In this updated piece, Don spoke to the staggering growth of the U.S. monetary base, indicating that when monetary velocity regains its speed, a “nightmare scenario” could unfold, with gold to money supply ratios exploding from levels, “so far [below] any all-time lows, so as to [defy] the description.”
Here is a highlighted segment taken from Don’s 30 min. commentary:
“What Ben Bernanke explained in a series of lectures last year, was the core of his strategy; A dramatic expansion of the U.S. monetary base, which shocked conservative republicans and…contributing to the big rally in gold. In his view, he had to do it to prevent a new depression. And he did that. But then he stayed with it, and his objective was to raise the value of the price of assets—he never mentioned gold of course. And he succeeded in the stock market, probably beyond his dreams.”
“At some stage there will be a transmission mechanism to move money from the fed’s monetary base, which is exploding at [a] 40% rate, and it will work it’s way into the money supply growth. Now that has to happen through what’s called a multiplier effect in the banking system, where banks create money by granting loans. That of course has not happened up until now, but there are signs that it’s emerging. And that is the big reason why the U.S. economy is doing better than most of the other big economies, because there is growth in lending in the U.S. banking system.”
“As that mechanism works, [there's] a point in which it builds it’s momentum, that the fears of the conservative economists, and the fears of gold investors come into play. Because once money supply growth starts to expand off that powerful monetary base, what you get is a self-reinforcing process. That’s the stage at which the nightmare scenario could unfold, if they don’t rapidly raise interest rates and start to shrink the monetary base.”
“[For gold investors], there’s more pain in store…until [the market] concludes, that buying may have downside risk, but the upside is going to be enormous, once the inevitable result occurs, of money supply growth growing far faster then GDP growth—setting off inflationary pressures in the economy. You cannot expand the monetary base by hundreds of percents for a long time, having a no fault situation. Eventually a huge challenge occurs.”
“So once you reach the stage of futility, of saying ‘nothing is going to happen, there will not be enough economic growth to stop expanding the monetary base,’…at some point then, what we will get, is monetary velocity will revive…This will occur in time therefore, where the ratio between the supply of gold, and the supply of paper money in the world, will be not just at an all time low, but so far [below] any all-time lows, so as to [defy] the description.”
Bottom Line: While there is still a current downdraft in the price of gold, long-term fundamentals are skewing even tighter to the upside. When the ultimate “gold to paper money ratio” balance occurs, it will no doubt catch most by surprise.
Once again, this was a powerful new commentary issued by one of world’s most successful commodity fund advisors. It is required listening for serious investors and market students.
To listen to Don’s conference call in its entirety (and to follow his regular work) visit: CoxeAdvisors.com
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Tekoa Da Silva
Bull Market Thinking