-- Posted Wednesday, 1 December 2010 | | Source: GoldSeek.com
By Jerry Western with Lorimer Wilson
If we continue down the same economic path that we have been following for the last four decades - and there is no indication that we won't even if we wanted to, or could, at this point - it is mathematically inevitable that gold and silver will approach infinity in U.S. dollar terms at some point in the future. Yes, approach infinity!
John H. (Jack) Weber made reference to our most recent article (see here) in his entitled “Considering All the Guesses Out There, What Will The Price Of Gold Ultimately Go To – And WHY” in which he stated "If you divide any number, i.e. the value of the dollar, by zero you get infinity which is a meaningless number, but that is the ultimate price to which gold and silver are headed."
In reality, there can be no end to this bull market in gold if there is no end to profligate dollar creation.
The mathematical function 'X Squared' or 'X to the second power', when solved for all numbers and plotted on a graph is a parabola. A parabola looks like a jet fighter taking off. It starts as a near horizontal line and rises gradually at first, but then steeper and quicker, until the line approaches vertical. The line rises at an ever steeper rate – and this is what has been happening to the number of dollars in existence. There are more and more of them every day and the rate at which they are being created is increasing at a faster pace as time goes by.
U.S. dollars need to be created in parabola fashion to keep the economy afloat.
The number of dollars in existence is not only increasing but increasing at an accelerating rate. One way to think about this is to watch how fast the supply of dollars doubles. If one plots a point on a timeline each time the number of dollars doubles, one will see that it is taking less and less time for the number of dollars to double. At first it takes decades for the number to double and then years. Eventually the numbers will be doubling in six months, then three, then six weeks, then three. You see where this is going. An economy cannot function in such an environment. This is where we are headed.
We get closer to the abyss and sudden catastrophic collapse by the day as we climb the vertical line.
We really dislike speaking in these terms or sounding alarmist but it's in the nature of markets and of life to surprise from time to time. How many people predicted the market crash of 1929, the attack on Pearl Harbor or the confiscation of gold in 1933? Very few, if any, and we believe that will be the case with the coming moves in the U.S. dollar, gold, and silver.
The amount of money needs to be continually increasing because in a fiat, credit-based monetary system such as ours, all money comes into being by way of loans or credit. There needs to be an ever-increasing number of dollars created to pay off existing loans. If a loan is made at 10% interest then there needs to be 10% more currency injected into the system to pay off that loan. Then more loans are issued on the repaid money and the system continues on.
Let's look at a simplistic example for clarity. A loan is provided for $100 @ 10% interest. The amount of money paid back is $110. That $110 is then lent @ 10%. The amount paid back is $121. That $121 is lent out @ 10%. The amount paid back is $133.10 - and so it goes. Do you see how the money supply is increased? Not only is it increased but the amount of money in circulation is increasing by a larger amount with each iteration. If we charted this growth we would see that the line is not linear but is rising and rising at a faster angle over time. After a number of iterations the line approaches vertical and a vertical line is unsustainable. Because the amount of gold in the world is relatively stable, and its price is denominated in U.S. dollars, and the number of those dollars is increasing, it is inevitable that the price of gold will also rise.
As the number of dollars in existence approaches infinity, so too will the price of gold (and silver and all other commodities).
Actually, we believe that 'changes' are likely to be made before we get to the point of incipient hyperinflation but we'll leave what those changes might look like for another article. We do believe, however, that those changes will be sudden and catch most everyone off guard. We may see a surprise overnight devaluation or revaluation of both the dollar and of gold. That may be when this bull market in precious metals comes to an end - but you will have won because you have physical metal in your possession. You do, don’t you?
The current dollar/bond paradigm we live under is by far the largest Ponzi scheme ever unleashed.
It is literally impossible to pay off all claims at current (par) dollar value. If nothing is done and we do go through a hyperinflation of the dollar, all of these fantastic dollar gains in equities will be an illusion. It is those who hold the real tangible items or claims on those items who will win.
If you have a bond or equity that is denominated in dollars and only pays out in dollars, have you really won anything in a hyperinflation that culminates in the destruction of the currency? No,of course not. So your investment in bonds went from a million to a billion and then to a trillion dollars. Big deal when that trillion buys you a dozen eggs. Don't scoff. It happened in Zimbabwe recently and many times throughout history, including twice in the United States. You only win if you possess an asset.
The most liquid, tangible, fungible, recognizable, coveted, time-tested, and easily-converted-to-something-else assets are precious metals.
Got gold yet? If not, what are you waiting for!
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Jerry Western is the author of a new book entitled “Got Gold? Get Gold!: The Everything Gold Book” on how to protect one’s wealth in the 21st century gold rush and a frequent guest contributor to www.FinancialArticleSummariesToday of which Lorimer Wilson is editor (editor@munKNEE.com)
-- Posted Wednesday, 1 December 2010 | Digg This Article | Source: GoldSeek.com