Gold Price – US$700 Or US$7000?

By: Kelsey_Williams

Does either of the above preclude the other?  In other words, if we expect gold to reach $7000.00 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700.00 per ounce? Conversely, if we are predicting or expecting gold to decline from its current level and even breach $1000.00 per ounce on the downside, can $7000.00 per ounce, or anything even remotely close to that number, be a reasonable possibility? 

I do not think either one precludes the other.  In fact, I think it is entirely possible that we can see bothfigures.  And not necessarily spread over an inordinately long period of time, either.

Here is a possible scenario that would allow that to happen.

As the U.S dollar strengthens, the U.S. dollar price of gold declines.  This is clearly evident in the price action of gold since its high point of approximately $1900.00 per ounce in 2011. There is no way to know for certain how long relative dollar strength will last. And it is reasonable that if ongoing dollar strength takes gold below $1000, it might come to rest somewhere between $860 – 890.00 per ounce.  In January 1980, gold peaked at $850.00.  Revisiting that number is plausible, and well within the realm of realistic speculation.  And, yes, there are technical indicators that point to a gold price of as low as $700.00 per ounce.

But what type of economic conditions might accompany the reality of that price projection?

I think the consensus is that an ongoing stronger U.S. dollar would be accompanied by a stronger economy.  That makes sense.  But what if it doesn’t happen that way?  What if the economy continues to struggle even more?  Remember, we have been subjected to huge creations of money and credit over the past ten years.  And that is on top of similar policies and actions by the Federal Reserve over the past one hundred years. Is our economy strong enough to weather the effects of attempted normalization?  Or, is it too late?

I believe that is exactly the question that is plaguing the Federal Reserve.  And it is the reason they have struggled with firm decisions on altering their accommodative expansion of money and credit.  This is most obvious in their lack of decisiveness regarding interest rates.

Regardless of that, whatever the Federal Reserve has done – or hasn’t done – since 2011 (when gold peaked at $1900.00) has been interpreted positively, generally; at least as far as the U.S. dollar is concerned.

Otherwise, we would not have seen the U.S. dollar price of gold drop over that time to its current level of $1290.00 (and previously as low as $1040.00 in January 2016). But even with a relatively stronger U.S. dollar, the economy still struggles. And there are indications that it could get worse.  Regardless of the Fed’s attempts to avoid it, deflationis a very real possibility. An implosion of the debt pyramid and a destruction of credit would cause a settling of price levels for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than currently.  It would translate to a very strong U.S. dollar.  And a much lower gold price.

Those who hold U.S. dollars would find that their purchasing power had increased.  The U.S. dollar would actually buy more, not less. But the supply of U.S. dollars would be significantly less.  This is true deflation, and it is the exact opposite of inflation.

Of course, this would be accompanied by a complete collapse of any and all forms of real estate, commodities, stocks, etc. – pretty much any asset or item denominated in U.S. dollars.

The most severe effects would be felt in the credit markets and in any assets whose value is primarily determined and supported by the supply of credit available.  Things would be much worse than what we experienced in 2008-12.

The biggest difference would be that the changes would result in  depression-like conditions on a scale most of us can’t even imagine.  And the depression would likely last for years, maybe even decades.

Imagine, if you will, that groceries, gasoline, and house rent cost half of what you now spend.  Whatever cash you have, or is available to you, would buy twice as much.  And you would have money available for other things.  Deflation, in and of itself, is NOT a bad thing.

A U.S. dollar that is worth more in purchasing power should be welcomed.

Unfortunately, depressed economic conditions would make life for most of us nearly unbearable.  You might not have a job.  Or you might live in an area which experiences social unrest.  Also, there could be disruptions in transportation and the orderly supply and delivery of various goods and services.

As far as gold is concerned, its price will be determined by seeking a level that is inversely in accordance with whatever level of strength the dollar achieves. For example, if purchasing power of the U.S. dollar increases by one hundred percent, generally speaking, then we can expect a fifty percent decrease in the U.S. dollar price of gold.

As bad as those things may sound, it will likely be a lot worse.

What will make things worse will be intervention and interference by government.

Government hates deflation. And not because of any perceived negative effects on its citizens. It is because the government loses control over the system which supports its own ability to function. Inflation, fractional-reserve banking, enhanced supplies of money and credit are intentional creations of governments and central banks. They are used to fund and reinforce the operation and grandiose plans of government and the big banks.

Hence, we can expect government to respond decisively to any series of events which resemble those previously described. Their intentions would be clear. All efforts would be focused similarly to those employed in our previous brush with financial disaster just a few years ago. But don’t expect similar results.

The events themselves are a logical end result of a financial system which has overdosed on artificial stimulation; not entirely dissimilar to an addict’s reactions to long-term drug abuse.

Since each successive financial ‘fix’ requires a stronger dose to maintain the expected results, and since the ongoing systemic damage is cumulative, we reach a point that demands recognition of the problem, and then painful steps to resolve it successfully. The government and the Federal Reserve will not ever acknowledge the harm their policies have caused. And they will never take the steps necessary to right a sinking ship.

And even if the attempt were made, the shock to the system would likely be too much to bear at this point. At best, they might be able to postpone the inevitable rejection.

What government definitely will do is ANYTHING AND EVERYTHING that they think will minimize, end, and reverse events which would bring about deflation.

Which is exactly what they did ten years ago. And they barely managed to avert complete disaster – at least temporarily. But we don’t really know how much systemic damage was done (i.e. exactly how much money and credit were created, how big is the Fed’s balance sheet and how badly inflated are the numbers, how under-capitalized are the banks). I assure you, it is much worse than anything we have been told.

Similar events today would bring about the price collapse in various markets which we discussed, as well as usher in deflation and a full-scale depression. All of this would be resisted on every front by government and the Federal Reserve. They would literally launch an all-out financial war (and maybe another real war, too) by opening the money and credit spigots full force in a futile attempt to reverse the credit implosion and negative price action of critical assets.

Their efforts and intentions would be counter-productive and harmful. The depression in our scenario would last much longer than needed. And the price declines which are necessary to correct the excesses of the past and cleanse the system would be countered every step of the way by regulations and programs of dubious value. The efforts of government would actually worsen things and prolong the suffering.

It is more likely, though, that the results would be much worse than anything we could expect. Even a relatively strong U.S. dollar would be unable to survive the onslaught. In their efforts to ‘save the patient’, the government would ‘kill’ the dollar. We would likely find ourselves awash in money and credit created without regard to potential damage. All in order to stave off the inevitable results while ignoring their curing effects on a very ill economy.

As the reality of the new Depression sets in, the failure of initial efforts by government will be seen more clearly. They will then step up their efforts. Damage to the U.S. dollar would be reflected in the U.S. dollar price of gold which could easily go from $700.00 to $7000.00 in months, maybe weeks.

By that time, the U.S. dollar price of gold will be meaningless. What will be more important is owning physical gold. The turmoil, social unrest, and economic upheaval that accompanies a complete repudiation of the U.S. dollar will probably set us back fifty years or more on a lifestyle basis.

So, if you are one of those who thinks that $7000.00 gold is right around the corner, better plan accordingly. And don’t discount entirely the possibility of deflation and $700.00 gold before your wish comes true.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

By Kelsey Williams

http://www.kelseywilliamsgold.com

Kelsey Williams is a retired financial professional living in Southern Utah.  His website, Kelsey’s Gold Facts, contains self-authored articles written for the purpose of educating others about Gold within an historical context.

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