Thursday, March 7, 2013

My Prediction on the Price of Gold

 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.

*  .
**Larry McDonald, A Colossal Failure of Common Sense.