The popular contrarian Bill Fleckenstein offers up his thoughts on currency debasement in gold, inspired by the latest bouts of QE, particularly out of Japan.If a Dollar Falls in Bretton Woods and No One’s There to Hear It. . . For those who are trying to ascertain how high gold might ultimately go in this bull market, that answer is not knowable. My guess is it will rise until fiscal and monetary prudence is the order of the day, however long that takes. Nevertheless, there are ways to think about what sort of price it might achieve under various scenarios.
Paul Brodsky and Lee Quaintance, of QB Partners, have given the question a fair amount of thought and have written a number of papers that I have found quite useful. What I like about their approach is that it is disciplined and not emotional, and it has led them to calculate what they call the “shadow gold price.”
This shadow price is derived from the “Bretton Woods formula for valuing money in a gold-exchange regime (i.e., the fixed value of a currency equals its monetary base divided by official gold holdings). Under this formula the exchange rate of the U.S. dollar to an ounce of gold would be about $8,250 presently, a figure that reflects the amount of monetary base inflation already engineered by the Fed. (The U.S. monetary base approximated $2.15 trillion in September and reported official U.S. gold holdings have remained relatively constant at about 8,133.5 metric tons or about 261.5 million ounces.)”
Just In Time for Halloween: the Monsters in Debasement I am not predicting that gold will go to that price, as I have no idea what the ultimate bull market high might be. I am trying to show that there are ways to try to calculate the price where gold might trade if some form of gold standard were reintroduced, which I believe is where we are ultimately headed. The point being, I think more people will do some form of analysis to support a decision to buy gold at today’s prices (I expect this will be especially prevalent in the “official/institutional” sector, where fancy calculations have historically been able to rationalize anything).
It is quite clear the world is slowly realising that, no matter the colour, all paper currencies are headed for debasement, leaving thoughtful people and institutions with little choice — as has been the case for literally thousands of years — except to establish a position of some sort in the one currency that can’t be printed.