Three Scenarios For Gold

Tyler Durden's picture




 

Even though we have presented comparable scenarios looking at the coverage of the US money base in gold terms previously, aka "gold coverage" ratio, including once from Dylan Grice, and once from David Rosenberg, now that we have drifted into a new, previously unchartered and very much open-ended liquidity tsunami, it is time to revisit the topic. Luckily, Guggenheim's Scott Minerd has done just that. Not only that, but he presents three distinct gold pricing scenario, attempting to forecast a low, medium and high price range for the yellow metal.

To wit: "The U.S. gold coverage ratio, which measures the amount of gold on deposit at the Federal Reserve against the total money supply, is currently at an all-time low of 17%. This ratio tends to move dramatically and falls during periods of disinflation or relative price stability. The historical average for the gold coverage ratio is roughly 40%, meaning that the current price of gold would have to more than double to reach the average. The gold coverage ratio has risen above 100% twice during the twentieth century. Were this to happen today, the value of an ounce of gold would exceed $12,000.” 

Keep in mind, the $12,000 price is based on the current monetary base. When this number rises by $2 trillion (at least) through the end of 2014, the upside case of gold will be orders of magnitude higher.

And now you know why bickering over a few hundred dollars here and there is largely irrelevant, and in fact one should be delighted if gold can be purchased at as low a price as possible. Why? Because one thing is absolutely certain: in order to keep the ponzi going, with every other sector at peak leverage, including household, corporate and financial, and real assets already massively encumbered by debt, the only real indirect buyer of gold will be the world's central banks, by means of diluting the existing paper supply. And whether or not the New York Fed, or some gold cartel, are actively pushing the price of gold lower, this is very much irrelevant, and in fact continues to be a welcome diversion, one which allows for the artificially low entry prices into gold. Because one day, gold will revert to its fair value, and so often happen, that is when its will go back to 100% "coverage" as faith in fiat evaporates. At that point whether one bought gold at $1000, $1500 or even $2200 will be absolutely irrelevant.

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Wed, 10/17/2012 - 13:51 | 2898486 New Revenue
New Revenue's picture

Barbaric relic, bitchez!

Wed, 10/17/2012 - 13:56 | 2898506 redpill
redpill's picture

The price of gold will be violently contested.  It's a tightly wound spring held down by those who cannot fathom allowing the story to propagate that a spiking gold price would tell.  Eventually it will become unstoppable, and when that happens, hold on to your asses.  Don't sit there and be giddy that gold is spiking, instead use that canary in the coal mine properly and get your economic contingencies in order because it means the shit is hitting the fan.

Wed, 10/17/2012 - 14:13 | 2898534 Pladizow
Pladizow's picture

Brodsky refers to it as the Shadow Gold Price.

Rickards covers this thouroughly in Currency Wars.

Maloney also covers this extensively in his book.

It's how gold was fixed at $35/oz at Bretton Woods.

Gold: No better place to store your labour!

Wed, 10/17/2012 - 14:39 | 2898627 BaBaBouy
BaBaBouy's picture

Manipulation Machine Notwithstanding, GOLD $50K ...

Wed, 10/17/2012 - 14:42 | 2898637 Stackers
Stackers's picture

Damn it. All I have is a few hundred pounds of silver.

Wed, 10/17/2012 - 15:24 | 2898757 Pseudo Anonym
Pseudo Anonym's picture

not too worried.  when gold $50K, gold/silver ratio 1:10

Wed, 10/17/2012 - 16:47 | 2899223 strannick
strannick's picture

Gold sale on, while COMEX, unallocated LMBA, gold certificate, GLD supplies are thought to last.

Wed, 10/17/2012 - 21:34 | 2899780 philipat
philipat's picture

in the present state of central planning and manipulated markets, historical averages don't really count for much, especially with a desperate Fed. So the one weakness with this analysis is, what is there to prevent the cover ratio falling even further below the historical average?

Wed, 10/17/2012 - 22:45 | 2899965 European American
European American's picture

Damn it. All i have is a few pounds of gold.

Wed, 10/17/2012 - 14:43 | 2898631 BaBaBouy
BaBaBouy's picture

Option Bernanke... GOLD $50K ...

Wed, 10/17/2012 - 14:52 | 2898645 nope-1004
nope-1004's picture

I could never imagine a more perfect scenario:  Currency devaluation and debauchery world wide, gold rehypothecated, physical holding "held" in London and NY by bankers, ETF's totally faking physical in their possession to control price, banks at record short interest levels, and nations scrambling to unload debt.

You couldn't make up a better scenario for the metals.  I truly consider myself lucky to be living during this time, because when the manipulation hits the end of the line and everyone comes calling for their "stored" gold, it's going to get very interesting.

It's hard to see outside the forest when the forest is full of bankster thugs trying to sway opinion..... but PM's will absolutely skyrocket at some point.  At that point, I will go and piss in JPM's foyer, for the hell of it.

 

Wed, 10/17/2012 - 17:02 | 2899287 ParkAveFlasher
ParkAveFlasher's picture

I see your "piss in the foyer" and raise you a "shit in Jamie's hat".

Wed, 10/17/2012 - 17:53 | 2899420 Janice
Janice's picture

I call. Read 'em and weep....golden showers and do-do rain.

Wed, 10/17/2012 - 17:53 | 2899421 Janice
Janice's picture

I call. Read 'em and weep....golden showers and do-do rain.

Wed, 10/17/2012 - 17:54 | 2899424 Janice
Janice's picture

And a pair!

Wed, 10/17/2012 - 20:34 | 2899681 Supernova Born
Supernova Born's picture

"Very interesting" is about 100% likely to equal a "threat to national security" in progress. It won't be good a good time for anybody except tyrants, warlords and sadists.

Wed, 10/17/2012 - 14:48 | 2898658 killallthefiat
killallthefiat's picture

All of this presupposes the actual presence of gold in the vault.  Talk of gold at $12,000 implies that the Fed can keep this shit together infinitely.  But, to quote a Tyler:

On a long enough timeline the survival rate for everyone drops to zero.

Wed, 10/17/2012 - 14:05 | 2898539 Bay of Pigs
Bay of Pigs's picture

Indeed. $1800 is a launching point for the next leg up, not a blow off top.

Sadly, most get it totally wrong on gold listening to the deflation crowd and USD bulls.

Wed, 10/17/2012 - 14:40 | 2898630 Levadiakos
Levadiakos's picture

You'll need it to bail out your $50 silver.

Wed, 10/17/2012 - 14:59 | 2898688 oddjob
oddjob's picture

Bailouts are for sorry ass paperbugz. Just shut up and print cuz that's all you got.

Wed, 10/17/2012 - 15:54 | 2898947 Bay of Pigs
Bay of Pigs's picture

Great, another top caller on the silver market. 

Wed, 10/17/2012 - 18:30 | 2899494 Pubcoceo
Pubcoceo's picture

i totally agree with you, but even in deflation, as a store of value gold would even be more important. Gold at $100 in that scenario will still buy you a good used car. Gold isnt an investment its a fire insurance policy, and the constagflagration is here.

Wed, 10/17/2012 - 19:49 | 2899620 This just in
This just in's picture

constagflagration bitchez!

Wed, 10/17/2012 - 14:09 | 2898556 DoChenRollingBearing
DoChenRollingBearing's picture

@ redpill

Yes, great comments.  They will fight it and fight it, but in the end they will lose (keeping the price of gold down).  And when the price of gold starts its truly majestic rise, you are correct, "hold on to your butts".  Be prepared.  Silver will be nice for spending, hold your gold to carry your wealth through the hard times.

I believe the author of this article is using the Fed's gold holding figures incorrectly, as most the gold at the Fed belongs to foreigners...  Only a little of that gold is US gold.  Most of America's gold is at Ft. Knox.  Those +/- 7000 tonnes at the Fed may be there, but it is not ours...  Unless we confiscate it.  There is some fear in Germany (maybe among others as well) that the USA may do just that: CONFISCATE their gold, you know possession being 90% of the matter...  Still, I believe that the author is WRONG by using the Fed's gold holdings as a proxy for "our gold".

Please correct me anyone if I have the facts wrong.

Wed, 10/17/2012 - 14:30 | 2898596 Sophist Economicus
Sophist Economicus's picture

Bearing, you are right that the NY Fed only "stores" the gold in NYC:

 

The Federal Reserve Bank of New York maintains a vault that lies 80 feet (24 m) below street level and 50 feet (15 m) below sea level,[7] resting on Manhattan bedrock. By 1927, the vault contained 10% of the world's official gold reserves.[6] Currently, it is reputedly the largest gold repository in the world (though this cannot be confirmed as Swiss banks do not report their gold stocks) and holds approximately 7,000 tonnes (7,700 short tons) of gold bullion ($415 billion as of October 2011), more than Fort Knox. Nearly 98% of the gold at the Federal Reserve Bank of New York is owned by the central banks of foreign nations.[8] The rest is owned by the United States and international organizations such as the IMF. The Federal Reserve Bank does not own the gold but serves as guardian of the precious metal, which it stores at no charge to the owners, but charging a $1.75 fee (in 2008) per bar to move the gold. Moving the bars requires special footwear for the staff, to protect their feet in the case that they drop a 28 pound bar on their feet. The vault is open to tourists.[9]

 

 

Also, the FED has Treasury IOUs for the gold that was confiscated from them in 1934.     Treasury holds the gold in Fort Knox (if it is there).   Fed will never see it again....

Wed, 10/17/2012 - 14:44 | 2898644 Vooter
Vooter's picture

Thank god the staff's feet are protected....

Wed, 10/17/2012 - 14:35 | 2898614 Antifaschistische
Antifaschistische's picture

In my opinion gold is hated for one reason....it is hated because it is a method for HIDING wealth, not because it's a method of STORING wealth.   Wealth "stored" that can be confiscated is highly preferable.  A house is taxed, your car is taxed, your capital gains are taxed, your sales are taxed, etc.    But gold, sitting in your undisclosed location can't be tapped even if it is made a crime to posess.   If they don't know you have it...they can't tax it, or come get it.   THIS is the problem TPTB have with all you gold/silver/platinum/rhodium etc. fans.

And as Redpill is pointing out...$12k gold may sound great to all the hoarders of yellow, but we will not like the world that accompanies such a mess...and a mess it will definitely be.

Wed, 10/17/2012 - 14:42 | 2898635 Vooter
Vooter's picture

"$12k gold may sound great to all the hoarders of yellow, but we will not like the world that accompanies such a mess"

We'll like it more than the non-hoarders will...

Wed, 10/17/2012 - 23:18 | 2900028 Antifaschistische
Antifaschistische's picture

lol...yes, excellent point Vooter, and I too love hoarding.   I'm just not a doomsday prepper that just can't wait for doomsday.   I'm a reluctant prepper that is not looking forward to the certain demise of my beloved country.

Thu, 10/18/2012 - 09:28 | 2900773 fockewulf190
fockewulf190's picture

Reminds me of this scene from Gone With the Wind: http://www.cswap.com/1939/Gone_with_the_Wind/cap/en/2_Parts/a/05_34

If Pa had one of those unfortunate boating accidents with his Phyzz over at his favorite fishing hole just a wee bit before the Yankees came and pillaged his poor Tara, he would have been drinking his whiskey in celebration that he and his family were going to pull through their Great Reset and not have to worry about having something to eat.

Paper isn't worth shit when your faced with a Great Reset.

Wed, 10/17/2012 - 15:03 | 2898700 Midas
Midas's picture

I am not so sure about apocalypse setting in because gold goes up by a factor of 7 in the next decade.  It has done that in the last decade without too much bother.

Wed, 10/17/2012 - 15:41 | 2898874 LongBalls
LongBalls's picture

Now you know, if you did not already, why the banksters hate to even print fiat anymore. The new push, and they will succeed, is for a digital currency. Even if gold is worth 12k or even 100K an oz. they will know when you go to cash in on your savings (gold) for use. Unless you barter........None-the-less, it's still better to have gold than not.

Wed, 10/17/2012 - 19:52 | 2899626 This just in
This just in's picture

Damn boating accidents!  I would have gladly reported all those ounces. 

Wed, 10/17/2012 - 21:10 | 2899722 Supernova Born
Supernova Born's picture

Gold is hated for the same reason the Evil Queen hated and wanted to kill Snow White.

Gold is the "fairest of them all".

Wed, 10/17/2012 - 23:13 | 2900019 GoinFawr
GoinFawr's picture

"And as Redpill is pointing out...$12k gold may sound great to all the hoarders of yellow, but we will not like the world that accompanies such a mess...and a mess it will definitely be"

Didn't Paul Van Eeeeeden and every other gold bear predict the same thing would happen when ('if' for him still?) gold passed 1200 US bitz and bytes?... and here's me years later still not having to line up for toilet paper.

As for your first observation: STFU 'loose lips...' !

Wed, 10/17/2012 - 14:05 | 2898543 Stoploss
Stoploss's picture

I am using one thousand an ounce per 1 trillion, for my conversions.

 

Gold today: =  16,100

Wed, 10/17/2012 - 14:31 | 2898602 giggler123
giggler123's picture

Don't be greedy now, 16,099

Fag's to U yellow bugs, I'm hoarding earth, can't eat gold?  Can only buy food when someone else wants to sell, but you can grow food and for that you need brown ;)

Wed, 10/17/2012 - 14:56 | 2898674 ciscokid
ciscokid's picture

With gold in your pockets you could buy anything you want.

Wed, 10/17/2012 - 15:12 | 2898726 Long-John-Silver
Long-John-Silver's picture

The government will come in and take your "Brown". You can't hide property. People lost their farms in the great depression because they could not pay the taxes on it. FDR also made it near impossible for a non-NRA farmer to sell his products to pay his taxes so he could keep his farm.

Wed, 10/17/2012 - 18:48 | 2899523 Overfed
Overfed's picture

Silver too, bitchez!

 

I've always wanted to say "bitchez" on ZH.

Wed, 10/17/2012 - 13:53 | 2898491 Jam Akin
Jam Akin's picture

To infinity and beyond.

Wed, 10/17/2012 - 13:53 | 2898492 Dr. Engali
Dr. Engali's picture

Gold bitchez!

Wed, 10/17/2012 - 14:02 | 2898531 A Lunatic
A Lunatic's picture

An excellent prescription, good Doctor........

Wed, 10/17/2012 - 14:11 | 2898560 DoChenRollingBearing
DoChenRollingBearing's picture

LOL, and the more the better re this prescription!

Wed, 10/17/2012 - 19:55 | 2899630 This just in
This just in's picture

Can you OD on gold?

Wed, 10/17/2012 - 21:06 | 2899715 TexasTrader
TexasTrader's picture

Sure can ... I believe King Midas died of starvation right?  Of course I will keep hoarding until I get to the point that everything I touch turns to gold, then I might cut back a little.   ;-)

Wed, 10/17/2012 - 21:16 | 2899740 Harbanger
Harbanger's picture

You can't OD on it but you will need some Castor oil.

Wed, 10/17/2012 - 13:54 | 2898493 Bazinga
Bazinga's picture

The relic, Munger? Oh, you mean that shiny stuff Bernanke hates in public but collects in private...

Wed, 10/17/2012 - 13:56 | 2898508 Bay of Pigs
Bay of Pigs's picture

Hey Chaaaaaarlie, lets go up to Candy Mountain!

Just die already you useless fucker...

Wed, 10/17/2012 - 13:54 | 2898494 Confundido
Confundido's picture

But, but you can't eat gold!

Do NOT follow this link or you will be banned from the site!