16 June 2021 is five years from today. What will the gold price be 16 June 2021?
Currencies are Worthless
As the world’s fiat paper currencies have lost 99% or more of their purchasing power in the last 100 years, we have to understand that fiat paper currencies are not a suitable unit of account to accurately measure prices.
Gold is in fact a much better measuring stick for value than paper currencies.
A currency doesn’t measure anything. It just has an arbitrary value placed upon it by the population using it. It’s not backed by anything and it can fail at any time. By the tale of history, we know that the unbacked fiat paper currencies used today will ultimately destruct and become worthless. All unbacked fiat currencies throughout human mankind have failed.
A more accurate measurement is to measure fiat currencies in gold. If we look at the US Dollar as measured in gold, we can see that the US Dollar has utterly failed in keeping its store of value, with the value plunging about 98% in a mere 50 years.
Source: Gold Price Charts, BullionStar
When you need a stack of USD 100 bills to buy a milk and a couple of eggs, the the US Dollar gold price is meaningless as an indicator. What we have to establish when talking about the price of gold is that it keeps purchasing power constant. If 1 oz of gold coin can buy an exclusive men’s suit today at USD 1,300, and the same 1 oz gold coin buys an exclusive men’s suit at USD 2,600 tomorrow, it means that gold is still at USD 1,300 in today's purchasing power and we haven’t gained anything. Same thing if the gold price goes to USD 650 and it can still buy the same suit.
We as a society should have transcended the idea of measuring value in fiat currencies a long time ago. Currencies are not a reliable measuring stick. Just imagine if the centimeter, meter, yard or foot were to fluctuate in length.
100 cm 100 years ago has become 2 cm today. Think about it. This is what has happened with our currencies.
The Gold Price
The gold price is an interesting term because the gold price doesn’t reflect what’s happening on the physical gold market whatsoever.
In today’s marketplace, a lot of things are regarded as “gold”. On the London Gold Market alone, there’s 600 times more gold traded each day than there is gold mined globally that day.
All sorts of paper gold passes for “gold” on the financial markets. The vast majority, certainly more than 95%, and likely more than 99% of this paper gold is not backed by any physical gold.
“Gold” is created out of thin air as paper obligations. The demand and supply of this paper gold have little to do with the physical gold market.
The demand for real physical gold has been insatiable in the last couple of years but without the price of gold reflecting the huge demand. Physical gold has been flowing from the Western vaults to Asia. The Chinese in particular have been vacuuming the London vaults for gold. The high physical demand hasn't been reflected in higher gold prices though because whereas Easterners have been buying physical gold, Westerners have been selling paper gold.
As the price of “gold” is set on the OTC paper market in London and on the COMEX futures market in New York, the US Dollar denominated gold price decreased between 2012 and 2015 despite the high physical demand which instead lead to physical shortages of gold.
Whether the physical demand is up or down 5 tons in China or India matters little when there’s 5,500 tons of paper gold traded each day in London as visualized in this infographic. London, and to a lesser extent COMEX in the US, are the price discovery markets for gold. Paper gold on these markets is however almost exclusively cash settled with less than 1% of the contracts/futures settled with delivery of physical gold.
The gold price is thus not dependent on the market fundamentals of physical gold but this may very well change in the future.
With China picking up all physical gold available everytime the price slides, widespread shortages are the likely outcome if the gold price ever were to decrease significantly again. With the historic vaulting capital of the world, London, already running out of stockpiled gold there just wouldn't be enough physical gold to satisfy demand if the price were to ever plunge significantly again.
It's been healthy for the demand/supply balance of the physical market that the gold price has increased 22% in USD Year-to-Date 2016. We however have to understand that the largest potential for a revaluation of the gold price paradoxically may be preceded by a decrease in gold prices.
When trend seeking Western investors sell their paper gold and the price slides, Easterners take the opportunity to buy physical gold at bargain prices and thereby stress the physical market with shortages as a result Such shortages may very well be what ultimately breaks the neck of the paper markets because when there is no longer any physical gold available at the price dictated by the paper markets, there will be a disconnect between the price of paper gold and physical gold. Paper gold will go towards zero whereas the price of physical gold will skyrocket.
Such a revaluation of physical gold will bring the fiat paper currencies to their knees as their worthlessness as a store of value will be brought into the daylight.
USD 65,000/oz
What will the price of gold be in 5 years?
Gold is savings – Gold is wealth, and as such the price denominated in something as inferior as the US Dollar isn't very important.
For the sake of reflection, we can play with the idea of what the price of gold would have to be if the US Dollar were to go on a fully-backed gold standard.
The US gold reserve officially stands at 8,133.5 tons although it has never been properly independently audited. At USD 1,300/oz, this would be equivalent to 340 billion dollars. The total US money supply is about 17,000 billion dollars. For each "gold backed" dollar today, there is thus 49 unbacked dollars. The gold price would thus have to increase 50-fold to USD 65,000 if the US Dollar were to be fully gold-backed by 16 June 2021.
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