"Since inflation rates are low, then there's no reason for gold to go up very much."
This misunderstanding is expressed in many different ways, such as:
"Since the Consumer Price Index shows only 4% inflation, then gold should go up by no more than about 4% per year."
or
"Since M1 is showing only moderate inflation, or deflation, then gold prices are due for a moderate gain, or even a fall."
or
"Since inflation expectations are moderate, and interest rates on bonds are low, then gold's outsized gains are unsustainable, and thus in a bubble."
or
"When interest rates begin to rise, the more attractive rates will pull money out of gold and back into bonds."
or
"Since M1 is showing only moderate inflation, or deflation, then gold prices are due for a moderate gain, or even a fall."
or
"Since inflation expectations are moderate, and interest rates on bonds are low, then gold's outsized gains are unsustainable, and thus in a bubble."
or
"When interest rates begin to rise, the more attractive rates will pull money out of gold and back into bonds."
All of these statements are not true because they are only vaid when the world is on a fully backed gold standard.
But we are not on a gold standard!
Instead, paper money is highly leveraged to the underlying gold. So much so that, only in theory could the gold be used to back up paper money, and only as a last resort if paper money began to die through rejection by the people, which leads to hyperinflation.
There is about $15 trillion in the US banking system, and only about $0.35 trillion worth of gold to back it up, if the gold even exists, and has not been sold or leased into the market to try to manipulate the market and contain gold's price rise in dollars.
(261 million oz. of "official" U.S. gold x $1350/oz. = $0.35 trillion) This is gold leveraged 42 to 1. This implies that gold could rise 42 times. That's 42 x $1350 = $56,700/oz.
If you count all the unfunded liabilities of the US government, the leverage is hundreds to one.
So, to sum up, the popular myth correctly assumes that inflation will pour into gold, and on a one to one basis. But it incorrectly assumes that paper money is fully backed by gold, but it's not. And the myth also fails to account for all the prior inflation of previous years, which will also pour into gold and silver.
Here's a bit more math that more clearly shows why the myth is wrong.
The US government's budget now exceeds $3.5 trillion, but only collects $2 trillion, and thus, is printing/creating/borrowing $1.5 trillion of new money to pay the bills. With M3 at about $15 trillion, the money creation inflation may be said to be about 10%.
This is the true inflation, the money creation, and this is only in the US; but the rest of the world is inflating, too. The US is regarded as about 1/4th to 1/5th of the world economy, and the rest of the world's paper money systems are not in much better shape, and often worse, so the world's paper money inflation rate can be roughly estimated at 4-5 times bigger, or perhaps $6 trillion per year.
The world annual production of gold is about 2300 tonnes, which, at 32,151oz./tonne, is 74 million ounces. At $1350/oz., that's $100 billion dollars worth of new annual world gold production.
See the problem? How can $6 trillion ($6000 billion) of new money annually, buy only $100 billion of new gold annually, without a massive increase in the price of gold?
Gold prices would have to rise about 60 times, just to balance out the new money creation of the world. That implies a gold price of $81,000.
The US budget deficit alone, the $1500 billion, is 15 times larger than the $100 billion world annual gold production.
Thus, when the pile of paper money is already so very large, then small increases in the very large pile are relatively huge to the underlying tiny gold market.
Remember there is a bit of truth about the myth, and it's that all paper money creation will flow into gold on a 1 to 1 basis, as it eventually must. Remember, all paper money will flow into real money, since all paper money represents a potential claim on real money, and can potentially be spent on gold, and this has implications far beyond what most analysts are capable of thinking about, or writing about.
The 10% annual inflation of the US money supply today, which is $1.5 trillion can, alone, cause gold to rise 15 times, up 1,400% to over $20,000/oz!
Therefore, there is no reason to think that gold is in a bubble. Did gold increase 15 times this year from $1000 to $15,000? No? Then gold has not yet "kept pace" with the inflation. Paper money is the bubble, it's the bubble that created the housing bubble, and paper money will remain a bubble for years to come, until it all comes crashing down, and flows into gold.
The thing to remember about gold is that it is like a magnet that attracts and devours fake money. It will draw into itself all the fake money in the entire world until the paper money fraud is extinguished from the system, and it will do this naturally, all on its own.
The reason is that any fool can see the truth of the situation today, and more and more people are buying gold. As more and more people buy gold, the gold price will continue to rise. As more and more people see gold prices rise, even the most foolish of fools will naturally and simply follow the trend, and buy gold for the obvious gains they are seeing.
This is why the "powers that be" are manipulating the gold prices, trying to keep them down, or contain the rise, with a vengeance. This is why there are so many forms of paper gold to buy that don't require real delivery, such as leveraged programs, certificate programs, storage programs, IRA programs, futures contracts, options on futures contracts, ETF's, futures on ETF prices, options on ETFs, etc. All such forms of paper gold are merely tricks designed to prevent people from buying real gold, which prevents gold's real price from going up, which keeps the paper money fraud going.
After all, as gold rises a mere 30% per year, as it has been done over the last year, and an average of about 20% per year for the last ten years, it's far more attractive than most other investments. But furthermore, as I've shown you, the real potential is for gold to go up by 15 times, when US paper money is inflated by a mere 10% per year.
And what happens if things continue as they are for the next 15 years? With paper money inflation at 10%, and with silver increasing at 30%?
If inflation of paper money continues at 10% per year, for 15 years, the $15 trillion in the US banking system grows to $63 trillion, having grown about $6 trillion in the final year!
See for yourself at http://www.smartmoney.com/compoundcalc/
That shows that on a large pile of money, 10% growth is clearly unsustainable!
And what happens when silver continues to gain 30% per year for the next 15 years?
The annual silver production market today is $15 billion. So that grows to $768 billion, which is still a very managable, small, and realistic figure, with plenty of room to continue to grow in a world with $63 trillion to spend!
This shows that on a small pile of money, 30% annual growth is very realistic and sustainable for 15 years.
I strongly advise you to take possession of real gold and silver, at anywhere near today's price, while you still can. The fundamentals indicate rising prices for decades to come.
Sincerely, Jason Hommel
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