios. If the money supply were to fall by 25%, then the SGP would still be USD 7,456, if the monetary base were to rise by another 50%, then it would be at USD 16,634.

This calculation is by no means a pure mind game but rather the way the exchange rate between paper and money was calculated during the Bretton Woods Agreement. After the Federal Reserve Act of 1914 coverage was set to at least 40%. Therefore we have also based our calculations on a 40% coverage ratio.

At the moment less than 2.6% of US government debt is covered by gold, which is clearly below the long-term median of 5%. Should the gold price therefore double, the coverage would only rise to the long-term median. But this would also require stable government debt, which is less than likely. The highs of the ratio dating from the 1980s would only be reached at a price of about USD 15,000.

If one were to fully cover the current debt with gold, the price would have to increase to USD 57,000/ounce. That said, a full coverage is extremely unlikely; at its highs the ratio was at 55% in 1915 and at slightly less than 25% in 1980.

All this and much more in the full report below.

Special Report GOLD - In GOLD We TRUST - July 2011

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GetZeeGold's picture


Looks like I'm early. Glad I packed a lunch.


Sudden Debt's picture

I wish I could type as fast as you...


maybe if I used both my hands?....


but how would I jerk off and smoke at the same time?

I tried it once....


I guess I'll only figure that one out when I gain as much experience as you do... :)


tictawk's picture

There are two ways to resolve today's debt problem.  Our currency is created from DEBT. The choice is very simple.  The Fed can either MONETIZE all the debt thereby rendering the currency worthless or we have a DEFAULT on all the zombie loans and unpayable debt.  If it is the latter, many banks will go under and people will lose their money that is in those banks.   The default occurs when credit effectively dries up for most everybody and cash becomes king.  We are seeing the initial stages of that currently.    After the collapse of debt, the govt may try to monetize future liabilities.  The debt monster is so huge, that the FED at this point is powerless.  This is demonstrated daily given that nothing is working.  All the money they throw at the problem is sucked up by the equity market and does little for the economy where it really counts.

Spitzer's picture

No, cash does not become king in the latter, the cash is backed by the full faith and credit of the US govt. Without the credit, the dollar will sell off, not rise.

The quantitative theory of deflation is dead wrong. If it where right then the Euro should have rallied in the summer of 2010, when Greece was on the cusp of default, instead it fell from 1.49 to 1.19(incipient hyperinflation)

Also, why didn't the Thai Baht rise is 1997 when Thailand defaulted on debt ? It crashed by 40% within days. There was no huge rise in the printing of Thai Baht when that happened.

DoChenRollingBearing's picture

A little off topic, but I know Spitzer will enjoy this.

I was rooting around in older FOFOA articles and encountered the below quotation, which matches almost exactly what ZH-er "Acidtest Dummy" once wrote, a brilliant comment.  FOFOA wrote in Sept. 2008:

"The way "the deal" was supposed to work was that the CB's would have to use little to none of their own gold, but instead keep the price just above production costs for mines so that "oil" could take it's gold right out of the ground. The supply from the mines would be supplemented by gold going from the private sector to "oil" as well."

Acidtest Dummy wrote words to the effect that Au uses carbon, in both hydrocarbon and human forms, to gather itself together in ever larger lumps.  When I first saw Acid's remark, it electrified me...

Hephasteus's picture

Ya good points. But when the curve on oil and gold production collapses it's going to be a stair step ride. Right now gold should be about 3k an ounce. If it doesn't go ahead and stair step then when we hit another peak oil curve bump it'll go absolutely nuts. Since it's based on production right now as gold get's harder to get and oil to get gold get's harder to get it's game over.

Quinvarius's picture

Raising the price of gold so that there is a financial asset to counter the debt solves everything with no haircuts. 

grekko's picture

You got it backwards.  You don't raise the price of gold, that never changes.  The only thing that can be done is to devalue the Fiat!

KlausK's picture

"New Deal" for Europe:

Google translated:

The "New Deal" was a U.S. reform program has been boosted by in the thirties of last century, massive state investment, the economy. The euro zone could also collect on the issue of EU bonds funds "to finance the economic recovery, rather than saving measures carried out" according to SPIEGEL information in a declaration, inter alia, the former Prime Minister Guy Verhofstadt (Belgium), Giuliano Amato (Italy), Michel Rocard (France) and former Portuguese President Jorge Sampaio support.,1518,771996,00.html

We know how to print, too!

Popo's picture

Apparently I missed the "return to sound money".   When did that happen exactly?

Michael Victory's picture

The return to sound money.. escorted in with the shovel ready jobs.

Believe that..

I've got a bridge to sell you. 

(link = Why we're freggin doomed.)


fredquimby's picture


I asked FOFOA to make this post into a book as it is the best piece of gold writing I have ever read


DoChenRollingBearing's picture

+ $55,000

His "Return to Honest Money" is his summation to everything that I have read before at his blog.

Note everyone that FOFOA has called for a price that could be as high $100,000 / oz!

Ahmeexnal's picture

Yes, and silver will be three times as valuable as gold.

DoChenRollingBearing's picture


Would you be interested in writing a "Guest Post" at my blog on silver?  I direly need an expert on silver to write "The Case for Silver" or similar.  If you might be interested, send me a gmail at my name, I will send you the link to mt blog, you can take a look around and decide for yourself.  My blog uses my real name, so I do not post the link here.

sskid's picture

You should watch these videos, or link them to your blog

if you want a case for silver vs fofoa.

These are the first two, you can find the rest at his ytube channel


DoChenRollingBearing's picture

THANKS, sskid!

I will go look at them, and if they are sound, up they go!

I still need someone to write something for me though...

DoChenRollingBearing's picture

@ sskid, I just put five of the videos up at my blog as well as the below comments:

"I still wait for a silver expert to come and write a Guest Post on the case for buying silver.  I do not know silver well.  I like gold better, but I hold about twice as many ounces of silver as I do of gold and platinum combined.

I have seen a very few, but they are there, at Zero Hedge make a case that the price of silver could actually go HIGHER than gold.  I believe those who say that are basing that on fundamentals (usage of silver is higher than what is being mined, etc.).

While I plead for a silver expert to come and write here, Zero Hedge contributor "sskid" sent me the below links to YouTube videos which basically critique FOFOA's Guest Post's (author "costata") column on silver not long ago.  There are eight of these, at the moment, I have only watched one (the first).  I post the first five, the rest are there at YouTube right along these.  To watch them all would require over two hours...  That is one reason why I need an expert to step and write a cogent article on silver!"

sskid's picture

The first one is very slow, should maybe skip it, watch this one




Oh regional Indian's picture

;-) Gold bugs hate that kind of talk Ahmeex.
I happen to agree.

I also think that a move to real hard money (ie. land/edible/security) assets by the end of this year is highly advisable.

We are entering final phase. Such a ride.

SWRichmond's picture

$10,000.00 gold wouldn't surprise me one bit.  The gold investments I have is for moving wealth forward into the next currency regime, whatever it is.  Silver is for profit potential.  Gold is safety.  Silver is fear and greed.  Simple.

gosseyn's picture

And a gold/silver ratio <1 for the first time in history?  Dream on, my friend.

HungrySeagull's picture

Actually it may be a possibility provided that Silver is a industrial metal. Gold may do well as a subistute when it becomes cheaper than silver.

Copper? Forget it. Wheat? Rots. Corn? We burned it all as fuel.

Iam_Silverman's picture

"Copper? Forget it"

Please elaborate.  In many cases, Copper has been used as a monetary metal.  It has many industrial uses, as does Silver (and to some extent, Gold).  Rumor has it that China has been considering a tri-metal backed currency.

I am interested as to why you think that copper might not be a useful Semi-PM to hold.  What about Nickel?

Copper Bullion Coins:

They are attractive, but are they worth holding?

XenoFrog's picture

Copper bullion has storage issues that Silver/Gold do not.

Iam_Silverman's picture

"Copper bullion has storage issues that Silver/Gold do not."

Again, I am a novice.  Please elaborate.  Does it have to do with the price per unit weight issue - as is often used by Gold buyers to disparage Silver purchases?  If it does, well that's no real issue here.  I have acres and acres to store stuff.

DosZap's picture

Check the Premiums on this rip off.......and you will change your mind QUICK.

Iam_Silverman's picture

"Check the Premiums on this rip off"

I wasn't looking to buy from these folks, actually.  I was just looking for an image of Cu bullion (generically).  I know that like other metals, you should shop around and educate yourself before you buy.

DosZap's picture

These folks foreigners?, FRA was not 1914......Dec 22nd 1913.

Spitzer's picture

That's right.

Ben Davies is a distant second at $30,000+ but he said that on CNBS. He might have been thinking $100,000 but didn't want to say it. He could be FOFOA for all I know.

Cognitive Dissonance's picture

What are the implications - enter the Shadow Gold Price.

I love this term. If we can have a Shadow Banking System and a Shadow Government and a Shadow Military why can't we have a Shadow Gold Price.

I spent some time this weekend with the extended family and I was asked many questions about the banking system and precious metals. When I began talking about "paper" PMs as opposed to physical they suddenly became confused. Isn't it the same thing? When I talked about the leverage used in paper, meaning that the physical backed up only a small fraction of all the paper PMs, there was shock and outright disbelief.

They simply couldn't understand how the government, that bastion of wholesome goodness, would allow this to go on. When I explained how the Fed (not a gvt agency - surprise) and the gvt were involved in this they stopped listening. The Big Lie was too big to be believed.

Can't blame them really. No one wants to believe their Daddy is a serial rapist or a child molester. Best just to close the eys, cover the ears and scream "I can't hear you".

mayhem_korner's picture

Nice post, CD. 

And as we come to understand how small of a minority it is that understands the Big Lie and how it is going to play out (yes, several permutations but all end the same), it becomes clear that the collapse is going to yield an incredible concentration of wealth housed by that same, very small minority.

I expect there will come a time when all those nuggets of ignored wisdom come to roost, and all those who've cast us aside as "paranoid nut jobs" will come pounding on the door in repentant fury.  For that potential I keep my banter to a very close few - immediate family and trusted friends.

-in my sopwith camel

dark pools of soros's picture

that's why TPTB do not care how water down the fiat gets..  they know it is debtmoney not wealth..  but to manipulate it to force the public into such debts as to give away the farm so to speak, then the wealth is transferred

They have already crippled the working-class private unions and are on the warpath vs the working-class public unions.  And the main thing against those unions aren't the pay scale as it is the security and benefit/healthcare factors in those contracts.

DosZap's picture

I stopped the FACTS and the Save your butt routine about a year ago.

NO one wants to hear it, and no one (I know owns any physical).

So  be it..........

If the entire scenario was resolved and it dropped back to $300.00 an oz, I would lose a wad.

Since that is impossible in the real world,I continue as most here do to have insurance against the almost certain.

doggings's picture

CD I have these conversations too, and youre exactly right, the Big Lie needs 64bit processing power, and most of these people are Amstrads or Commodore 64's.

curiously every single one Ive managed to make take the sheeple quiz has scored 2 or more but always take offence to their verdicts.

"its not me, I can see clearly, its everyone else.."


DoChenRollingBearing's picture

My score was -2.  

Nice quiz!  I recommend to everyone here.  But ZH-ers need this quiz less so than our clueless friends and family...

Bleeaat!   Baaa-aah!  Baa-aah-aah!

Ahmeexnal's picture

"E' Meglio Vivere un Giorno da Leone che Cent'Anni da Pecora"

RockyRacoon's picture

Question 4, but who is Max Keiser one would ask?   If you gotta ask....

My score was -4.    I have a mixed wardrobe of hats in assorted metals.

Needless to say, I don't venture forth in electrical storms.   I may be crazy but I'm not stupid.

Iam_Silverman's picture

" I have a mixed wardrobe of hats in assorted metals."

Sadly, all I can afford right now is my Aluminum foil beanie....

MagicHandPuppet's picture

Awesome quiz!  It's nice to get a good laugh, even in such a dark topic.

wandstrasse's picture

imho, the mainstream NOT asking and answering how money is created is collective self-hypnosis or psychological repression. Why? Because the answer to that question is too dire and momentous. Our wealth (individual and as a society) has merely been PRINTED since decades now, at the expense of our children, of sweatshop slaves in Asia, of industrial stock breeding, of victims from oil wars etc. I can hardly bear this, so I do not expect anybody else to bear this.

Cognitive Dissonance's picture

Our wealth (individual and as a society) has merely been PRINTED since decades now......

This is something the average person has a very difficult time understanding for some very simple reasons. Push aside the deliberate obscuring of how the system works. On a personal level it is easy to understand why they are confused, particulalry if they believe what they are told by the MSM.

I must expend my own labor to receive printed pieces of paper. Thus that paper has "value" which is derived from my expended labor. While people understand in a general way that the govt/fed/treasury "prints" money they tend to think it is only printed when value is somehow created somewhere out there to back the newly printed paper.

When I explain that there is no value created to back the extra printed paper they are very confused since the only way they receive the paper money is from the exchange of their labor. I use the example of counterfeiting and how the counterfeited money "steals" the value of the existing money, thus diluting the value of their own paper money (aka inflation) and this is what is done when the Fed creates money out of thin air to purchase Govt treasuries.

The bigger picture is often lost because they are still struggling with the concept of paper money printed into existence without labor behind it (or Gold since many people still think the currency is backed by Gold). Until that hurdle is jumped, everything else said after that point it is just words with no real meaning or understanding.

I spent some time this weekend talking about how the US removed itself from the international Gold standard during the Nixon administration and how the world financial system (with the US syaing do it or else) replaced it with the international oil standard (aka the US Dollar as the world's reserve currency) where every industrialized country (eventually) agreed to buy and sell oil only with US Dollars, thus creating an artificial demand for dollars, allowing the US to print like crazy because those extra dollars were soaked up by the world wide increasing demand for oil to feed growing countries. This was totally foreign to everyone, who had no idea the dollar was no longer backed by Gold. The Fort Knox myth is still very much alive and working it's delusional magic.

And my family is for the most part professionals, doctors, lawyers, architects, engineers etc. While everyone understood small parts of what I was saying before I started, no one ever tried to understand the bigger picture. While their egos would never admit it, they profess ignorance because they don't really want to know, not that they couldn't understand it which is what they say. The ignorance is staggering and not isolated to my family. I see this in my clients as well and they for the most part are also professionals.

NotApplicable's picture

So, you're saying that they are still 'happy.'

Cognitive Dissonance's picture

No....actually many of them are profoundly unhappy. They know that something is coming round the bend. And while they don't want to know what it is they also know it is coming. So while they can pretend to be happy because they don't know the specifics they can't deny it all.

I offer as proof the one third of the population on prescription antidepressants or pain killers, the two thirds that use alcohol and other various stimulants and depressants, the 10% of the population who are alcoholic and another 20% who abuse alcohol. I could go on, but I think you get the picture. They aren't happy in their ignorance. They are just afforded the opportunity to pretend they are happy and then die a slow death inside.

On a short time scale wilful ignorance is bliss. On a long time scale wilful ignorance is suicide.

firefighter302's picture


Brilliantly stated posts, Cognative Dissonance.

Happy 4th. Cheers.


dark pools of soros's picture

CD - try to sum things up more like that last line instead of trying to train people to think with a detailed map. Think poetry instead of user manual. There is a place for the long journals, but if you are talking to people in person, it has to resonate quickly


I tell people that the money we use is just 'Depreciating Promises'

That seems to generate an anxious anxiety and a need for them to seek answers instead of just asking curious questions






Cognitive Dissonance's picture

You must live in a part of the country where the people still has some independent brain functions. I live and work close to Washington DC, the heart of the beast. And while the population on a whole is actually very educated and several of the counties surrounding DC are in the top ten for personal income and net worth, their jobs, careers and loyalty is intimately tied to the US Govt., Congress, the lobby, the US military, Govt and military contractors, sub contractors and suppliers etc....not to mention all the various people and businesses who support those systems.

It's a very different world here near DC. Very dogmatic in their thinking......though they would vehemently argue otherwise. That doesn't mean everyone. But most certainly the majority. It is extremely difficult to get people to think "B" when they are paid to think "A".

Normalcy bias is everywhere and the trends I see here in DC are everywhere in the country. But the force is extremely strong within 50 miles of DC.

DC, the strange attractor.