WEBVTT NOTE The Future of the Price of Gold 1 00:00:00.000 --> 00:00:05.880 Our next speaker is a senior fellow with the Ludwig von Mises Institute. 2 00:00:05.880 --> 00:00:11.760 He serves as the book review editor for the quarterly journal of Austrian Economics, author 3 00:00:11.760 --> 00:00:18.440 in his own right, The Economics of Prohibition, Tariffs, Blockades and Inflation, The Economics 4 00:00:18.440 --> 00:00:24.160 of the Civil War, Bastiat Collection, the quotable Mises. 5 00:00:24.160 --> 00:00:33.400 and he is a graduate of St. Bonaventure University, received his PhD from Auburn University and 6 00:00:33.400 --> 00:00:38.220 he's going to tell us something that everybody in this room wants to know, the future of 7 00:00:38.220 --> 00:00:50.020 the price of gold. Please help me welcome Dr. Mark Thornton. 8 00:00:50.020 --> 00:00:56.740 Thank you, Doug. I visited Las Vegas a few years ago on vacation in July, and I swore 9 00:00:56.740 --> 00:01:03.940 I'd never come back to Las Vegas during July. It was so hot. We drove in, we're on the 10 00:01:03.940 --> 00:01:09.820 outskirts of town, drive by this bank, and the thermometer says 99 degrees. And then 11 00:01:09.820 --> 00:01:17.300 about a half a mile later, past another bank, it's 101 degrees. And as you get into town, 12 00:01:17.300 --> 00:01:31.300 Block by Block, 102, 103, 105, 107, 108, 109. I couldn't believe it. I'd never been in a place that was that hot. I was afraid to get out of the car. 13 00:01:31.300 --> 00:01:41.300 Of course, the same thing happened this time, except there were no banks to tell me what the temperature was. 14 00:01:41.300 --> 00:01:47.780 Actually, I was thrilled and delighted to get an invitation to speak to you here today. 15 00:01:47.780 --> 00:01:54.480 Given this event, given the time that we, this juncture in the economy and how important 16 00:01:54.480 --> 00:02:00.980 that is, as I prepared this talk, the price of gold was at an all-time high in terms of 17 00:02:00.980 --> 00:02:02.180 dollars. 18 00:02:02.180 --> 00:02:07.980 And as we go forward from here in time, the price of gold will be a key indicator or gauge 19 00:02:07.980 --> 00:02:14.980 of what's going on in the economy. Five years ago, I spoke at a Mises Institute conference 20 00:02:15.020 --> 00:02:22.020 here in Las Vegas called Austrian Economics in Financial Markets. It was in February though, 21 00:02:22.580 --> 00:02:29.100 and the subject of my talk was the continuing bull market in gold. How high can it go? At 22 00:02:29.100 --> 00:02:35.660 the time, the economy was in great shape. Inflation was low, unemployment was low, we 23 00:02:35.660 --> 00:02:50.460 The price of gold was trading within a range of $375 to $450 per ounce. However, the price 24 00:02:50.460 --> 00:02:58.840 of gold was up 75% over the preceding four years. This created a great deal of excitement 25 00:02:58.840 --> 00:03:03.700 amongst gold dealers and buyers, and there were a lot of forecasts out there that gold 26 00:03:03.700 --> 00:03:15.060 would rise to $500 an ounce, or $700 an ounce, or $1,000 an ounce, or even $1,200 an ounce. 27 00:03:15.060 --> 00:03:21.220 I told the audience that all these predictions were correct and that they were all incorrect. 28 00:03:21.220 --> 00:03:27.740 That the price of gold would reach all of these forecasts and exceed all of those forecasts. 29 00:03:27.740 --> 00:03:37.300 I even told them that the price of gold would eventually hit $5,000, $10,000 and $15,000 an ounce. 30 00:03:37.300 --> 00:03:42.660 You should have seen the faces of the gold dealers in the audience. 31 00:03:42.660 --> 00:03:48.180 I even said that the price of gold could even reach infinity if the dollar experiences a 32 00:03:48.180 --> 00:03:52.180 hyperinflation and is completely destroyed. 33 00:03:52.180 --> 00:03:57.720 After all, fiat monies, which are just paper monies decreed by government and not by the 34 00:03:57.720 --> 00:04:03.720 are not backed by gold or silver or anything else, eventually are destroyed by monetary inflation. 35 00:04:03.720 --> 00:04:11.720 Central bankers inevitably succumb to political influence and pressure to finance government expenditures and debt. 36 00:04:11.720 --> 00:04:21.720 In contrast, the gold standard provides a constraint on government spending, debt, war and imperialism. 37 00:04:21.720 --> 00:04:28.000 Imperialism. The passage of the Federal Reserve Act in 1913 established such a central bank 38 00:04:28.000 --> 00:04:34.600 in the United States and a mechanism to pay for a century of imperialism, war and the 39 00:04:34.600 --> 00:04:41.440 growth of government. When Nixon closed the gold window in 1971, he opened up the inflationary 40 00:04:41.440 --> 00:04:51.440 floodgates which have seen the amount of money increase by 1,250 percent. The money supply 41 00:04:51.440 --> 00:04:59.640 Supply has increased by 18% since my skyscraper model issued a signal of global economic crisis 42 00:04:59.640 --> 00:05:06.520 in August of 2007, and other measures of the money supply are up much higher. 43 00:05:06.520 --> 00:05:14.000 The value of the dollar has decreased by 96% since the founding of the Federal Reserve 44 00:05:14.000 --> 00:05:20.920 in 1913, as measured by the Consumer Price Index, the one that's always noted in the 45 00:05:20.920 --> 00:05:27.800 the paper and on radio and on television, but this is a flawed measure of inflation 46 00:05:27.800 --> 00:05:34.320 or even increases in price. It systematically underreports price inflation to help cover 47 00:05:34.320 --> 00:05:41.320 up the activities of the Federal Reserve. Now most mainstream economists actually think 48 00:05:41.320 --> 00:05:48.240 that the CPI overstates inflation, but this is because they are rewarded for coming up 49 00:05:48.240 --> 00:05:56.920 with new ways to adjust or calculate inflation over time. If an item in a consumer's basket 50 00:05:56.920 --> 00:06:02.680 rises and the consumer stops buying it, it can be dropped from the calculation. But when 51 00:06:02.680 --> 00:06:08.460 consumers turn to cheaper substitutes, they get added into the basket that's measured 52 00:06:08.460 --> 00:06:16.680 by the government. Things like quality improvements, technological advances, and gains in productivity 53 00:06:16.680 --> 00:06:24.960 are all put into the adjustment process so that inflation can be measured by those in 54 00:06:24.960 --> 00:06:26.440 power. 55 00:06:26.440 --> 00:06:33.220 This tainted view of the CPI by mainstream economists basically takes all of the benefits 56 00:06:33.220 --> 00:06:41.600 of the market economy and uses them as justifications to underreport the impact of monetary inflation 57 00:06:41.600 --> 00:06:44.120 by the central bank. 58 00:06:44.120 --> 00:06:56.120 It's really a nasty cover-up story. If you help the Fed cover up for the signs of its nasty practices, you will be well rewarded. 59 00:06:56.120 --> 00:07:09.120 Now if you don't give the Fed credit for all these gains produced by the market economy, in terms of quality improvements, technological improvements, and increases in productivity, 60 00:07:09.120 --> 00:07:37.120 In 2005, at the Las Vegas Conference, I stated the following factors for making the case against the long-term health of the U.S. dollar and as reasons why the price of gold would surpass all of those predictions that were then current in the media. 61 00:07:37.120 --> 00:07:44.120 1. The federal government's debt continues to increase. That's certainly gotten much 62 00:07:44.120 --> 00:07:51.120 worse since 2005. In 2005, the national debt was $7.5 trillion. Today it is $13.2 trillion 63 00:07:54.600 --> 00:08:00.600 and rising rapidly. That's a 75% increase in five years. 64 00:08:00.600 --> 00:08:23.600 2. The federal government's deficit continues to increase. Here again, things have only gotten much worse. In 2005, the annual deficit was $300 billion. Last year, it was $1.4 trillion. That's a 365% increase. 65 00:08:23.600 --> 00:08:33.600 Number three, the third factor was that Social Security is broken and will not be fixed. 66 00:08:33.600 --> 00:08:39.600 Well, in 2005, the estimates for the future unfunded liabilities of the U.S. government, 67 00:08:39.600 --> 00:08:48.600 these are promises to pay Social Security, Medicaid and Medicare benefits where there's no revenue to cover, 68 00:08:48.600 --> 00:09:03.600 Those estimates in 2005 were all less than $50 trillion. Today, estimates of the future unfunded liabilities of the U.S. government all exceed $100 trillion. 69 00:09:03.600 --> 00:09:08.600 So again, things have gotten much worse in a very short period of time. 70 00:09:08.600 --> 00:09:27.600 Number four, the U.S. is experiencing an increasing population of tax eaters, and by tax eaters I refer to people who have Social Security benefits, government employees, retirees, people on welfare, government contractors, and the like. 71 00:09:27.600 --> 00:09:30.600 This too has gotten much worse. 72 00:09:30.600 --> 00:09:36.600 Of course, there's a lot of concern about unemployment today at 10 percent. 73 00:09:36.600 --> 00:09:40.600 The full unemployment rate is close to 18 percent. 74 00:09:40.600 --> 00:09:45.600 But the real concern should be the reduced employment in the private sector, 75 00:09:45.600 --> 00:09:49.600 in the production of goods and manufacturing. 76 00:09:49.600 --> 00:09:55.600 I mean, after all, unemployment is, you know, you don't have a check, but at least you're not working, you don't have to do that. 77 00:09:55.600 --> 00:10:02.600 But the problem is that we have fewer people producing goods, services and manufacturing in the United States. 78 00:10:02.600 --> 00:10:08.600 The number of jobs has fallen by 15 to 20 percent since 2005. 79 00:10:10.600 --> 00:10:20.600 Number five, rebalancing the world economy and economic power, specifically Europe, Japan, China and India. 80 00:10:20.600 --> 00:10:28.920 In 2005, China and India were not really on Americans' radar, but today they are crucial 81 00:10:28.920 --> 00:10:36.460 players in the world economy. Their central banks are actually buying gold. Meanwhile, 82 00:10:36.460 --> 00:10:45.240 our allies in Japan and Europe are in deep trouble regarding their national debt. Japan, 83 00:10:45.240 --> 00:10:49.720 which was once famous for its management, has now managed to create one of the worst 84 00:10:49.720 --> 00:10:59.560 National Debts on the Planet. It is second in terms of debt to GDP only to Zimbabwe. Zimbabwe 85 00:10:59.560 --> 00:11:13.000 has a ratio of debt to GDP of 285 percent. Japan's debt to GDP is 189 percent. Going 86 00:11:13.000 --> 00:11:19.500 Coming down the list, in Greece and Italy, their ratio is 115%. France and Portugal and 87 00:11:19.500 --> 00:11:25.060 Germany and the United Kingdom are in the range of 70%. The United States and Spain 88 00:11:25.060 --> 00:11:32.060 are in the low 50%. Now a good rule of thumb with regard to the fiscal soundness of a nation 89 00:11:33.820 --> 00:11:39.000 is that if you have less than 20% of debt compared to your GDP, you're considered 90 00:11:39.000 --> 00:12:08.000 are considered fiscally sound. If you have debt to GDP between 20 and 50 percent, you're considered stable. Anything over 50 percent up to 100 and you're considered unstable, and anything over 100 percent, you're considered at risk. At risk for things like financial failure, hyperinflation, really nasty stuff. 91 00:12:08.000 --> 00:12:13.840 Number six was, I listed as holding on to the empire. 92 00:12:13.840 --> 00:12:16.040 This too has gotten much worse. 93 00:12:16.040 --> 00:12:23.660 2005 was probably one of the peaks of activity in Iraq, but things have actually gotten much 94 00:12:23.660 --> 00:12:28.720 worse in terms of the cost of holding on to empire. 95 00:12:28.720 --> 00:12:35.840 National defense spending has increased by 40% since 2005, and worse yet, we are spending 96 00:12:35.840 --> 00:12:39.600 and a much larger chunk of it in Afghanistan. 97 00:12:39.600 --> 00:12:46.260 In Afghanistan, the nickname for Afghanistan is Graveyard of Empire. 98 00:12:46.260 --> 00:12:54.260 Just ask Alexander the Great or Genghis Khan what it's like to try to hold on to Afghanistan. 99 00:12:54.260 --> 00:12:56.480 They couldn't do it. 100 00:12:56.480 --> 00:13:03.360 The British Empire, at the height of its power, could not do it, could not subdue Afghanistan. 101 00:13:03.360 --> 00:13:13.260 and of course the Soviet Union all were defeated and ultimately depleted in Afghanistan. 102 00:13:13.260 --> 00:13:20.140 Number seven, the US dollar status is a reserve currency with particular concern about China 103 00:13:20.140 --> 00:13:31.880 again and Japan. In 2005, China was buying up tons of dollars in US treasuries as a sign 104 00:13:31.880 --> 00:13:46.520 China has slowed its purchases of U.S. government debt and is diversifying into foreign currencies 105 00:13:46.520 --> 00:13:48.720 and gold. 106 00:13:48.720 --> 00:13:55.000 None of these seven problems that I listed in 2005 have been fixed or have gone away 107 00:13:55.000 --> 00:13:56.700 on their own. 108 00:13:56.700 --> 00:14:03.820 By most measures, each of these seven problems has gotten much worse. 109 00:14:03.820 --> 00:14:09.500 In fact, the problems have snowballed much faster than most observers, including myself, 110 00:14:09.500 --> 00:14:11.260 would have predicted. 111 00:14:11.260 --> 00:14:16.300 And then, of course, we have a whole bunch of new problems. 112 00:14:16.300 --> 00:14:24.420 Things like the government owning Fannie Mae and Freddie Mac, running billions of dollars 113 00:14:24.420 --> 00:14:31.740 Inters in red ink at taxpayer expense, the FDIC that insures our bank deposits is virtually 114 00:14:31.740 --> 00:14:37.620 broke and is facing a rising number of problem banks that it needs to take over. 115 00:14:37.620 --> 00:14:45.000 Meanwhile, at the Federal Reserve, its balance sheet has undergone an historic expansion 116 00:14:45.000 --> 00:14:50.740 as well as a reduction in the credit quality of its balance sheet. 117 00:14:50.740 --> 00:14:56.940 So not only have those seven problems gotten much worse, we've added in several new problems 118 00:14:56.940 --> 00:14:58.740 coming to light. 119 00:14:58.740 --> 00:15:03.140 The common thread of all this is debt. 120 00:15:03.140 --> 00:15:09.660 The problem is we have too much debt, both personally, in business, and most especially 121 00:15:09.660 --> 00:15:10.660 in government. 122 00:15:10.660 --> 00:15:18.900 And the number one rationale for governments to inflate the money supply is its debt. 123 00:15:18.900 --> 00:15:24.000 Inflations are almost always the result of an accumulation of government debt that cannot 124 00:15:24.000 --> 00:15:25.980 be paid for. 125 00:15:25.980 --> 00:15:28.420 Why do governments inflate the money supply? 126 00:15:28.420 --> 00:15:34.700 Well according to economist Murray Rothbard, who taught at UNLV and who we've spoken about 127 00:15:34.700 --> 00:15:38.740 today, the answer is quite simple. 128 00:15:38.740 --> 00:15:46.220 Quote, whoever is granted a monopoly of printing money will use that monopoly to print, to finance 129 00:15:46.220 --> 00:16:09.220 In 2005, as I was looking back on that talk, the biggest mistake I made was this statement, 130 00:16:09.220 --> 00:16:22.620 I am not going to tell you to sell everything and buy gold bullion as much as I'd like to. 131 00:16:22.620 --> 00:16:28.300 In contemplating the future of the price of gold, we must remember the most basic economic 132 00:16:28.300 --> 00:16:38.460 concept concerning price. The price of gold is what is in our collective heads. The price 133 00:16:38.460 --> 00:16:44.140 The price of gold is not the result of any kind of physical or mechanical process. The 134 00:16:44.140 --> 00:16:49.740 price of gold is determined by what we think about gold and what actions we collectively 135 00:16:49.740 --> 00:16:59.140 take in terms of buying and selling gold. Now, humans did choose silver and gold as 136 00:16:59.140 --> 00:17:05.900 money amongst all of the commodities, in part because of its physical characteristics. Gold 137 00:17:05.900 --> 00:17:12.340 Gold and silver are durable, they're divisible, and so we initially chose silver and gold 138 00:17:12.340 --> 00:17:18.820 because of some of those physical properties as well as some of its supply characteristics. 139 00:17:18.820 --> 00:17:26.580 Gold and silver exist only in small quantities on this planet and as a result are relatively 140 00:17:26.580 --> 00:17:37.580 are generally scarce so that a small amount of gold or silver can convey a substantial amount of value. 141 00:17:37.580 --> 00:17:45.580 Now, people have focused on other factors in the market for gold and its price. 142 00:17:45.580 --> 00:17:50.580 For example, some people think that the central banks are manipulating the price of gold 143 00:17:50.580 --> 00:17:55.580 by buying and selling gold into the market. 144 00:17:55.580 --> 00:18:01.220 Other people think that the central banks are manipulating gold by leasing gold to private 145 00:18:01.220 --> 00:18:07.420 people and not telling anybody about it. And then other people think that all the gold 146 00:18:07.420 --> 00:18:14.740 in Fort Knox has surreptitiously disappeared either by government policy or employee theft 147 00:18:14.740 --> 00:18:23.740 or other reasons. All three groups lament that these schemes would, if true, reduce the price 148 00:18:23.740 --> 00:18:30.740 of Gold, keep it damped down, so as to not be an indicator of inflation in the economy. 149 00:18:38.300 --> 00:18:43.380 However, all of that still is a matter of being in our head. Most people have never 150 00:18:43.380 --> 00:18:47.260 heard of these schemes or don't believe in them, so it doesn't have much of an impact 151 00:18:47.260 --> 00:18:52.780 on the marketplace. However, if one of these schemes were to be revealed, it would have 152 00:18:52.780 --> 00:18:58.420 obviously a great increase in the price of gold and the price of gold can change very 153 00:18:58.420 --> 00:19:08.140 rapidly. Imagine, for example, if CNN started broadcasting a story about how all the gold 154 00:19:08.140 --> 00:19:12.860 in Fort Knox is missing and it had been missing for the last 10 years. What would you think 155 00:19:12.860 --> 00:19:17.620 would happen in the market for gold the next morning? Well, of course, it would shoot up 156 00:19:17.620 --> 00:19:26.620 So again, it's not a physical mechanical process, it's in our head, things can change very rapidly. 157 00:19:26.620 --> 00:19:36.620 The fact that the price of gold is regulated by what is in our head makes forecasting the price of gold very difficult. 158 00:19:36.620 --> 00:19:43.620 Of course, gold and paper money vary inversely against one another in predictable ways. 159 00:19:43.620 --> 00:19:53.620 so that 9 out of 10 times if the value of the dollar is falling on a particular day, the value of gold is rising. 160 00:19:53.620 --> 00:19:59.620 But forecasting the value of currencies is also inherently difficult and highly problematic. 161 00:19:59.620 --> 00:20:09.620 Any investment strategy that you adopt concerning gold should acknowledge these inherent difficulties in forecasting the future. 162 00:20:09.620 --> 00:20:32.620 Austrian economics, unlike mainstream economics, are very wary of economic forecasts. There is no real hard science of predicting the magnitudes and timing of economic change. Therefore, you should be cautious, especially about specific forecasts regarding gold. 163 00:20:32.620 --> 00:20:46.620 What Austrian economists do argue is that correct economic theory does help us to better understand their environment and to act accordingly. 164 00:20:46.620 --> 00:20:58.620 Some of the factors that I've laid out suggest, obviously, that the current high price of gold is very well justified by events in the economy. 165 00:20:58.620 --> 00:21:04.220 Currently, as I mentioned, gold is at or near an all-time high. 166 00:21:04.220 --> 00:21:11.900 The technical target on the price of gold is $1,600 an ounce, based on technical analysis 167 00:21:11.900 --> 00:21:14.620 over the next year, year and a half. 168 00:21:14.620 --> 00:21:22.180 However, gold has also fallen quite sharply at various points in time. 169 00:21:22.180 --> 00:21:28.380 And we must remember that conditions in the stock market also impact the market for gold. 170 00:21:28.380 --> 00:21:35.400 A correction in the stock market is something we need to be leery about, whether it's a 171 00:21:35.400 --> 00:21:39.780 stock market crash or long bear market in stocks. 172 00:21:39.780 --> 00:21:44.540 The strong bear market rally over the last year, year and a half, has been driven not 173 00:21:44.540 --> 00:21:50.220 by an improvement in the fundamentals of the economy, but by a lack of alternatives 174 00:21:50.220 --> 00:21:53.020 to invest profitably. 175 00:21:53.020 --> 00:22:19.020 Real estate prices continue to fall, so the stock market has been propped up by those factors as well as by gimmicks such as cash for clunkers, the homebuyers' tax credit, and the cooking of the books with respect to things like accounting standards and unemployment. 176 00:22:19.020 --> 00:22:30.020 This suggests that what is in our collective heads regarding the stock market could change dramatically in the near future, 177 00:22:30.020 --> 00:22:34.020 and that there could be substantial losses in the stock market going forward. 178 00:22:34.020 --> 00:22:42.020 If asset prices were to fall dramatically in unison in terms of stocks, in terms of real estate, in terms of commodities, 179 00:22:42.020 --> 00:23:01.020 and commodities, we should also expect a like-minded fall in the price of gold as well. At least a temporary fall in the price of gold. Robert Prechter is even forecasting that the price of gold will be less than $680 an ounce. 180 00:23:01.020 --> 00:23:08.020 Now this is a deflationary scenario, and, but when I say it's deflation, it's deflation 181 00:23:08.500 --> 00:23:13.380 of asset prices. I do not expect the Federal Reserve to cut back on its efforts to inflate 182 00:23:13.380 --> 00:23:18.660 the money supply. Far from it. I expect the Fed to continue its efforts to inflate the 183 00:23:18.660 --> 00:23:25.660 money supply. In fact, we should not be surprised by new extreme efforts if the economy and 184 00:23:25.660 --> 00:23:32.140 and Stock Market were to falter. It is reasonable to expect that the Bernanke Fed has several 185 00:23:32.140 --> 00:23:39.140 such measures on the shelf and ready to implement. The deflationary scenario simply means falling 186 00:23:39.140 --> 00:23:45.260 asset prices, but the Federal Reserve's response suggests even further strength in 187 00:23:45.260 --> 00:23:52.260 the price of gold going forward. In an era of paper money, owning gold and silver is 188 00:23:52.260 --> 00:24:01.420 Precious metals provide economic protection against both inflation and deflation. They 189 00:24:01.420 --> 00:24:11.120 provide economic protection against things like war and financial market meltdowns. 190 00:24:11.120 --> 00:24:15.480 Like insurance, your purchases of gold should be viewed as something you hope you never 191 00:24:15.480 --> 00:24:44.480 Also, like insurance, gold is something you don't own one week and sell the next. Therefore, even though I have expectations of possible lower prices of gold ahead, it does not mean that I would recommend selling your gold. In fact, the lower prices should be viewed, in my opinion, as a buying opportunity because the longer-term prospects for the economy and the dollar indicate that. 192 00:24:44.480 --> 00:24:52.840 that. Longer term, therefore, I remain very bullish on gold. The only thing that would 193 00:24:52.840 --> 00:24:58.960 change that opinion is if we had, for example, real budget cuts, real tax cuts, a balanced 194 00:24:58.960 --> 00:25:06.160 budget, true deregulation and privatization, and real moves to return to sound money. And 195 00:25:06.160 --> 00:25:13.220 that just doesn't seem very likely today. The ultimate demise of the dollar still seems 196 00:25:13.220 --> 00:25:20.220 to be far off in the future. However, it sure seems a lot closer than it was in 2005. It 197 00:25:20.500 --> 00:25:25.340 is important to remember that the increase in the future price of gold is never going 198 00:25:25.340 --> 00:25:32.180 to be a smooth ascent and indeed is subject to major pullbacks along the way, as I have 199 00:25:32.180 --> 00:25:38.820 already pointed out. It is also important to remember that things can happen much faster 200 00:25:38.820 --> 00:25:46.720 than Expected. As Ludwig von Mises pointed out, inflationism is doomed when we all realize 201 00:25:46.720 --> 00:25:53.060 that the central bank does not have any intention of stopping the inflationary process. When 202 00:25:53.060 --> 00:26:00.180 we get that message into all of our collective heads, then we will abandon the dollar and 203 00:26:00.180 --> 00:26:03.840 bring the scheme to an end and restore sound money. Thank you very much. 204 00:26:08.820 --> 00:26:10.820 Thank you very much.