There Is No Such Thing As A Gold Bubble

Gold will not reach a maximum and fall for decades like it did in 1980. This time, it's going to infinity in dollar terms. But that doesn't mean we don't need to be very careful here.

• Gold cannot experience a bubble as it is money, not a speculative derivative like the dollar.

• The dollar will not recover and bring gold into a long bear market like in 1980-2008.

• Reserve balances are falling while total bank credit is increasing, indicated leverage is coming to a crescendo.

Jonathan Knowles

So I'm listening to Gary Savage's weekend report and find myself strongly disagreeing with something fundamental he said. He is trying to get his subscribers to control greed given the current rally, something that I fully agree with. But his example for why you should control greed and the consequences of not doing so make no sense. He said that you should control greed because if you can't do it here with gold going higher and higher, it will be even more difficult to control greed during the "bubble phase" of gold.

There is no such thing as a bubble in gold. Gold is money. The dollar is a speculative money derivative. Gold can be overvalued, theoretically, in the obscure situation where the value of gold on the Fed's balance sheet exceeds 100% of the Fed's liabilities. This happened for about 36 hours in January 1980. The peak came at 130% on January 21. But that's not a "bubble" and it cannot last very long at all. Back then, the debt was still serviceable because it was relatively low. So yes, hindsight is 20/20, but still, that the dollar was going to recover with gold at 130% of Federal Reserve liabilities and the debt serviceable, could have been foreseen. I wasn't alive so I don't know what I would have done. But I cannot see how we get out of it this time.

A bubble is when people chase a fantasy because there's way too many derivatives floating around and people need to buy something with them (or better yet, nothing, as in the case of Bitcoin). Gold is not a fantasy, and it's not a derivative of anything. Debt (most of the value of a dollar) being forever serviced in a forever Ponzi is a fantasy, and too much debt fuels bubbles.

What Gary means by "gold bubble" is there will come a time when gold will hit a "maximum", say $10,000 or whatever he believes it will be, and then the dollar will recover for decades, like 1980-2008. No, it won't. Not this time.

All derivatives die. The dollar will, too. There cannot be a gold bubble. Gold can be briefly – very briefly – overvalued fundamentally, meaning over 100% of Fed liabilities, but not by that much. Theoretically, the fantasy of the dollar could recover and bring gold into a 28-year bear market as in 1980-2008, but that's only if the debt backing the dollar is serviceable for that long. It's not anymore. This time the dollar is going do die, and there will be no 28-year recovery. Not even close.

Controlling greed is correct. Gary is absolutely right about that. You do that by not leveraging up, and keeping enough dollar cash on hand to stay focused and keep emotions at bay. But at the end of this, I am not selling money for dollars and locking in worthless dollar profits. I am buying stuff with money and recirculating money. The dollar will be irrelevant. Even if the name remains relevant, it will be at a 1000:1 revaluation at least, just as the New Shekel is 1000 Shekels, so that 1000 shekel bill with the Rambam on it in my father's drawer I saw as a kid is worth about $1. Any new currency is just the same old currency with zeros lopped off.

Personally, once gold accounts for 80% of Fed liabilities, I will start buying assets with money. Once it gets to 100%, I will liquidate all but 10% or so of my real money for assets. Once we hit a 30:1 ratio of gold to silver, I will start buying stuff with my silver. The lower we go, the more stuff I will buy with silver. Once we hit 15:1, I will convert whatever silver I have left to gold so I can think about what I want to do without having to do something rash.

Reserve Balances Starting to Fall