by Jason Hommel, April 5, 2008
Life is unfair. We are all being tested, all the time, on things that "are not on the curriculum" that nobody may have taught us. How unfair! Often we are tested on things that we have no way of knowing! Scary, but true. But the sooner we realize those facts of life, the better off we will be!
The results of the tests in life are not merely whether you get an A, B or C in school. In life, the tests will have far more significant consequences, and may determine if you become wealthy enough to effectively help others, or go bankrupt and have to start all over again, or worse.
Today, everyone in the world who has any money or wealth is being tested on their own knowledge of the nature and value of paper money, and on how much paper money there might be; and on the nature and value of silver and gold as money, and on how much silver and gold there might be.
We are being tested on things that nobody teaches, and on things that are, frankly, impossible to know, although estimates exist, and I do try to share some of the professionally compiled estimates on those subjects.
Here's a bit of the curriculum on money:
The Money Chart: The Fundamentals of Gold & Silver Feb 25, 2006
Speech given at the Silver Summit September 26, 2006
Why Silver Will Soar May 23, 2007
Today, I'd like to talk a little bit about the facts of hyperinflation. Everyone will be tested on this in this market, so pay attention, because these facts are not widely taught. If you understand this, you can get a serious advantage over other people.
Back in 2003, I wrote:
Inflation & Deflation During Hyperinflation Nov 6, 2003
Back when I was selling individual essays, that was a best seller.
I identified a monumental sea change situation that changed in 2001. In 2001, an amazing thing happened. Hyperinflation started in the U.S., and has continued ever since, and gotten worse.
In 2001, the purchasing power of money in the banks (the gold value) peaked, and then started going down faster than the rate of increase of new dollars. Whereas before 2001, both the number and the value of dollars increased at the same time.
June 1998: M3 5,711 billion / gold price $296/oz. = 19.3 (billion oz. gold value)
June 1999: M3 6,221 billion / gold price $260/oz. = 23.9 (billion oz. gold value)
June 2000: M3 6,809 billion / gold price $288/oz. = 23.6 (billion oz. gold value)
June 2001: M3 7,628 billion / gold price $270/oz. = 28.2 (billion oz. gold value)
June 2002: M3 8,178 billion / gold price $318/oz. = 25.7 (billion oz. gold value)
June 2003: M3 8,761 billion / gold price $345/oz. = 25.4 (billion oz. gold value)
Sept 2003: M3 8,909 billion / gold price $390/oz. = 22.8 (billion oz. gold value)
Money value peaked in 2001, with M3 being worth 28.2 billion ounces of gold. That's a fact that "paper money value" peaked in terms of the amount of gold it could theoretically buy.
But hey, you know what? Experts claim there are only about 5 billion ounces of gold ever mined in the history of humanity! This shows that there are probably a few too many fraudulent dollars out there.
Today, the value of M3 is still bloated and terribly over valued, and M3 is still increasing in number, while shrinking in value.
Nowandfutures shows that M3 is $14 trillion. What a vast increase over $7.6 trillion in 2001! Nearly double in 7 years!
The gold price today is $912/oz.
So, for April, 2008: M3 14,000 billion / gold price $912/oz. = 15.3 (billion oz. gold value)!
That's 15.3 billion oz. of gold, in theory, that all U.S. money in the banks can buy.
U.S. dollars (Fed notes) are very over valued still, and going down in value, still!
And hyperinflation continues, as inflation of the money supply is now 19%!
INFLATION IS 19.5%! (Inflation of the money supply!)
What's inflation? The U.S. is diluting the value of the dollar by making too many.
It's like adding an extra can of water to the juice.
It's like adding a bunch of cold water to the hot bath.
It's like trying to make Jello with too much water.
The inflation rate is the amount of extra dollars that they are adding each year, that are destroying the value of the dollar.
But since 2001, the value of the dollar is being destroyed FASTER than the inflation rate--that's the hyperinflation that started in 2001.
You are being tested on your knowledge of that, right now.
To pass the test, you need to own physical silver or physical gold.
If you fail the test, you are happy to own paper money, paper bonds, or paper silver and gold certificates.
The CPI is under counting, as it uses hedonic adjustments, and excludes "unimportant" things like gold, silver, food, housing, and energy (what else is there?!), and the true inflation rate must be higher. Experts seem to suggest that the true consumer inflation rate is between 8-12%, but a housewife who pays attention to grocery prices might know more. This is another unknowable part we all get tested on.
Now, the difference between what bonds pay you (2-4%?), and what inflation takes from you (12-19-22%?), is the cost of owning bonds, and while I don't know exact numbers, as nobody can, what I do know, and I guarantee you, is that this is a negative number. What the number is, who knows. Let's say it's negative 15% or so. That's the price you pay, the money you lose each year, for owning bonds, now days, and this has been the penalty since about 2001.
Don't pay attention to people who claim there is deflation, or worry about deflation. There is inflation, a lot of inflation, so much inflation that we have hyperinflation. The thing that is deflating is the value of money, because there is hyperinflation.
Why is there hyperinflation? Because there is "never enough money" to avoid bankruptcy of the major institutions, because they are printing money for the war in Iraq, and for too much government. The money printers are fearing deflation because other people might be taking money out of the banks (which is said to be deflationary) to hold it in the mattress, spend it overseas, or use it to buy silver and gold. But that's not deflation, it's the result of hyperinflation.
Hyperinflation makes people take their money out of the banks, and spend it as fast as possible.
The point is that there is no monetary incentive for people to hold cash or bonds right now; as they are losing money because of the high money creation rate, and the gold rate increases.
Another main point that follows is that gold will continue to go up as long as current conditions exist, as they have, since 2001. Since 2001, gold has been going up by about 22% per year. That's from $250 to a high of $1000, over 7 years.
Now then. Where are the economic incentives today when owning gold pays 22% per year, and owning bonds costs 15% per year?
The incentive is to sell bonds and buy gold. The world economic conditions are paying people to move into gold.
There is no reason to think that anything will change, until it does.
The required change is for bonds to pay more than the annual gold value increases.
Until bonds pay more than owning gold, then gold will continue to rise.
How far will this process be likely to go? How long? Until when?
Until bonds pay more than owning gold, then gold will continue to rise.
That's not a misprint; it's a repeat of the main point.
Here's another clue:
The size of the U.S. Bond market might be about $25 trillion, and the world bond market might be $50 trillion.
The size of the world gold market might be about $5 trillion.
Right now, an extremely tiny portion of the $50 trillion market is trying to buy into the $5 trillion market.
I think about $0.115 trillion is going into gold annually right about now. (4000 tonnes x $900/oz.)
That's about 1/5th of 1% of the money is going into gold. And yet 91% of the people are now concerned about inflation. Selling gold to people should be the easiest job in the world right now, the easiest pitch ever. Everyone should want it, yet virtually nobody is buying it, the demand has barely started, and the demand for silver is like 100 times less.
This might be another clue as to how long the gold market will go, but is no guarantee:
Jan. 1980: M3 1,822 billion / gold price $850/oz. = 2.1 (billion oz. gold value)
Gold will go up at least until the gold value of paper money is 2 billion gold ounces, or significantly less, as that was the condition in 1980, and it should probably continue further than that. After all, the U.S. government does not have 2 billion ounces of gold; it only has 0.261 billion ounces of gold.
Be prepared for gold prices to continue to rise about 22% per year or more, at least until bond interest payments rise to over 22% per year, or whatever the gold price increases might be at the time.
Now, I want to address people who will inevitably ask me, "What will happen if there is deflation". I will respond, "There isn't any deflation". They will respond, "But so-and-so thinks there is deflation." I will respond, "Well, so-and-so is wrong." They will respond, "But what if things change, and we actually have deflation?" OK, there's a real question. I will respond, first of all, there is no deflation, the money supply is soaring. Before the money supply can actually shrink, it has to slow down growing, and we'd see that first. Then, the money supply would have to be stable. Then, the money supply would have to actually stop. Bankruptcies would vastly increase. Bankruptices are one of the only things that can actually cause deflation, as that destroys credit and money in the banks when banks go belly up. When banks start going bankrupt, how confident will people be to let their money sit in bonds in the banks? Not very. They will start to buy gold even faster than they do today, since gold is not anyone's liability. If that happens, gold will go up until bonds start paying more than gold is going up each year, AND until banks stop going bankrupt. So, if there is deflation, gold will go up more, and for longer, until people trust banks again, which could be a very long time.
This is why the Fed is doomed. Printing more will not work. Printing less will not work. Printing nothing will not work. All the inflation of all the years from 1913 until now is beginning to crash down on our heads, and it will keep crashing until it stops. And when will that be? Until bonds start paying more each year than gold is going up each year.
As always, silver trumps gold, in my opinion, since so much silver has been consumed in jewelry and flatware and industry. If the silver to gold ratio returns to the historic 15:1, we will make 3 times as much money in silver, than in gold. But due to the rarity of silver, because it has been used up, because it is hard to find, and because only about 8 times as much silver is mined than gold each year, silver will probably exceed the value of the historic 15:1.
To get an A+ on one of the tests of life today is real simple. You don't need to know any of what I just said, but it might help. All you need to do is buy silver.
Monex is the low-cost gold and Silver retailer. Paul Bea @ monex 800-949-4653 x2172
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