Guest Post: The Rise And Fall Of US Confidence, Or Why The Fair Value Of Gold In Phase Space Is $6,000-$12,000

Tyler Durden's picture

Submitted by The World Complex

The Rise And Fall Of US Confidence

Today we look at a graph of confidence in the US system. The US confidence ratio represents the ratio of outstanding US Federal debt to the dollar value of US gold holdings (as reported*). No corrections for inflation should be necessary, as both terms are valued in the same depreciating dollars. We use the term confidence as the ability of the US to stretch this ratio to (by our thinking) absurd multiples was a reflection of the world's confidence in the United States--which differs from the ability to actually repay debts.

For post-1971 I used the assumed holdings of 250 million ounces multiplied by the average annual price (from Kitco). There are those who suggest the true holdings are substantially less than 250 million ounces. That may be so, but the picture is already bad enough if we accept the official numbers.

Confidence level sank throughout the Depression up until the beginning of WWII, after which ascendant American power was reflected in a climbing confidence ratio up to the oil crisis in the early 1970s. Confidence sank as the US withdrew from Viet Nam and inflation rose until the price of gold rose sufficiently to restore confidence in American solvency.

From 1980 to 2001 was a golden age for the US. In this time, both stock and bond markets were strong, the US currency was strong, and the only credible opposition to US hegemony disintegrated. But every bubble meets its pin, and ever since the planes hit the towers, the US power and prestige has gone into decline. This decline is marked by a rapid decline in the confidence index. How low will it go?

There is a provocative looking left shoulder and head, suggesting a drop to the neckline somewhere around 2020, after which there may be something of a resurgence in American confidence. The anticipated completion of the bankruptcy head-and-shoulders formation promises to be a hair-raising event.

Actually, though, what appears to be happening is the blowing of bubbles. A bubble is blown, but can only expand so far before confidence fails and the bubble deflates. Then another, in this case larger, bubble is blown. If the bubble is able to deflate without society collapsing, perhaps it will be possible to blow another. Or perhaps we will be wise enough to act in ways that prevent the bubble from being blown in the first place.

At the World Complex we are of the opinion that bubbles are bad--but we recognize they can be a lot of fun. Sort of like going on a bender. The US has been on a bender since 1980. Soon the weekend will be over and it will have to be back at work. Although the new boss may be of the Asian persuasion.

For the bubble to deflate, the debt must disappear, or the gold price must rise. Assuming no change in debt levels, the gold price would have to rise about ten-fold for the confidence ratio to fall to historical values. Unfortunately, a considerable rise in US debt appears to be baked into the cake at this point, so we would foresee gold to eventually reach breathtaking prices.

The 2-d reconstructed phase space of the confidence ratio appears below:

On this chart we don't dare suggest anything other than a fall towards the origin of the graph. If the ratio falls to 10, then gold has to rise to about $6,000 per ounce at today's level of debt. If the ratio falls to 5 (the last low in 1980), then gold would have to be about $12,000 per ounce (again, only at the present debt level). The numbers could be quite astronomical once the deficits in Medicare and Social Security start being realized.

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russki standart's picture

Gold will utimately balance the external debt of the US, as the fiat Federal reserve system continues to crumble. 

spiral_eyes's picture

Long term average of DJIA:AU 1:1. Price at peak of NASDAQ bubble 1:60. Price now 1:5. Now prices tend to overshoot. I will sell my gold at 1.5:1. That means at today's prices that should be something like $17,000 an ounce. Now the DJIA is still in a bubble. If we proportion the old ratio of gold to dollars from before 1971, all that fiat creation has led to a $9000:1oz/AU ratio. So the long term trend seems like we will end up at something like DJIA at 6,000, with AU at $9,000. 

Just my two cents. 

flacon's picture

Gold will soon not be measured in fine linnen (dollars), but rather in purchasing power... 

eisley79's picture

the problem with historical analysis, is that they depend on historical events.

In 2008 Western Capitalism ceased to exist.  While it still has the facade of what once was, it no longer shares much in common with what came before.

The events that have occured, are occuring, and will occur, cannot be gauged from the past, because Capitalism has never collapsed before (since its inception).  A new system will be formed, the peoploe in control now will try to shape it in their image, while those opposed to it will attempt to move the new system back towards "freedom".

Gold and Silver have always existed as stores of values, while other systems come and go.  The end game in the current system, is DOW 0 and Gold Infinity.  Something else will replace both the dollar, and the monetary system before these asymptotes are reached.

Look at the value of Gold and Silver historically relative to the value of farm land.  That is about as universal and true a relationship that one could find.  In the new system, it is that ratio that should return to normal, and everything else relative to it as well.


Freddie's picture


Well said. Sad but true.  It has happened for thousands of years.

Cole Younger's picture

"Gold will soon not be measured in fine linnen (dollars), but rather in purchasing power"

Agree. If gold continues to climb, there will come a point that it is meaningless to price it in dollars.

essence's picture

"I will sell my gold at 1.5:1. That means at today's prices that should be something like $17,000 an ounce"


Will you really sell your Gold (after it having gone up x8) and buy stocks even if HFT and a corrupt SEC are still in place? A bought off Congress and puppet president still in place?




DoChenRollingBearing's picture

Why not wait until after freegold arrives, and sell it for $60,000 / oz?

Although I may chicken out some and sell a LITTLE bit for $5000 and maybe a LITTLE bit more at $17,000.  Hey, does a Bearing know the future?

But, for now, BUY while physical gold is still available!

GoldBricker's picture

As an old fox once told me: "Buy all the way down and sell all the way up".

Or was it the other way around? I can never remember.

Idiocracy's picture

A good time to trade your gold for the DJIA might be when the companies in the index start to do significant business in PM backed currencies.

theMAXILOPEZpsycho's picture

exactly so many people are saying this based on the previous 2 bull markets - but what if the dollar actually collapses this time?? and gold ends up being worth about $50,000 easily in todays money??

the ends of previous bull markets were market by raised interest rates + sound fiscal policy + deficits that were a fraction of todays

for me the Dow gld ratio is certainly not my major indicator of when to sell

spiral_eyes's picture

I'll put it into farmland, industrials (companies, not stocks), productive assets, real estate, energy infrastructure, groundwater. Then wait for the next Kardsahev wave to begin. Gonzalo Lira's post-hyperinflationary recipe is something he really nails.

russki standart's picture

Who Carez what  the Yahoo and Bloomberg hack scribblers have to say? Unlike the 1970´s, when gold demand was primarily driven by the US, the rest of the world is gladly buying up AU whilst boobius americanus is relying on the Dow to reflate and restore their 401k´s. Only problem is that the resulting pensions streams will pay out on dollars that will buy much less. 

Spitzer's picture

why dont these retards ever talk about how many times  US treasuries could buy the DOW ?

The fed has a trillion, china has 3 and japan has a trillion. Thats 4 trillion, double the value of all the gold in the world

GoldBricker's picture

True, but it's like robbing a bank with a toy gun. Once you really have to use it, the game is up.

It's a literal paper dragon (or, these days, an electronic computer-game dragon). Once the average man groks the fact that paper trillions are bidding for their physical stuff, he'll clamp on tightly and use fiat only for daily necessities.

dropdeadfed's picture

This is already happening. +1

OutLookingIn's picture

A small point, however, valid none the less.

Simile: Figure of speach that dirrectly compares two things using "like" or "as".

Metaphor: A direct comparison of two different things without using the words like or as.

I suppose this would be a direct comparison between the level of education attained and the 'grade' that was awarded to such attainment! In other words, how the great American educational system has failed.

zerohedgeJUNKIE's picture

sell gold nahh!!! we rather stick to the tradition.

Bullionaire's picture

Negative JPM:SILVER watch - unless TPTB hit silver for $5 today, enjoy Day 30.


Suck on THAT, Blythe.



Snidley Whipsnae's picture

"Americans Choose Gold As Best Long Term Investment"

This Gallup Poll, conducted Aug 25, this year, speaks for itself. In addition to the questions asked by the poll there should have been one more, worded in this manner: 'Do you own any gold?'... How many of those polled actually own gold? How many like the 'idea' of owning gold?

Interesting survey results; breakdown by age, party preference, sex, etc...


Yamaha's picture

Looks like a graph of my hormones.......

SeventhCereal's picture

It is inevitable that gold will go up over time, the question is are you liquid enough to survive the indefinite pullbacks from the manipulating banksters and their cronies in government?

seek's picture

Hold physical, don't buy on margin, bought with savings and not operating funds would pretty much guarantee sufficient liquidity for nearly a lifetime. The bigger issue is if it's a long stretch of manipulation, being around to enjoy the profits.

That said, one look at the 5-year chart shows they've lost control of the market in the longer term, their manipuations seem to be fixated on OpEx days now.

Oh, BTW, powers that be, thanks for being so predictable on the OpEx plunges. I held my latest purchase off until the OpEx pullback last week, and as a result  purchase was up by several K before it was delivered today. Keep up the good work!

aminorex's picture

I find it hard to understand what you could possibly mean by reading your words.  A human being is neither liquid nor illiquid.  I can make sense of it if I substitute "sufficiently capitalized" for "liquid enough".

delacroix's picture

what happens, if it is discovered, that there is no gold in fort knox. none, zero.

alien-IQ's picture

discovered? perhaps you mean confirmed?

Terminus C's picture

Bad shit... Really bad shit.

Doña K's picture

Gold price to the moon and heads will fall off

zerohedgeJUNKIE's picture

Fort Knox should be audited by the congress to verify and confirmed. If it happens that indeed there's no gold. Heads will roll via Guillotine.

Al Gorerhythm's picture

Past and present serving congress critters and senators should be rounded up and like German menfolk around Dachau after the liberation, paraded through the vault, if it is shown to be empty. There should be no mystery left for anyone involved, as to the anger that will be displayed towards them on Explanation Day.

ActionFive's picture

At a manipulated 1800/oz with a debt of +14trillion, that gold might pay the bills for a few days at these prices.

I guess if nobody cares now, why then?


StormShadow's picture

The real question is this: of the gold that may or may not be there, how much is still ours and not liened to another party (or 100 parties as the case may be, and prob is)

Doh! Now that's something a war might start over, eh?

alien-IQ's picture

Gold at $6000 would put the cost of a loaf of bread at...$25? (theoretically)

I feel a drinking binge coming on....

Terminus C's picture

Better do it soon because a shot will soon be $75.

InconvenientCounterParty's picture

fine spirits might be a better investment than gold. Just something to think about.

Clampit's picture

As do people ... for those looking to diversify.

Freddie's picture

You can eat broken bottles and they don't pay a dividend. ;-)

MayIMommaDogFace2theBananaPatch's picture

You turn that into Street Entertainment and sure as hell it WILL pay a dividend.

russki standart's picture

They already are..... cost of Macallan 18 yr old has increased from $89 to $129 in the last 3 years, a higher return than any USD deposit.

theMAXILOPEZpsycho's picture

buy and hold - there's no capital gains tax on perishable items

passwordis's picture

There's no capital gains tax on secretly held PMs either!

DosZap's picture


Not until YOU SELL.

passwordis's picture

You're kidding, right? I'm talking about holding physical.