Gentlemen, Start Your Deloreans

Tyler Durden's picture




 

Submitted by Lee Quaintance & Paul Brodsky of QBAMCO,

“If my calculations are correct, when this baby hits 88 miles per hour... you're gonna see some serious _ _ _ _.”

It seems engines are revving and it may be time to go forward to the past. Earlier this month, a large and well respected asset manager that has begun taking positions in gold expressions issued a report in which it began to justify gold’s relative value. One metric it used was comparing the quantity of currency in the world to the quantity of gold. The report concluded that using this metric, the relative value of gold would be about $2,500/ounce, a significant premium to its current spot price.

The analysis posited gold’s value upon a return to the gold standard, posing the question: “what if the entire world’s gold were used to back the global supply of fiat currency?” It then explained that there are approximately $12.5 trillion of physical and electronic global currency reserves and in excess of 155,000 metric tons (tonnes) of above-ground gold (which would imply a price of approximately $2,500/ounce if current global bank reserves were to be backed by gold). As you know, we agree fully with the concept of finding one’s value bearings on gold by pricing its quantity vis-à-vis the quantity of reserves (as per our Shadow Gold Price); however, we thought it important to explain the flaws in the method used above, and to augment it in a way we feel better portrays gold’s present value.

First, we do not think $12.5 trillion in global base money is the relevant figure to use as the numerator.

The only reason there would be a conversion from a fiat monetary system to a gold standard would be continuing financial pressures, specifically pressure from the commercial marketplace to deflate the value of systemic credit. This credit-deflation dynamic began in 2008, and has been forcing global central banks to print more base money (bank reserves) with which to service and repay that credit. In a global monetary system in which the future purchasing power of currencies is respected and the system is generally perceived as solvent, there would be no need for a conversion to a fixed exchange rate (a gold standard). So, any discussion of conversion must presume further stress weighing on the marketplace; the ongoing perception of endless money creation that threatens further purchasing power loss. A gold standard would be demanded by global commercial counterparties and savers. Central banks and their treasury ministries would ultimately be forced to cap such fears by “fixing” the exchange value of their currencies to gold.

So the numerator in the calculation should not be the current level of base money, but the amount of unreserved credit in the system (i.e. global bank assets). (Fiat currencies are largely credit currencies, created primarily in the banking system as unreserved loans that create offsetting deposits in kind.) Thus, we think the most appropriate benchmark to use as the numerator in the calculation would be global bank assets – about $100 trillion – not $12.5 trillion in global base money.

Second, for gold to be money in a gold standard overseen by governments, the denominator used must be official gold holdings – not total above-ground gold in the world. Otherwise, the mechanism of a gold standard – the ability to exchange a government-sponsored currency for gold interchangeably at a fixed rate – would not work.

As per the World Gold Council, about 31,000 tonnes of gold is held in official hands (only about 20% of total above-ground reserves). Central banks have no legally or ethically enforceable claim on the balance of the 155,000 tonnes, which is held in private hands. This implies that the denominator in the calculation would have to be much closer to 31,000 tonnes than 155,000 tonnes.

So, we agree with the logic of dividing base money by gold holdings to find gold’s “intrinsic value” (as per Bretton Woods and our Shadow Gold Price), but we believe the reasonable value upon conversion to a gold standard would be many multiples higher than $2,500/ounce.

We are heartened that some of the world’s largest and most sophisticated financial asset investors are beginning to consider money and gold stocks into their present value analyses for currencies, and in turn into their portfolio allocations. We believe allocations to gold will increase substantially as investors previously dedicated to stocks and bonds progress in their analysis.

Speaking of Transmissions…

Herewith a reiteration of our proposal of a transmission mechanism to a fully-reserved banking system, gold standard and fully-funded federal debt in the US:

  1. The Fed purchases all existing bank assets via the creation of base money on a one-to-one basis (i.e. deposits are replaced with base money which reduces bank leverage to 1)
  2. Banks are commensurately required to lend only against time deposits they can source (banks become credit intermediaries, not creators)
  3. Simultaneously, the Fed purchases Treasury’s gold at a price which would fully fund Treasury’s outstanding debt (yes, unfunded liabilities remain unaddressed)
  4. The Fed then guarantees the exchange value of its existing base money liabilities against the gold it then holds in reserve (a classical gold standard)

Theoretically, the notional size of the existing money stock would remain stable so there would be no diminution of purchasing power by existing currency holders. The wealth redistribution that would occur at revaluation would be from current non-gold asset holders to gold holders, which is a byproduct of bank system deleveraging regardless of whether it is market-driven or policy administered.

While some continue to argue that the US can only get its fiscal house in order by running trade and/or budget surpluses, it would seem the US’s official gold stock could be revalued to the extent that no trade or budget surplus is necessary as any sort of precondition. Going forward, of course, if the US were to allow trade and budget deficits to persist, it would lose its gold in the process and the credibility of the dollar would decline in sympathy.

Practicalities

The Fed would pay for Treasury’s gold at a price high enough to provide the proceeds to Treasury to pre-refund ALL of its debt. At the current U.S. bank asset to base money ratio, that number would be about 5 to 6 times the current spot price. In the aftermath of the dollar’s devaluation against gold, it clearly would behoove the Fed to support gold as its own reserve base going forward.

In aggregate, bank assets are marked at a premium to market value so banks would gladly dump their assets as marked. Banks would then have incentive to offer rates of return and maturity terms to depositors that are commensurate with the banks’ lending opportunities (as things should be).

Fears of US Treasury paper free-falling into a bottomless pit in response to the dollar devaluation are unfounded as these liabilities immediately become fully-funded by Treasury’s gold sale to the Fed. There would be no domestic or foreign public/private bids required.

In theory, the bank assets/loans the Fed would purchase could be marked down 90% if need be and still not impact the solvency of the Fed. The Fed could simply bid gold up X times to maintain its capital cushion. (After all, the Fed is the monopoly supplier of base money.)

Some have argued that such a policy maneuver would put incremental pressure on non-US entities that have borrowed in USD terms. We disagree as the USD money stock that supported that debt originally would be unchanged in terms of its quantity. Only the mix between base and credit/deposit money has changed. Some have also argued that US Treasury paper would be susceptible to ratings agency downgrades as a result of these actions. Hogwash. Nothing would have occurred except an exchange of base money from the Fed to Treasury and gold from Treasury to the Fed. Thus, if anything, Treasury paper would be upgraded immediately as Treasury payments would be immediately defeased by the newly acquired base money proceeds from the gold sale to the Fed.

As Marty McFly said; “I guess you guys aren’t ready for that yet. But your kids are gonna love it.”

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Thu, 10/25/2012 - 18:49 | 2920073 Dalago
Dalago's picture

I can't wait!!!

Thu, 10/25/2012 - 19:13 | 2920117 sunaJ
sunaJ's picture

Since when did logic determine the actions of these wunderkind PhD planners?  No, they will not let go until their fiat currency is plucked from their fingers (cold & dead, optional).

Thu, 10/25/2012 - 19:43 | 2920160 nope-1004
nope-1004's picture

This is an insane calculation.  It doesn't take into consideration corruption, fraud, further debasement, unfunded liabilities, boomer demographics and associated pensions, and central bank rehypothecation.

Gold should be at $25,000 per ounce right now, and the fuckers in power know it.

There isn't enough money to go around to satisfy all these political dreams, much less debt financed livelihoods.  $2,500 an ounce, then what?  No more MF Globals?  No more JPM short positions?  LOL.

I'll keep my 'wealth' at the bottom of the lake, thank you very much.  $2,500, $5,000, or $10,000/oz is not the level that the worlds' debt crisis gets solved.  Gold is the final bubble in this ponzi and it will shoot to levels unimaginable because fiat will sink to levels finally realized.

 

 

Thu, 10/25/2012 - 19:47 | 2920197 3rdgrader
3rdgrader's picture

Ten Thousand Dollars per ounce of pure Gold is very close to the yellow metals actual value today, by this time next year they will have printed several Quadrillions more of the counterfeit paper stuff, will make the relative value One Hundred Thousand Dollars per ounce at that time.

Thu, 10/25/2012 - 20:47 | 2920300 Precious
Precious's picture

The price of gold is whatever the next buyer is willing to pay and the next seller is willing to take.  

So, I'd say the price today is pretty much exactly where it should be.

Tomorrow might be different.

The only thing the "respected asset manager" can hope for is somebody reads his report and agrees.  Otherwise it's meaningless.

Thu, 10/25/2012 - 21:27 | 2920376 FEDbuster
FEDbuster's picture

The problem is physical price is tied to the paper gold price (so far).  The paper gold short sellers (and silver) keep flooding the market with golden IOUs to keep a lid on prices.

Average cost of production of an oz of physical gold is still a relevant number.  At $25K/oz sale price, we will have a near zero unemployment rate due to everyone digging and panning for gold.  Many unemployed construction workers here in AZ have already made that career change.  I hope to live long enough to see ex-investment banksters with a pan in their hands down at our local creek.

Thu, 10/25/2012 - 21:52 | 2920432 PeaceMonger
PeaceMonger's picture

I couldn't agree more.

Ask yourself: how many 1 oz gold coins would I trade for a new 1/2 ton truck? 5? 10? That's the price of gold currently for you for that good.   The point being is that if/when scarcity hits the goods you need to live, gold will always be accepted for exchange.  Given the portability and denomination flexibility of PMs, they will always be accepted, and thus retain their value.

Fri, 10/26/2012 - 03:53 | 2920830 Al Gorerhythm
Al Gorerhythm's picture

Yup: and people are still trusting other folk with their money. In Australia, a financial house just went bust (Banksia Securities) wiping out $750 million. It just vaporized I guess. One poor slob dropped $60 G into his account two days prior to the announcement. Trust us! Yeah, riiight.

Can't seem to wake folk up though. Family still zombiefied.

Thu, 10/25/2012 - 20:52 | 2920322 rocker
rocker's picture

I aqree with yours and the jailbirds numbers.  What many have missed is the new trend in digital dollars.  I had a problem of this years ago and it just keeps getting worse. Banks don't even need physical dollars.  I buy physical PMs because I don't want to own paper gold. Now banks don't want to own physical dollars.  They get paychecks deposited with digital dollars. People buy groceries with digital dollars.

I can not cash a check for 10 grand with out waiting a week, even when the money is in my account. Supposedly. Believe me, this wlll not end well.

Thu, 10/25/2012 - 21:12 | 2920353 fourchan
fourchan's picture

"many"

Thu, 10/25/2012 - 23:31 | 2920524 DoChenRollingBearing
DoChenRollingBearing's picture

@ nope-1004

Like you need another "+ 1"!

The best way to get this all started would be a suggestion that FOFOA made:  The Traesury and/or the Fed make an announcement that they will buy any and all gold for $10,000 per (physical) oz (or any other similar arbitrary number).  Then we all just sit back and watch as the weaker hands take the deal...  Then we are off to $55,000 or more.  

I can hardly wait to see how the saga of Germany wanting some of their gold back turns out...

Too bad about the damn boating accident and icefishing clumsiness!

Thu, 10/25/2012 - 18:57 | 2920081 alstry
alstry's picture

How much was a pound of gold worth as the Titanic was sinking?

You need systemic thinking for systemic failures when we are all milking each other for production.

As technology continues to replace human production, how much gold or currency will we need as we increasingly digitize goods and services to take on the economic qualities of air?

http://www.udderworld.com

Thu, 10/25/2012 - 18:59 | 2920100 HungryPorkChop
HungryPorkChop's picture

Yeah, sure, but the life boats were worth their weight in gold. 

Thu, 10/25/2012 - 19:03 | 2920102 fuu
fuu's picture

168 week old account, first post 10/12/12, and you do nothing but spam that website.

Link pimping, serious bidness.

Mynhair is that you?

Thu, 10/25/2012 - 19:17 | 2920136 alstry
alstry's picture

Never forget that everything Hitler did in Germany was legal.  Martin Luther King

Thu, 10/25/2012 - 20:17 | 2920252 fuu
fuu's picture

Also, $20.67/toz * 14.583toz/lb = $301.43061.

Fri, 10/26/2012 - 06:54 | 2920926 Grimbert
Grimbert's picture

or even 1 troy lb = 12 troy oz = $248.04

Fri, 10/26/2012 - 06:57 | 2920930 Ghordius
Ghordius's picture

or that up to 1968 one million bucks could be converted to one ton of gold - in europe

Fri, 10/26/2012 - 09:09 | 2921129 fuu
fuu's picture

Fair enough, he just said a pound.

Fri, 10/26/2012 - 00:00 | 2920638 Precious
Precious's picture

And the naive German Jews kept trusting in the "rule of law" to the point of annihilation.

Thu, 10/25/2012 - 19:28 | 2920152 alstry
alstry's picture

Who is Alstry?

 

Thu, 10/25/2012 - 20:46 | 2920308 JuliaS
JuliaS's picture

A batshit crazy spam-bot without a single original thought.

Thu, 10/25/2012 - 19:34 | 2920168 Abitdodgie
Abitdodgie's picture

The price will go up WHEN they say it can and not before .

Thu, 10/25/2012 - 20:28 | 2920271 cranky-old-geezer
cranky-old-geezer's picture

 

 

How much was a pound of gold worth as the Titanic was sinking?

How much will a pound of gold be worth when the US dollar sinks?

Thu, 10/25/2012 - 21:44 | 2920416 Catflappo
Catflappo's picture

How much was a box full of banknotes, (or indeed an entire deck full of banknotes) worth as the Titanic was sinking?

 

What's your point?

Fri, 10/26/2012 - 00:01 | 2920634 MJ
MJ's picture

How much was farm land, food, or a penthouse worth when it went down? Not more than an equal amount of gold.

Troll.

Edit: cat beat me to it

Thu, 10/25/2012 - 18:52 | 2920084 swissaustrian
swissaustrian's picture

I was expecting some chart porn

Thu, 10/25/2012 - 19:06 | 2920110 JPM Hater001
JPM Hater001's picture

You will have to settle for traditional but imagine gold at $56,000 an ounce...

Of course if you do your research you will find Silver in the 10's of Thousand should this be the case so I still don't understand why Gold gets the limelight...again.

Thu, 10/25/2012 - 19:31 | 2920154 Zero Govt
Zero Govt's picture

visually Gold is a stronger (richer?) colour and its value considerably more

when considering national breakdown the thought of carting Silver across a guarded border compared to Gold is a 'no contest' 

my 2+ boxes of Silver weigh a ton, the Gold slips into any envelope, file or down your pants!

Thu, 10/25/2012 - 19:38 | 2920174 zerozam
zerozam's picture

I think I've actually seen a golden buttplug...

Thu, 10/25/2012 - 19:50 | 2920178 knukles
knukles's picture

YES!

I've been waiting years for somebody to say that!

I've found it!  The Quest for the reference to the Golden Buttplug is Over!

Thu, 10/25/2012 - 19:54 | 2920204 Zero Govt
Zero Govt's picture

are airport metal detectors tuned/de-tuned for Gold teeth .........or butt plugs?

Thu, 10/25/2012 - 19:56 | 2920219 Hulk
Hulk's picture

That asshole's worth a butt load of money !!!

Thu, 10/25/2012 - 22:49 | 2920540 wee-weed up
wee-weed up's picture

zerozam said:  I think I've actually seen a golden buttplug...

How is ol' Bwany Fwank doing these days?

Thu, 10/25/2012 - 18:53 | 2920087 HungryPorkChop
HungryPorkChop's picture

Jim Sinclair offered the equation for price of gold back in 2011.  The end price was upwards of $16,000 and before QE3.

Thu, 10/25/2012 - 18:56 | 2920091 goldenrod
goldenrod's picture

No, it is $12,500 which is still a lot higher than today's price.  Buying gold is a no-brainer.

 

Thu, 10/25/2012 - 19:03 | 2920106 RockyRacoon
RockyRacoon's picture

Hey, how'd you know?  I don't have a brain and that's zaccly what I'm doing!

Thu, 10/25/2012 - 22:44 | 2920528 DoChenRollingBearing
DoChenRollingBearing's picture

me tu rocco, me tou.

brane, wazzat?

Thu, 10/25/2012 - 19:04 | 2920107 e-man
e-man's picture

$16,000 or $12,500 makes no difference.  Wealth is not a measure of how much you have (ask anyone from Zimbabwe), wealth is a measure of how much more you have than the person next to you.

Thu, 10/25/2012 - 19:13 | 2920128 Bastiat
Bastiat's picture

"many multiples" bitchez!

Thu, 10/25/2012 - 19:41 | 2920179 logicalman
logicalman's picture

Health is more important than wealth.

I'm knocking on the door of 60 and can still cycle 50 miles of trails without blinking, all while carrying a lot more than my physical weighs.

Might prove useful one day!

Thu, 10/25/2012 - 20:34 | 2920283 Tango in the Blight
Tango in the Blight's picture

So how much does the average Joe have?

Thu, 10/25/2012 - 22:46 | 2920534 DoChenRollingBearing
DoChenRollingBearing's picture

MEDIAN Joe would have zero.  Only 1% of Americans own ANY investment gold.

AVERAGE Joe?  Maybe 1.5 oz?  Are we all above average?

Thu, 10/25/2012 - 19:27 | 2920151 I think I need ...
I think I need to buy a gun's picture

this is where we are all depending on Bernankes expertise!!!!!!!!!!!!!!!!!!!!!!1

Thu, 10/25/2012 - 18:58 | 2920099 AgShaman
AgShaman's picture

I bought a sizeable chunk of multi-layered cheese a couple days ago...

It just seemed like the right thing to do

Thu, 10/25/2012 - 19:21 | 2920143 Xanadu_doo
Xanadu_doo's picture

Never can has too much cheese.

Or gold.

Thu, 10/25/2012 - 19:01 | 2920104 Wakanda
Wakanda's picture

Buy you fuckers, BUY!

Thu, 10/25/2012 - 20:43 | 2920299 Tango in the Blight
Tango in the Blight's picture

No, don't buy. Moar for me...

Thu, 10/25/2012 - 22:48 | 2920539 DoChenRollingBearing
DoChenRollingBearing's picture

Indeed Tango!  If we can succeed in convincing people NOT to buy, more for us!  LOL!  Sell your gold, bitchez!

Thu, 10/25/2012 - 19:03 | 2920105 UP Forester
UP Forester's picture

Fears of US Treasury paper free-falling into a bottomless pit in response to the dollar devaluation are unfounded as these liabilities immediately become fully-funded by Treasury’s gold sale to the Fed.

 

So, why would the Treasury sell all the gold to the Fed?

Because the Fed has proven it is uber-trustworthy and working in the "best interests of the people," or what?

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