The Future of the Price of Gold

0:00Our next speaker is a senior fellow with the Ludwig von Mises Institute. He serves as the book review editor for the quarterly journal of Austrian Economics, author in his own right, The Economics of Prohibition, Tariffs, Blockades and Inflation, The Economics of the Civil War, Bastiat Collection, the quotable Mises. and he is a graduate of St. Bonaventure University, received his PhD from Auburn University and he's going to tell us something that everybody in this room wants to know, the future of the price of gold. Please help me welcome Dr. Mark Thornton.

0:50Thank you, Doug. I visited Las Vegas a few years ago on vacation in July, and I swore I'd never come back to Las Vegas during July. It was so hot. We drove in, we're on the outskirts of town, drive by this bank, and the thermometer says 99 degrees. And then about a half a mile later, past another bank, it's 101 degrees. And as you get into town, Block by Block, 102, 103, 105, 107, 108, 109. I couldn't believe it. I'd never been in a place that was that hot. I was afraid to get out of the car. Of course, the same thing happened this time, except there were no banks to tell me what the temperature was.

1:41Actually, I was thrilled and delighted to get an invitation to speak to you here today. Given this event, given the time that we, this juncture in the economy and how important that is, as I prepared this talk, the price of gold was at an all-time high in terms of dollars. And as we go forward from here in time, the price of gold will be a key indicator or gauge of what's going on in the economy. Five years ago, I spoke at a Mises Institute conference here in Las Vegas called Austrian Economics in Financial Markets. It was in February though, and the subject of my talk was the continuing bull market in gold. How high can it go? At the time, the economy was in great shape. Inflation was low, unemployment was low, we The price of gold was trading within a range of $375 to $450 per ounce. However, the price of gold was up 75% over the preceding four years. This created a great deal of excitement

2:58amongst gold dealers and buyers, and there were a lot of forecasts out there that gold would rise to $500 an ounce, or $700 an ounce, or $1,000 an ounce, or even $1,200 an ounce. I told the audience that all these predictions were correct and that they were all incorrect. That the price of gold would reach all of these forecasts and exceed all of those forecasts. I even told them that the price of gold would eventually hit $5,000, $10,000 and $15,000 an ounce. You should have seen the faces of the gold dealers in the audience. I even said that the price of gold could even reach infinity if the dollar experiences a hyperinflation and is completely destroyed.

3:52After all, fiat monies, which are just paper monies decreed by government and not by the are not backed by gold or silver or anything else, eventually are destroyed by monetary inflation. Central bankers inevitably succumb to political influence and pressure to finance government expenditures and debt. In contrast, the gold standard provides a constraint on government spending, debt, war and imperialism. Imperialism. The passage of the Federal Reserve Act in 1913 established such a central bank in the United States and a mechanism to pay for a century of imperialism, war and the growth of government. When Nixon closed the gold window in 1971, he opened up the inflationary floodgates which have seen the amount of money increase by 1,250 percent. The money supply Supply has increased by 18% since my skyscraper model issued a signal of global economic crisis in August of 2007, and other measures of the money supply are up much higher.

5:06The value of the dollar has decreased by 96% since the founding of the Federal Reserve in 1913, as measured by the Consumer Price Index, the one that's always noted in the the paper and on radio and on television, but this is a flawed measure of inflation or even increases in price. It systematically underreports price inflation to help cover up the activities of the Federal Reserve. Now most mainstream economists actually think that the CPI overstates inflation, but this is because they are rewarded for coming up with new ways to adjust or calculate inflation over time. If an item in a consumer's basket rises and the consumer stops buying it, it can be dropped from the calculation. But when consumers turn to cheaper substitutes, they get added into the basket that's measured by the government. Things like quality improvements, technological advances, and gains in productivity are all put into the adjustment process so that inflation can be measured by those in power.

6:26This tainted view of the CPI by mainstream economists basically takes all of the benefits of the market economy and uses them as justifications to underreport the impact of monetary inflation by the central bank. It's really a nasty cover-up story. If you help the Fed cover up for the signs of its nasty practices, you will be well rewarded. Now if you don't give the Fed credit for all these gains produced by the market economy, in terms of quality improvements, technological improvements, and increases in productivity, In 2005, at the Las Vegas Conference, I stated the following factors for making the case against the long-term health of the U.S. dollar and as reasons why the price of gold would surpass all of those predictions that were then current in the media.

7:371. The federal government's debt continues to increase. That's certainly gotten much worse since 2005. In 2005, the national debt was $7.5 trillion. Today it is $13.2 trillion

7:54and rising rapidly. That's a 75% increase in five years. 2. The federal government's deficit continues to increase. Here again, things have only gotten much worse. In 2005, the annual deficit was $300 billion. Last year, it was $1.4 trillion. That's a 365% increase. Number three, the third factor was that Social Security is broken and will not be fixed. Well, in 2005, the estimates for the future unfunded liabilities of the U.S. government, these are promises to pay Social Security, Medicaid and Medicare benefits where there's no revenue to cover, Those estimates in 2005 were all less than $50 trillion. Today, estimates of the future unfunded liabilities of the U.S. government all exceed $100 trillion.

9:03So again, things have gotten much worse in a very short period of time. Number four, the U.S. is experiencing an increasing population of tax eaters, and by tax eaters I refer to people who have Social Security benefits, government employees, retirees, people on welfare, government contractors, and the like. This too has gotten much worse. Of course, there's a lot of concern about unemployment today at 10 percent. The full unemployment rate is close to 18 percent. But the real concern should be the reduced employment in the private sector, in the production of goods and manufacturing.

9:49I mean, after all, unemployment is, you know, you don't have a check, but at least you're not working, you don't have to do that. But the problem is that we have fewer people producing goods, services and manufacturing in the United States. The number of jobs has fallen by 15 to 20 percent since 2005. Number five, rebalancing the world economy and economic power, specifically Europe, Japan, China and India. In 2005, China and India were not really on Americans' radar, but today they are crucial players in the world economy. Their central banks are actually buying gold. Meanwhile, our allies in Japan and Europe are in deep trouble regarding their national debt. Japan, which was once famous for its management, has now managed to create one of the worst National Debts on the Planet. It is second in terms of debt to GDP only to Zimbabwe. Zimbabwe has a ratio of debt to GDP of 285 percent. Japan's debt to GDP is 189 percent. Going Coming down the list, in Greece and Italy, their ratio is 115%. France and Portugal and

11:19Germany and the United Kingdom are in the range of 70%. The United States and Spain are in the low 50%. Now a good rule of thumb with regard to the fiscal soundness of a nation is that if you have less than 20% of debt compared to your GDP, you're considered are considered fiscally sound. If you have debt to GDP between 20 and 50 percent, you're considered stable. Anything over 50 percent up to 100 and you're considered unstable, and anything over 100 percent, you're considered at risk. At risk for things like financial failure, hyperinflation, really nasty stuff.

12:08Number six was, I listed as holding on to the empire. This too has gotten much worse. 2005 was probably one of the peaks of activity in Iraq, but things have actually gotten much worse in terms of the cost of holding on to empire. National defense spending has increased by 40% since 2005, and worse yet, we are spending and a much larger chunk of it in Afghanistan. In Afghanistan, the nickname for Afghanistan is Graveyard of Empire. Just ask Alexander the Great or Genghis Khan what it's like to try to hold on to Afghanistan.

12:54They couldn't do it. The British Empire, at the height of its power, could not do it, could not subdue Afghanistan. and of course the Soviet Union all were defeated and ultimately depleted in Afghanistan. Number seven, the US dollar status is a reserve currency with particular concern about China again and Japan. In 2005, China was buying up tons of dollars in US treasuries as a sign China has slowed its purchases of U.S. government debt and is diversifying into foreign currencies and gold.

13:48None of these seven problems that I listed in 2005 have been fixed or have gone away on their own. By most measures, each of these seven problems has gotten much worse. In fact, the problems have snowballed much faster than most observers, including myself, would have predicted. And then, of course, we have a whole bunch of new problems. Things like the government owning Fannie Mae and Freddie Mac, running billions of dollars Inters in red ink at taxpayer expense, the FDIC that insures our bank deposits is virtually broke and is facing a rising number of problem banks that it needs to take over.

14:37Meanwhile, at the Federal Reserve, its balance sheet has undergone an historic expansion as well as a reduction in the credit quality of its balance sheet. So not only have those seven problems gotten much worse, we've added in several new problems coming to light. The common thread of all this is debt. The problem is we have too much debt, both personally, in business, and most especially in government. And the number one rationale for governments to inflate the money supply is its debt. Inflations are almost always the result of an accumulation of government debt that cannot be paid for.

15:25Why do governments inflate the money supply? Well according to economist Murray Rothbard, who taught at UNLV and who we've spoken about today, the answer is quite simple. Quote, whoever is granted a monopoly of printing money will use that monopoly to print, to finance In 2005, as I was looking back on that talk, the biggest mistake I made was this statement, I am not going to tell you to sell everything and buy gold bullion as much as I'd like to.

16:22In contemplating the future of the price of gold, we must remember the most basic economic concept concerning price. The price of gold is what is in our collective heads. The price The price of gold is not the result of any kind of physical or mechanical process. The price of gold is determined by what we think about gold and what actions we collectively take in terms of buying and selling gold. Now, humans did choose silver and gold as money amongst all of the commodities, in part because of its physical characteristics. Gold Gold and silver are durable, they're divisible, and so we initially chose silver and gold because of some of those physical properties as well as some of its supply characteristics.

17:18Gold and silver exist only in small quantities on this planet and as a result are relatively are generally scarce so that a small amount of gold or silver can convey a substantial amount of value. Now, people have focused on other factors in the market for gold and its price. For example, some people think that the central banks are manipulating the price of gold by buying and selling gold into the market. Other people think that the central banks are manipulating gold by leasing gold to private people and not telling anybody about it. And then other people think that all the gold in Fort Knox has surreptitiously disappeared either by government policy or employee theft or other reasons. All three groups lament that these schemes would, if true, reduce the price of Gold, keep it damped down, so as to not be an indicator of inflation in the economy.

18:38However, all of that still is a matter of being in our head. Most people have never heard of these schemes or don't believe in them, so it doesn't have much of an impact on the marketplace. However, if one of these schemes were to be revealed, it would have obviously a great increase in the price of gold and the price of gold can change very rapidly. Imagine, for example, if CNN started broadcasting a story about how all the gold in Fort Knox is missing and it had been missing for the last 10 years. What would you think would happen in the market for gold the next morning? Well, of course, it would shoot up So again, it's not a physical mechanical process, it's in our head, things can change very rapidly.

19:26The fact that the price of gold is regulated by what is in our head makes forecasting the price of gold very difficult. Of course, gold and paper money vary inversely against one another in predictable ways. so that 9 out of 10 times if the value of the dollar is falling on a particular day, the value of gold is rising. But forecasting the value of currencies is also inherently difficult and highly problematic. Any investment strategy that you adopt concerning gold should acknowledge these inherent difficulties in forecasting the future. Austrian economics, unlike mainstream economics, are very wary of economic forecasts. There is no real hard science of predicting the magnitudes and timing of economic change. Therefore, you should be cautious, especially about specific forecasts regarding gold.

20:32What Austrian economists do argue is that correct economic theory does help us to better understand their environment and to act accordingly. Some of the factors that I've laid out suggest, obviously, that the current high price of gold is very well justified by events in the economy. Currently, as I mentioned, gold is at or near an all-time high. The technical target on the price of gold is $1,600 an ounce, based on technical analysis over the next year, year and a half. However, gold has also fallen quite sharply at various points in time.

21:22And we must remember that conditions in the stock market also impact the market for gold. A correction in the stock market is something we need to be leery about, whether it's a stock market crash or long bear market in stocks. The strong bear market rally over the last year, year and a half, has been driven not by an improvement in the fundamentals of the economy, but by a lack of alternatives to invest profitably. Real estate prices continue to fall, so the stock market has been propped up by those factors as well as by gimmicks such as cash for clunkers, the homebuyers' tax credit, and the cooking of the books with respect to things like accounting standards and unemployment.

22:19This suggests that what is in our collective heads regarding the stock market could change dramatically in the near future, and that there could be substantial losses in the stock market going forward. If asset prices were to fall dramatically in unison in terms of stocks, in terms of real estate, in terms of commodities, and commodities, we should also expect a like-minded fall in the price of gold as well. At least a temporary fall in the price of gold. Robert Prechter is even forecasting that the price of gold will be less than $680 an ounce. Now this is a deflationary scenario, and, but when I say it's deflation, it's deflation of asset prices. I do not expect the Federal Reserve to cut back on its efforts to inflate the money supply. Far from it. I expect the Fed to continue its efforts to inflate the money supply. In fact, we should not be surprised by new extreme efforts if the economy and and Stock Market were to falter. It is reasonable to expect that the Bernanke Fed has several

23:32such measures on the shelf and ready to implement. The deflationary scenario simply means falling asset prices, but the Federal Reserve's response suggests even further strength in the price of gold going forward. In an era of paper money, owning gold and silver is Precious metals provide economic protection against both inflation and deflation. They provide economic protection against things like war and financial market meltdowns. Like insurance, your purchases of gold should be viewed as something you hope you never Also, like insurance, gold is something you don't own one week and sell the next. Therefore, even though I have expectations of possible lower prices of gold ahead, it does not mean that I would recommend selling your gold. In fact, the lower prices should be viewed, in my opinion, as a buying opportunity because the longer-term prospects for the economy and the dollar indicate that.

24:44that. Longer term, therefore, I remain very bullish on gold. The only thing that would change that opinion is if we had, for example, real budget cuts, real tax cuts, a balanced budget, true deregulation and privatization, and real moves to return to sound money. And that just doesn't seem very likely today. The ultimate demise of the dollar still seems to be far off in the future. However, it sure seems a lot closer than it was in 2005. It is important to remember that the increase in the future price of gold is never going to be a smooth ascent and indeed is subject to major pullbacks along the way, as I have already pointed out. It is also important to remember that things can happen much faster than Expected. As Ludwig von Mises pointed out, inflationism is doomed when we all realize that the central bank does not have any intention of stopping the inflationary process. When we get that message into all of our collective heads, then we will abandon the dollar and

26:00bring the scheme to an end and restore sound money. Thank you very much.

26:08Thank you very much.