Thursday, October 14, 2010

Interim projections for gold
The starting-point is to go back to when the bull market began for precious metals, at roughly the turn of the millenium. At that time, the small number of informed, precious metals commentators who occupied this niche were “estimating” that the price of gold could hit $1000/oz – with the more confident/bullish pundits suggesting that gold might even reach $2,000/oz.

Skip-ahead to today, and now any experienced precious metals commentator who estimates $2,000/oz as a “ceiling” for the price of gold is seen as being extremely conservative.

What happened between then and now? Were those earlier commentators simply not as aware or astute with respect to the potential of precious metals? Hardly. As a commentator who was not one of the first to become an advocate for precious metals, I have great admiration for the “first generation” of commentators who were here before myself.

Not only did they demonstrate superior insight in seeing what was happening before others, but they also demonstrated extraordinary courage and conviction in being ready to stand up and make their predictions for this sector – when it was literally the most-unloved asset-class among all Western investors.

What has changed since $2,000/oz was originally seen as a long-term maximum for the price of gold is that our currency-debauching bankers keep “moving the goal-posts”. Put another way, the bankers have accelerated the destruction of their cherished, paper currencies so rapidly that the earlier predictions were rendered obsolete.

In short, while the original “gold bugs” were seen as extremists and alarmists, in fact their only ‘sin’ was to underestimate the monetary depravity of bankers. Thus, we have established the proposition that rather than being shrill “Chicken Littles”, that precious metals commentators have been making sober, conservative appraisals of the economic harm caused by the extreme excesses of bankers – in the absence of a gold-standard.

This leads us to a second proposition: Given the reasonable, responsible efforts of precious metals commentators to apprise us of the relative appreciation of gold and silver versus banker-paper, the rate of change of such estimates provides a reasonable “proxy” for the speed at which the bankers are destroying these fiat-currencies. Most notably the U.S. dollar, the world’s “reserve currency”.

It is extremely useful to identify such a proxy, living in a world where our governments use heavily-contrived statistical fictions as a means of deceiving rather than informing us. Listen to clueless, media talking-heads yammer on about a “gold bubble”, listen to the same vacuous voices talk about “near-zero inflation”, and you can rest assured that you will live in a state of perpetual ignorance regarding the rate of destruction of our paper currencies (and the paper wealth they represent).

As useful as these commentators’ future estimates of gold and silver prices are, however, it recently occurred to me that such literature is very likely concealing a very large “blind spot” regarding the economic analysis conducted by precious metals commentators. Specifically, we run into nothing less than a logical disconnect when our analysis turns toward a subject with great relevance for the precious metals sector: hyperinflation.

Note that when such paper reaches zero, that this necessarily implies that the “price” of gold and silver in such a worthless currency is literally infinite . Even those people who didn’t excel in “math” will understand that there is a rather large gap between $10,000/oz and infinity.

This brings us (at last) to what is implied by any/every commentator who engages in price-forecasting with respect to silver and gold. Either such commentators are only making “medium-term” estimates for gold and silver prices, or that commentator is implicitly rejecting the possibility of hyperinflation – or the commentator simply doesn’t understand what hyperinflation really is.

In saying this, I’m not attempting to denigrate any other commentators. Indeed, being a “numbers guy” my entire life, I have always been highly cognizant of the increasing level of “mathematical illiteracy” in our societies. Part of this “illiteracy” is directly attributable to the enormous defects in our education systems. However, the other aspect of this lack of comprehension is that we are being exposed (for the first time) to mathematical concepts which are far more abstract or complex than anything which our ancestors ever needed/attempted to understand.

“Hyperinflation” is just such a concept. Not only do we need to carefully define this concept before we can possibly understand it, but we need to construct a definition where “understanding” is within the grasp of the average person. Here we run into a second “disconnect”. Economists and other scholars looking at related issues have indeed constructed several definitions for hyperinflation.

In the conclusion to this commentary, I will argue that such definitions are not accessible to the average person, and thus are not helpful in educating the general public about this very important concept.

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