Below is Fitzwilson’s
exclusive piece for KWN:
“Potential energy is a scientific term that relates
to real world phenomena, many of which we encounter in our daily lives. Gravity
is a prime example. If you elevate a bowling ball to the top of the table, you
have performed work. If the bowling ball were to fall to the ground, the impact
it might make is one measure of the potential energy transferred to it through
your efforts.
Potential energy is also relative. From the table
perspective, there is simply a ball sitting on it. There is no potential energy
relative to the table, only to the floor. When stopping to ponder this, it made
me think about the price of gold relative to the massive increase in the
monetary base....
“As many people are aware, the value of gold is one
of the great questions debated in the financial community. We have used the
example of currencies sitting on bar stools, including gold. On a stable floor,
there would be no potential energy between the currencies, just personal
preference and perhaps diversification considerations.
However, if the fiat currencies sitting on their
respective stools start to sink, there is financial potential energy being
created relative to the gold stool that had not moved and the currency stools
that are sinking (dropping in value).
Below is a chart that shows the Adjusted Monetary
Base. It is a frightening picture and representative of the financial abyss
into which we are sinking. From the post-Paul Volcker Fed era, you can see that
the base more than doubled from 1984 to 2009. In 2009, the increase in the
monetary base was and remains dramatic and unprecedented.
Answering the question about the value of gold
relative to the massive increase in the monetary base, we created the chart
below. This chart shows the price of gold divided by the value of the monetary
base.
By definition, the chart will be driven by a rising
or falling price of gold relative to an increase or decline in the base.
As you can see, gold was very overvalued at the start
of the period. The graph plunged from 1984 until roughly 2002, as did the price
of gold. Our suspicion is that the correction in the price of gold was not only
driven by the corrective forces brought on by the overvaluation, but was
turbocharged by the introduction of gold leasing and other non-market forces in
the very early part of the 1990s.
As gold bottomed early last decade, the value of gold
was extraordinarily undervalued relative to the monetary base. As gold move
steadily higher, it’s relative value declined when compared to a steadily
increasing, but non-exponential rise in the monetary base. The line then
plunged in late 2008 as the monetary base exploded to the upside. The explosive
growth in the monetary base has never abated.
What the wiggle to the right of 2009 represents is a
battle between forces maintaining a trading range for gold and a mushrooming
monetary base.
Keep in mind that the lower this indicator is on the
chart, the greater the value of gold. It is clear that we are nowhere near the
overvaluation of the 1980s. Given that there is no end in sight for increases
in the monetary base, the financial potential energy contained in the current
price of gold is extreme. Once that force is unleashed, the price of gold will
rise in a dramatic fashion. The bottom line is the downside for gold is
miniscule, and the upside is many times the current price.”
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