Guest Post: On Gold, A Cracked Dam, And The Fed's Small Thumb

Tyler Durden's picture

Submitted by Brian Rogers,

We get some rules to follow
That and this
These and those
No one knows

We get these pills to swallow
How they stick
In your throat
Tastes like gold
-Queens of the Stone Age

Real growth vs. the illusion of growth
Understand the short video below and you will understand what I mean when I say that the United States of America (and the rest of the world for that matter) has not fundamentally grown much at all over the last 40 years. 

We have instead replaced fundamental growth with the illusion of growth brought on by constantly increasing the monetary supply, aka, inflation.

Usually, when a good or service is dramatically increased, it's price will fall.  Too many cars manufactured?  Prices will fall.  Too many new houses?  Prices will fall.  You get the idea.  Good ol' laws of supply and demand. 

But laws, especially economic ones, can be broken or at least bent for extended periods of time.  Too many dollars produced?  Rates should rise.  But that didn't happen.  Quite the opposite.

Despite the dramatic increase in the amount of dollars circulating since 1971, interest rates in the US have fallen.  Exactly the opposite of what the laws of supply and demand tell us should have happened.  How was this possible?

It's good to be king
The dollar is the world's reserve currency.  This means that the rest of the world buys and pays for things in dollars rather than their own local currencies.  This situation, brought to us by the winning of World War II and dominating the Bretton Woods Conference, created a convenient and almost constant demand for dollars. 

This constant demand for dollars has somewhat offset the constant creation of new ones.  Not entirely, of course, we have experienced periods of great inflation like 1973-1980, for example.  But the point is, our inflation has generally been much lower than anyone would have expected because the rest of the world has continually lined up to buy more dollars.

This has led to one of the greatest periods of sustained asset price appreciation in human history.  The period of time from 1980 to today is often-times referred to as the 30-year bull market for bonds which is another way of saying that rates have been falling for about 30 years now.

With rates falling for 30 years, every asset which is priced off of interest rates, which is basically everything, has gone up in price.  Bond math 101 says that as rates fall, asset prices rise.  Rates rise, asset prices fall.  Easy peezy.

But like any good Ponzi scheme, even this one has a limit and investors briefly approached it in 2008.  When it looked like our global banking system was going to collapse, investors started dumping everything in site, essentially a de facto rejection of dollar based assets. 

Houston, we have a problem.

The dam has cracked and the Fed has a small thumb
And what happened when the world stopped demanding as many dollars in 2008, aka deflation?  Why Benny Bernanke and the Inkjets at the Fed picked up the ball and started buying US credit (dollars) using... wait for it, wait for it... dollars they created out of thin air.  Lovely.

But the world is slowly waking up from it's 40-year slumber.  The money printing is starting to create inflation which is ravaging countries all over the world.  Interest rates are starting to rise and as mentioned above, asset prices are starting to fall.  With the owners of these assets sometimes having borrowed heavily to buy them on the assumption that they will always go up in price, even a small drop in price spells death.

Fiat currency, legal tender laws, fractional reserve banking and reserve currency status are a legal license for those that control the currency to steal from those that do not.

Alas, this terrible system is finally coming to its' inevitable end.  And good riddance at that.

The death of fiat money will be the best thing to happen to human freedom and liberty in over 100 years. 

However, you must realize that the deflation associated with the collapse of the dollar-based fiat monetary system will wipe out decades worth of false asset price growth in a very short time.  Think days or months.

Gravity is a real bitch
Bonds, stocks (particularly banks and leveraged companies), commercial real estate, residential real estate, auto prices, factories, etc., will be obliterated.  All of this is priced off of the "risk free rate" - the Fed manipulated Treasury rate - and all of these assets will collapse in price once the dollar is finally rejected as the world's currency, rates start to rise and the global monetary system enters the Great Reset, aka the Death of the 30 year bond bubble.

How far could these assets fall?  No one knows but think about this, in 2008 stocks fell over 50% from current levels while the existing corrupt system survived.  Where would it have fallen without the Fed pumping trillions into the banks that they could then pump right back into the market?

Real estate has fallen over 30% nationally with the government continuing to print, buy and lend to anyone with a pulse to prop the market up.  Where would housing price in the absence of taxpayer funded FNMA/GNMA/FHLMC easy credit, mortgage tax deductions and new home buyer credits?  I'm not sure but I certainly think we are going to find out in the near future.

How low can you go?
When the dollar loses its' primacy, it's not a stretch at all to imagine stocks falling much, much farther than their 2009 lows.  Any stock with too much leverage could suddenly find itself bid-less.  Think S&P 500 between below 500. 

Think commercial and residential real estate falling another 50-75%.  Imagine the vast majority of real estate transactions being done for cash, no mortgage financing.  What is the cash price for real estate today?  Who knows, but certainly a far cry from today's.

Bonds will be wiped out.  Institutional investors could avoid bonds altogether for years as rates continue to leak higher.  The PIMCO's of the world are scrambling to put equity units together to catch their panicked clients exiting bonds.  My old boss Billy G sees the writing on the wall.

Was your grandfather lazy?  Mine wasn't.
Think these downside scenarios are crazy?  Think about this: the fiat money binge dates back officially to 1971 when Tricky Dick removed the final vestiges of the gold standard.  In 1971, the S&P was at about 110, today it's around 1,400 or growth of well over 10x.  The median US real estate price in 1971 was about $26,000. Today that same number is about $155,000 or growth over 5x.

Now ask yourself this, as a country are we really 5-10x more productive than our grandparents?  Because productivity - doing things faster, smarter, cheaper and better - is the only way to generate real, fundamental growth.  Otherwise we're just creating credit and pretending like it's growth.

Now perhaps we are a bit more productive than our grandparents - computers, the Internet, global communications, more efficient vehicles, etc... - but 5-10x???  No chance.  I had the privilege of knowing my grandfather quite well and believe me, I am definitely not 5-10x more productive than he was (truthfully, it's probably the reverse).

What is the silver (or perhaps golden) lining you ask?

Countries will still trade with one another simply because the survival of their people (the seat of power for any government, even the Chinese) depends on it.  With the dollar being trashed and every other fiat currency with it, which is all of them, countries will turn to trade with the one currency that cannot be debased and has thousands of years of history backing its primacy. 

Gold.  Gold, bitchez.
Gold will be the surviving currency that will rise dramatically in value until a new global currency regime can be established and agreed upon.  Most likely years.  Bretton Woods was a relatively quick process, but remember, the US won the war so we made the rules with very little debate.  Things certainly won't work that way next time.

So while the coming deflation via rising rates will ravage the value of dollar-based assets (the aforementioned bonds, stocks, commercial real estate, residential real estate, auto prices, factories, etc...) gold will at a minimum hold your purchasing power and could very will rise many times from current levels. 

Then, in the heat of the deflation, when everyone you know is selling everything they own to simply stay afloat, you buy.  Sell your gold and buy.  With both hands.  Aggressively.  Greedily.  And if a bank will extend you credit based on your gold holdings, take it and buy with leverage.  You will be creating generational wealth.

Good luck and think long and hard about what you own and what's happening around us.

And now, without further delay, the video that got this whole rant started:

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flacon's picture

Just wanted to point out that in 2008 gold dumped along with everything else. But I also should say that it was the PAPER price of gold, not gold itself. 



Dr. Engali's picture

That's to be expected in the liquidation process. The paper price of gold also recovered and gained after the liquidation stopped. We are still waiting on stocks to make it to their old highs. Which in my view they won't make it.

flacon's picture

Would you say that it is important to hold some of your wealth in paper rag money, because the last thing we will want to do is sell our gold/silver when the paper price tanks.... Best to already have that paper on hand for a few months.... Anyone care to comment on this?


FOFOA also believes the paper gold will tank for a while before it is revalued signifantly higher. What if it takes a year or more for them to come up with the new gold-backed paper money? Can we hold on to our hoard that long and still survive without having to sell it?

Dr. Engali's picture

I think it's important to have paper money for the liquidation cycle. My view is that we will have a cycle like 2008 where everything will happen real fast. That will be an opportunity to grab more precious metals. This time though there won't be an asset price recover because the dollar will be toast. I may be wrong but that is how I'm playing it.

I'm a big fan of FOFOA. I agree with his thesis, except for his Euro support. As far as holding on to my gold my thoughts are that silver gets me through the crisis and gold transfers my wealth.

LowProfile's picture

I took a page out of Kyle Bass' book.  Other than day to day expenses in the bank account, I keep a few months supply of silver on hand, a month's supply of paper on hand, and I keep another month's supply of US currency on hand...

...In physical US nickles.

I think the Euro will survive, for the reasons FOFOA outlines.  However, I think it will have stiff competition from a yet to be released Asian currency (or perhaps currencies).  The dollar may well be forced to adopt a 15% MTM like the Euro just to be accepted.

Pinto Currency's picture



We have chaos approaching and the concept of selling gold at the bottom of a perceived deflation to buy assets is not good advice.

Be careful out there as we do not know the future.

LowProfile's picture

There will be ample time and opportunity to exchange gold for other assets.  It will make perfect sense to do so when you do.  No hurries, no worries.

Oh regional Indian's picture

From I now understand, Gold is not for the proles at all. It will (does) have value to CB's, but for reason's few understand, it's about how "Currency" is created in the first place. I'd highly recommend the CAFR website and the work of Walter Burien for anyone wondering.

They CAN and WILL confiscate and it's legal (though un-lawful, it is completely LEGAL, BIG DIFFERENCE).

Homework to be done people, it's definitely not as simple as making a choice to Go Phyzz!



LowProfile's picture

I took a glance at that link and dude...  Nothing personal, but seriously:  You need to lay off the reefer.

And if you think there will only be "official" channels to buy and sell gold, you need to lay off it permanently.

Keep your body lean, your blood clean, and your mind keen. -H. Rollins

Oh regional Indian's picture

LP, there is no time for ordinary/linear/circular thinking anymore. None. 

Take a linear mind into the current, completely non-linear world and one is basically screwed.

People are provng Newton and Einstein to be complete nincompoops and you want to believe GATA's storyline on Gold?

Who be this Rollins you quote?

Good luck.


Western's picture

Based on your comment regarding gold confiscation.


Who's going to come and confiscate this gold? Who will the government pay and what will their contract look like;


"Hi... ummm, well we need you to go confiscate this valuable money, and we will pay you in this worthless money.... please give us the REAL money when you finally to get it from the clutches of these smart, fast moving, gold loving people and please give it to us, make sure you don't keep any for yourselves now, heh heh *cold sweat* "


Yeah, that's why I really don't give a fuck. There was a time when people took care of their own problems and we're fast coming up on that era again. The government will be too busy wanting food and energy and good PR to care about gold from the people. Path of least resistance.

LowProfile's picture

He'll give some bla bla bla about taxes...  Not realizing that every country, around the world, would need to be on board with enforcing every other country's tax laws on gold...

AustriAnnie's picture

The problem is, however, that those sent to confiscate will see the value in keeping some of the loot confiscated.  

TPTB cannot confiscate it all (since when can they do anything effectively?  see the war on drugs or the war on terror for examples).

However, the damage that is done by "good citizens" who turn their neighbors in, or law enforcement that pocket some of the gold they confiscate, is not to be ignored.  Other regimes have maintained a broad reach of power by "empowering" local law enforcement to steal directly from the people to their own benefit.

Ultimately the machine breaks because it cannot pay wages to its enforcers.  But that can take a long time. 


LowProfile's picture

ORI, use whatever thinking you want, as long as it's CLEAR.  Yours clearly isn't.

Enstien?  Yeah, he screwed some things up.  Newton?  Seriously now...

And Rollins?

...Are you finally getting what I mean by your needing to clear up your fucking mind, my friend?!


JOYFUL's picture


I checked out the same link and thought it was freakin brilliant! Because he comes at the issue from a different direction, or using another way of thinking does not impute any lack of clarity...on his part.

Enstien?[sic] Yeah, he screwed some things up.  Newton?  Seriously now......

Ok, let's get Master of the Mint,in 1717 Newton overvalued the guinea, changing the English system from bimetallic to gold, and the destinies of millions as well. His unworkable and artificial fixing of the gold\silver ration to a static formula is remarkably similar to his fixation and failure on alchemically changing base metals to gold...the whole effort constipated and midas-like...xactly what ORI referred to in his blog entry as the "curse of Midas"...from that point on England went into an aggressive program of accumulating gold, territorial possessions, and societal decay, now coming to ultimate fruition right in our own times, as Englishmen are marginalized and render impotent spectators in their own country by means of the same juvenile hoarding and acquistive greed that ORI warns about in his post...the failure to adhere to the masculine principle.

use whatever thinking you want, as long as it's CLEAR

 dear Friend ....He did....just what you asked of guess what?

yur smug mockery of his contribution here is so ironically hollow  and without merit that I strongly urge you take your own advice re clear thinking before further embarrassing yourself- clarity bein in the eye of the beholder, right now yu be lookin more like the  proverbial bagholder than the oracle of common sense you presumed yurself to be! [Stephanie Cooke - What Makes the WORLD Go Round...]


Pope Clement's picture

Thanks ORI and Joyful for the ass paddling of a rather arrogant poster. It's not what you know but what you think you know that makes us embrace foolish notions; and due to the nature of our seeming Jaynesian linguistic consciousness it is not easy to determine which is which?

Absinthe Minded's picture

Now I remembered why I don't click on Google links, they don't let you back out of their page. On an Ipad that's the only way you can go back. Fuck Google and their double click fuckin' bullshit! What kind of a fuckin' name is Google anyway! Fuckin' world dominating bunch of assholes.
/rant off

blunderdog's picture

Sounds to me like iPad's suck.

Schmuck Raker's picture

"Henry Rollins is [a much respected] American singer-songwriter, spoken word artist, writer, comedian, publisher, actor, and radio DJ."

-Wiki link:

[edit - Schmuck R]

Think of Zappa with more anger, or Jello Biafra uncensored.

blunderdog's picture

Hank's cool, but he's not near as smart as Frank or Jello.

Freegolder's picture

At least you're not trying to flog shares in ORI PlC today you luna-tic.

There is out there, then there is this guy.

Good for a laugh though, thanks.

Freegolder's picture

How about explaining WHY you think they will, rather than just spouting?


Come on smarty-pants.............why?

johnu1978's picture

Buy silver, it's on sale!!!

Primitive Skills Classes

lookma's picture

FOFOA also believes the dollar paper gold will tank for a while before it is revalued signifantly higher.


What if it takes a year or more for them to come up with the new gold-backed paper money?

It won't be gold backed.

Can we hold on to our hoard that long and still survive without having to sell it?

I see you enjoy shadowboxing the apocalypse and wandering the land. 

AlvarezEarnestine7's picture

my best friend's sister makes $63/hr on the computer. She has been out of work for eight months but last month her pay was $18250 just working on the computer for a few hours. Read more on this site...

fonzannoon's picture

everyone seems to be devaluing. Why is it always about the dollar when everyone is trying to win the race to the bottom?

tempo's picture

Three thoughts..First the worldwide labor glut creating good paying jobs at Foxconn paying $1.25/hr can't be good for the highest cost, most regulated, most entitled economies in the West. Second, the inability to control reactor #2 in Japan (www, resulting in the increasing radiation levels in the USA will be a BIG problem. Third, the Central Bankers have circled the wagons promising to print, flood, lie, etc will delay but not stop the eventual adjustments (deflation, default, war?).

UP Forester's picture

Don't worry.  It won't matter who's on the bottom of the pile under the cliff, it'll just matter who's smart enough to pull the golden ripcord.

Tsar Pointless's picture

I find this post...quite bullish, actually.

DoChenRollingBearing's picture

GOLD is King!

Recent submissions at my blog:

"Review of Barron's -- Dated 2 April"

"Marginal Utility and Gold"


slewie the pi rat's picture

a crAckED




Egypt’s Muslim Brotherhood Nominates President Candidate

Dr. Engali's picture

I love a post that has the words " gold bitches"

r00t61's picture

Not only that, he spelled it the ZH way.

Dr. Engali's picture

Yeah nd I just noticed that the damned auto spell on my phone spelled it the "right way" . Fuckin stupid ass smart phone.

wee-weed up's picture

Unfortunately, as long as the dumb Euroweenies keep fvcking themselves in the arse, the dollar will remain strong.

hedgeless_horseman's picture long as the dumb Euroweenies keep fvcking allowing themselves to be fucked in the arse, the dollar will remain strong.

Tim Geithner and company for the mother fucking win.

Born Right the FIRST Time's picture



Cuz it,s all I got 

Vint Slugs's picture

You'd better get thee some gold, 'cause you've backed the wrong horse if you think that silver will save your bacon in the Great Crisis.

Silver's going to show you that it's just another commodity when we get down and dirty in the next 2 years.  Answer me this - how is it that silver, with a "structural production/consumption deficit" that's been ongoing for more than 20 years, at its 2011 peak could not even exceed its nominal 1980 peak price?

When you finally figure out the answer, then you and the rest of the silver simpletons here will stop that "silver, bitchez" stuff and start deploying your assets rationally.

UP Forester's picture

Two words, learn 'em well:



SilverFocker's picture

Talk about a "simpleton"..........only a ass crack would make that sound, and only a moron would miss the principle behind the silver price.

DoChenRollingBearing's picture

@ Vint

Best to be diversified, even in PM holdings.  I own some silver and platinum.  Gold is the $-value bulk though (75%).

Neoteny's picture

Good question, Trav...thanks!

Why is it that silver did not break its 1980 nominal high?


Something definitely fishy about that. Lunacy, no doubt.

Meh, silver is just a commodity cuz there isn't enough left to make it money.

And besides, Fofoa and his other friend say so all the time by bashing good ole Bix
or Jason, even big Ted. So it must be true. Silver is just prettier aluminum.

And no, no, no - silver is not manipulated at all. Normal price mechanism. You can't prove it anyway. The CFTC would have certainly said something by now.


Cuz, it's perfectly reasonable for a dirt-ball 'commodity' to have only 2
banks as the ONLY sellers to thousand on the long side.

Dumb ass naked monkey fuck spending too much time staring at the sun. Beat it.