I made the following prediction about the price of gold to the German financial website Focus-Money:
The US monetary base has more than tripled in the past six
years;* the large commercial banks can multiply each dollar that the
Federal Reserve Bank creates up to tenfold. The banks’ lending often has
been ill advised. The collapse of Lehman Brothers** and the survival of
other large Wall Street firms through public subsidization evidence
misallocation of wealth, which has caused income inequality and slowed the free
market system’s creative processes. The resultant income inequality and growth
reduction have increased demand for welfare entitlements. Whether,
in the short run, there is deflation due to loan defaults or inflation due to
monetary expansion, there will be dollar instability. Recently, the
dollar’s reserve currency status and China’s trade policies have mitigated
inflation, but this lucky (for the U.S.) arrangement can change
overnight. Because of public demand for entitlements--caused by
injudicious, state-guided economic policies--the US government, like several
European governments, is borrowing at an unsustainable rate and lacks the
political will to contract its borrowing. Economic and dollar instability
coupled with government’s unquenchable thirst for debt to subsidize
entitlements will lead to expansion of the recently created bank reserves to
monetize government’s debt. The result will be depreciation of the dollar
and an end to the dollar’s reserve currency status, much like the end to the
pound’s role in the early twentieth century. The ultimate price of gold
is unpredictable in dollar terms, and it may go to infinity. As with many
economic phenomena, the difficult question is when my predictions will unfold.
I will say $2,000 in two years, $4,000 in ten years.
*http://research.stlouisfed.org/fred2/series/BASE/ .
**Larry McDonald, A Colossal Failure of Common Sense.
