Pricing Gold/Silver In A Deflationary World Due D
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Posted On: 05/30/2021 9:33:06 PM
Pricing Gold/Silver In A Deflationary World
Due Diligence
First, this post is a continuation from a previous post about Pricing Gold/Silver in a Hyper-Inflationary World,
https://www.reddit.com/r/Wallstreetsilver/com...ary_world/
which attempts to explain a gold bull market with an inflationary backdrop. If you haven't read it, I'd check it out first.
To the Moon, Alice! To the Moon!
The 1970s explains a gold bull market in an inflationary backdrop, but what if we are actually in a deflationary backdrop? Is there a model for what to expect? That answer comes from the 1930s. Let's take a look.
Below is a graph from the Federal Reserve's website for economic research, FRED. The graph is a natural log chart in billions of dollars from 1915 to the present. The black line is the free market price of Treasury gold (post-1971), or the Treasury's monetary gold stock (pre-1971). The green line is the amount of currency in circulation (CIC). The blue line is the CIC plus the total revolving credit in the system. Finally, the purple dash lines are the Fed's monetary base, which is either seasonally adjusted (1930s), or not (current). The two lines merge after 2001.
https://preview.redd.it/cmgao0ejua271.png?wid...048be51164
At first glance, you can see the two previous gold bull markets and the current one we're in now. In both situations, the free market price of Treasury gold did a full accounting of the CIC and the Federal Reserve's Monetary Base ( see previous post for Exeter's Pyramid ).
Just to explain the black line further: during the 1920s, the gold price was fixed at $20.67/oz, so the movement in the black line was gold coming or going into Treasury vaults. In 1934, FDR devalued the dollar by taking the gold price to $35/oz; but after that, movement in the black line was gold coming or going into Treasury vaults. In 1971, Nixon closed the Gold Window, which caused the price of gold to become freely traded while the amount of Treasury gold became fixed.
Now, lets look at the mechanisms behind the two bull markets.
In the 1970s, there were fears of inflation due to the Boomer generation coming of age and buying their first house, car, having kids, etc. It was a large generation increasing the velocity of money just as the dollar was de-peg'ed from its anchor of gold, forcing a repricing. However, the debt load was relatively low, which allowed Paul Volker to jack interest rates up to stop the hyper-inflationary spiral.
https://preview.redd.it/buvnk0y08b271.png?wid...164b5a4c3e
The 1930s was deflationary fears. After the Fed's creation in 1913, they made credit cheaper than the free-market price, which caused an increase of debt through the 1910s-1920s, which lead to a bubble in the stock market that crashed in 1929. Sound familiar? My argument is that the 1970s model may not be the best analog to our current cycle. We have record debt, a Fed induced Everything Bubble, and market manipulated-record low interest rates. So, lets zoom in and take a look.
https://preview.redd.it/unviicmhtb271.png?wid...869e4af363
Since the story around the 1930s bull market revolves around debt, I've added another line. The red line is the net interest bearing debt of the Federal Gov. As you can see, the Federal Government's debt rose dramatically in order to pay for WWI. Before that, they had no debt. After the war ended, we had a severe deflation in 1921. You can see where the Fed increased the monetary base, printed currency and papered over the deflation. Sound familiar?
The economy got back to work after 1921 and produced the "Roaring Twenties". This is period of time where, the Fed held interest rates lower than market, so the Fed Gov could pay down their debt. The red line drops throughout the 1920s. However, the manipulated low interest lead to a loan bubble (chart below), which morphed into a stock market bubble, that burst in 1929. Sound familiar? Late 90s-2008?
https://preview.redd.it/d24lhpjmcb271.png?wid...f0a25222ee
Bank Loans
In the 1930s chart, you can see the gold leaving the Treasury vaults through the early 30s, while the loan stack was defaulting. This is the bank runs of the 1930s. Ultimately, the amount of monetary gold supporting the monetary base declined sharply, while the Fed continued to increase the monetary base and CIC to paper over the deflation. This is what lead to a loss of confidence in the banking system. In order to sure up the banking system, FDR was forced to revalue gold in 1934 from $20.67/oz. to $35/oz, which covered the Monetary Base. Also, notice the print job and inflation that happened after 1929. We'll come back to this in the silver section.
Now lets fast forward to the current cycle.
https://preview.redd.it/j71c14fkdc271.png?wid...9cc08fd302
First, you can see the end of the 1970s cycle that peaked in 1980. It too, fully priced in the Monetary base before the bull market ended. You can also see the reduction in rate of growth for long term Federal Debt that happened in the late 1990s to 2008, which mimics the 1920s. Then we get to the GFC of 2008, where debt exploded along with the Fed's Monetary Base, which stabilized the banking system, but a funny thing happened with gold. It was never revalued. Instead, The Federal Reserve used it's own balance sheet to increase the Monetary Base, and since Nixon de-linked the Dollar and gold, gold was not revalued along with the increase in Monetary Base.
So why did this work? What was backing paper dollars that kept the system going after the GFC?
Answer: Confidence.
Confidence in the full faith and credit of the United States Treasury. What happens when that confidence breaks? The reason you're here, right now is that confidence in fiat is breaking. Its happening now. So what's left after the "Emperor has no clothes" moment?
Answer: Treasury Gold.
Since they kicked the can down the road, the dollar devaluation will be that much greater. So, when confidence is lost and the bank run starts on the Federal Reserve assets, at what price will Treasury Gold have to be in order to cover the Monetary Base?
Answer: $23,105 /oz
This is another moving target:
MBase can be found:
https://www.federalreserve.gov/releases/h6/cu...efault.htm
Treasury Gold can be found:
https://www.fiscal.treasury.gov/reports-state...rrent.html
Don't believe me? The devaluation is already baked in. Only a matter of time before the Gold price starts pricing it in, free-market style. Below is a chart that shows the US Dollar Trade-Weighted Index with an 8-qt lag (gray line) correlated to the US Trade Deficit (% of GDP), inverted. Notice a correlation? Look at the trade deficit. Its predicting at least sub-60, possibly sub-40 on DXY by ~Q2 2022.
https://preview.redd.it/3cvc1269yb271.png?wid...1987cad8be
Still don't believe me? I give you exhibit B: Below is chart showing the ratio of Gold price to monetary base (in billions $). At the end of both cycles in gold, the ratio passed 4.8. It did this when FDR devalued the dollar in 1934, and it did it again in 1980 when the free market determined the price.
https://preview.redd.it/1ipar0mnzb271.png?wid...5d43cba915
https://www.macrotrends.net/2485/gold-to-monetary-base-ratio
The current ratio is 0.31. So, what price of gold would be 4.8x the monetary base (in billions $)?
Answer: ~29,000/oz.
There's a funny thing about this price. It would cover all Foreign owned debt (27,000/oz), should the Federal Reserve/Treasury get a capital call from Foreign Central Banks/Sovereigns during a modern day "Good 'Ol Fashioned Bank Run".
https://preview.redd.it/ic4j7kopdc271.png?wid...febfec7031
So, we now have a price range for Gold in a 1930s deflation style model, what's this mean for silver?
Answer: To the Moon!
To explain the silver pricing, we'll have to go back to the 1940s.
https://preview.redd.it/9psjs750jc271.png?wid...a1025b3e10
Notice, after they revalued gold to cover the monetary base, the amount of CIC lagged, before enough was in the system to fully cover monetized gold. This is what Ben Bernanke was talking about when he said, they didn't print enough, fast enough. The economy was under capitalized, continuing the depression. However, they caught up through the early 40s. This is what they are doing the DXY, now.
They are burning through the dollar confidence, which is why the DXY will look like the inflation adjust gold chart through the 40s shown below. You can see where the CIC acceleration in the early 40s and cut down the value of $35/oz Gold. The DXY will fall, dramatically, while the free-market price of gold rises dramatically higher.
https://preview.redd.it/vwtr3wotgc271.png?wid...337c341388
Silver also, responded in the same manner, however, silver was not revalued with gold, so the price of silver (inflation adjusted) showed the free market move when FDR revalued Gold. It, also, priced in the high inflation through the 1940s. Does the jumps in price through the 40s, remind you of current silver price action?
https://preview.redd.it/d7ikcsiqhc271.png?wid...997094a25a
Now how's that look in the Gold/silver ratio? The second leg of every silver bull run had ended up with a lower Gold/silver ratio, than the first. The second leg of the 1930s - 40s bull run was 20% higher. If you get a same percentage over the 2011 high, we're looking at ~25:1 on the Gold/Silver ratio for the peak.
https://preview.redd.it/pwyrhcwsjc271.png?wid...a6ef6c9d52
So Price of Silver for our Gold target range:
Treasury Gold covers Monetary Base: $23,105/oz Au @ 25:1 is $924.2/oz Ag ( $1000 Ag, Silverbacks!!! )
Gold Price covers 4.8x Monetary Base (B$): 29,000/oz Au @ 25:1 is $1160/oz Ag ($1000 Ag, Silverbacks!!!! )
If you were to tell a man living in 1928, that in 6 years the gold price would be 69% higher, he would have thought you retarded.
I'm just an ape telling you that the gold and silver price will be at least $23,105 and ~$1000. Am I retarded? Cheers, Apes.
Much more here: https://www.reddit.com/r/Wallstreetsilver/com...ary_world/
,
Due Diligence
First, this post is a continuation from a previous post about Pricing Gold/Silver in a Hyper-Inflationary World,
https://www.reddit.com/r/Wallstreetsilver/com...ary_world/
which attempts to explain a gold bull market with an inflationary backdrop. If you haven't read it, I'd check it out first.
To the Moon, Alice! To the Moon!
The 1970s explains a gold bull market in an inflationary backdrop, but what if we are actually in a deflationary backdrop? Is there a model for what to expect? That answer comes from the 1930s. Let's take a look.
Below is a graph from the Federal Reserve's website for economic research, FRED. The graph is a natural log chart in billions of dollars from 1915 to the present. The black line is the free market price of Treasury gold (post-1971), or the Treasury's monetary gold stock (pre-1971). The green line is the amount of currency in circulation (CIC). The blue line is the CIC plus the total revolving credit in the system. Finally, the purple dash lines are the Fed's monetary base, which is either seasonally adjusted (1930s), or not (current). The two lines merge after 2001.
https://preview.redd.it/cmgao0ejua271.png?wid...048be51164
At first glance, you can see the two previous gold bull markets and the current one we're in now. In both situations, the free market price of Treasury gold did a full accounting of the CIC and the Federal Reserve's Monetary Base ( see previous post for Exeter's Pyramid ).
Just to explain the black line further: during the 1920s, the gold price was fixed at $20.67/oz, so the movement in the black line was gold coming or going into Treasury vaults. In 1934, FDR devalued the dollar by taking the gold price to $35/oz; but after that, movement in the black line was gold coming or going into Treasury vaults. In 1971, Nixon closed the Gold Window, which caused the price of gold to become freely traded while the amount of Treasury gold became fixed.
Now, lets look at the mechanisms behind the two bull markets.
In the 1970s, there were fears of inflation due to the Boomer generation coming of age and buying their first house, car, having kids, etc. It was a large generation increasing the velocity of money just as the dollar was de-peg'ed from its anchor of gold, forcing a repricing. However, the debt load was relatively low, which allowed Paul Volker to jack interest rates up to stop the hyper-inflationary spiral.
https://preview.redd.it/buvnk0y08b271.png?wid...164b5a4c3e
The 1930s was deflationary fears. After the Fed's creation in 1913, they made credit cheaper than the free-market price, which caused an increase of debt through the 1910s-1920s, which lead to a bubble in the stock market that crashed in 1929. Sound familiar? My argument is that the 1970s model may not be the best analog to our current cycle. We have record debt, a Fed induced Everything Bubble, and market manipulated-record low interest rates. So, lets zoom in and take a look.
https://preview.redd.it/unviicmhtb271.png?wid...869e4af363
Since the story around the 1930s bull market revolves around debt, I've added another line. The red line is the net interest bearing debt of the Federal Gov. As you can see, the Federal Government's debt rose dramatically in order to pay for WWI. Before that, they had no debt. After the war ended, we had a severe deflation in 1921. You can see where the Fed increased the monetary base, printed currency and papered over the deflation. Sound familiar?
The economy got back to work after 1921 and produced the "Roaring Twenties". This is period of time where, the Fed held interest rates lower than market, so the Fed Gov could pay down their debt. The red line drops throughout the 1920s. However, the manipulated low interest lead to a loan bubble (chart below), which morphed into a stock market bubble, that burst in 1929. Sound familiar? Late 90s-2008?
https://preview.redd.it/d24lhpjmcb271.png?wid...f0a25222ee
Bank Loans
In the 1930s chart, you can see the gold leaving the Treasury vaults through the early 30s, while the loan stack was defaulting. This is the bank runs of the 1930s. Ultimately, the amount of monetary gold supporting the monetary base declined sharply, while the Fed continued to increase the monetary base and CIC to paper over the deflation. This is what lead to a loss of confidence in the banking system. In order to sure up the banking system, FDR was forced to revalue gold in 1934 from $20.67/oz. to $35/oz, which covered the Monetary Base. Also, notice the print job and inflation that happened after 1929. We'll come back to this in the silver section.
Now lets fast forward to the current cycle.
https://preview.redd.it/j71c14fkdc271.png?wid...9cc08fd302
First, you can see the end of the 1970s cycle that peaked in 1980. It too, fully priced in the Monetary base before the bull market ended. You can also see the reduction in rate of growth for long term Federal Debt that happened in the late 1990s to 2008, which mimics the 1920s. Then we get to the GFC of 2008, where debt exploded along with the Fed's Monetary Base, which stabilized the banking system, but a funny thing happened with gold. It was never revalued. Instead, The Federal Reserve used it's own balance sheet to increase the Monetary Base, and since Nixon de-linked the Dollar and gold, gold was not revalued along with the increase in Monetary Base.
So why did this work? What was backing paper dollars that kept the system going after the GFC?
Answer: Confidence.
Confidence in the full faith and credit of the United States Treasury. What happens when that confidence breaks? The reason you're here, right now is that confidence in fiat is breaking. Its happening now. So what's left after the "Emperor has no clothes" moment?
Answer: Treasury Gold.
Since they kicked the can down the road, the dollar devaluation will be that much greater. So, when confidence is lost and the bank run starts on the Federal Reserve assets, at what price will Treasury Gold have to be in order to cover the Monetary Base?
Answer: $23,105 /oz
This is another moving target:
MBase can be found:
https://www.federalreserve.gov/releases/h6/cu...efault.htm
Treasury Gold can be found:
https://www.fiscal.treasury.gov/reports-state...rrent.html
Don't believe me? The devaluation is already baked in. Only a matter of time before the Gold price starts pricing it in, free-market style. Below is a chart that shows the US Dollar Trade-Weighted Index with an 8-qt lag (gray line) correlated to the US Trade Deficit (% of GDP), inverted. Notice a correlation? Look at the trade deficit. Its predicting at least sub-60, possibly sub-40 on DXY by ~Q2 2022.
https://preview.redd.it/3cvc1269yb271.png?wid...1987cad8be
Still don't believe me? I give you exhibit B: Below is chart showing the ratio of Gold price to monetary base (in billions $). At the end of both cycles in gold, the ratio passed 4.8. It did this when FDR devalued the dollar in 1934, and it did it again in 1980 when the free market determined the price.
https://preview.redd.it/1ipar0mnzb271.png?wid...5d43cba915
https://www.macrotrends.net/2485/gold-to-monetary-base-ratio
The current ratio is 0.31. So, what price of gold would be 4.8x the monetary base (in billions $)?
Answer: ~29,000/oz.
There's a funny thing about this price. It would cover all Foreign owned debt (27,000/oz), should the Federal Reserve/Treasury get a capital call from Foreign Central Banks/Sovereigns during a modern day "Good 'Ol Fashioned Bank Run".
https://preview.redd.it/ic4j7kopdc271.png?wid...febfec7031
So, we now have a price range for Gold in a 1930s deflation style model, what's this mean for silver?
Answer: To the Moon!
To explain the silver pricing, we'll have to go back to the 1940s.
https://preview.redd.it/9psjs750jc271.png?wid...a1025b3e10
Notice, after they revalued gold to cover the monetary base, the amount of CIC lagged, before enough was in the system to fully cover monetized gold. This is what Ben Bernanke was talking about when he said, they didn't print enough, fast enough. The economy was under capitalized, continuing the depression. However, they caught up through the early 40s. This is what they are doing the DXY, now.
They are burning through the dollar confidence, which is why the DXY will look like the inflation adjust gold chart through the 40s shown below. You can see where the CIC acceleration in the early 40s and cut down the value of $35/oz Gold. The DXY will fall, dramatically, while the free-market price of gold rises dramatically higher.
https://preview.redd.it/vwtr3wotgc271.png?wid...337c341388
Silver also, responded in the same manner, however, silver was not revalued with gold, so the price of silver (inflation adjusted) showed the free market move when FDR revalued Gold. It, also, priced in the high inflation through the 1940s. Does the jumps in price through the 40s, remind you of current silver price action?
https://preview.redd.it/d7ikcsiqhc271.png?wid...997094a25a
Now how's that look in the Gold/silver ratio? The second leg of every silver bull run had ended up with a lower Gold/silver ratio, than the first. The second leg of the 1930s - 40s bull run was 20% higher. If you get a same percentage over the 2011 high, we're looking at ~25:1 on the Gold/Silver ratio for the peak.
https://preview.redd.it/pwyrhcwsjc271.png?wid...a6ef6c9d52
So Price of Silver for our Gold target range:
Treasury Gold covers Monetary Base: $23,105/oz Au @ 25:1 is $924.2/oz Ag ( $1000 Ag, Silverbacks!!! )
Gold Price covers 4.8x Monetary Base (B$): 29,000/oz Au @ 25:1 is $1160/oz Ag ($1000 Ag, Silverbacks!!!! )
If you were to tell a man living in 1928, that in 6 years the gold price would be 69% higher, he would have thought you retarded.
I'm just an ape telling you that the gold and silver price will be at least $23,105 and ~$1000. Am I retarded? Cheers, Apes.
Much more here: https://www.reddit.com/r/Wallstreetsilver/com...ary_world/
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