THE FEDERAL RESERVE – WHAT WE DON’T KNOW

Having had the opportunity and time to ply their trade again and again, the sorcerers at the central bank have usually found favor with the gods of paper money.  This is true as long as the basic objective and standard of measurement is to avoid complete financial and economic disaster.

There are other more subtle distinctions, too. For example, there is a difference between the ‘highway to hell’ and burning eternally at the destination.

Some say that “what you don’t know won’t hurt you”. That is possible, I guess, but…

‘What we don’t know’ is a variable with infinitely spectacular implications. What we don’t know includes: anything which the Fed hasn’t told us; potential surprise announcements by the Fed or the government (confiscation of assets, bank holidays); the full extent of central bank intervention in the markets (bond and foreign exchange); the length and breadth of the problem bank list; etc.

Has the Fed lost control? It is a possibility. The financial markets don’t seem to think so. Yet.

If events unfold in such a way as to create the ‘perfect storm’, then a $10,000 gold price could become a reality quickly. The price quote would be meaningless, though. Here’s why.

Any combination of events which leads to $10,000 gold within a relatively short time frame would also be accompanied by declines of similar magnitude in the value of the U.S. dollar.

A collapse in the dollar’s purchasing power would be exacerbated by its lack of credibility. Any desire to hold dollars could eventually disappear.

The flow of goods and services would be affected negatively if people were unwilling to accept U.S. dollars in exchange for their items of trade. If it becomes bad enough, a complete repudiation of the U.S. dollar might occur.

A MEANINGLESS GOLD PRICE

At a time like that, $10,000 gold or any U.S. dollar price for gold becomes meaningless. What becomes critical is not the price of gold, but how much gold you own.

Any gold you own should retain its purchasing power. Hence, what you could buy with an ounce of gold under those conditions should be similar to what you can buy now.

That is a worst-case scenario, but it needs to be considered if you think gold is your ticket to riches.

Another consideration for gold investors is the form in which you own gold. Gold stocks, ETFs, and futures contracts are all paper products with ties to the metal which would be tenuous at best given the conditions that would likely accompany the lack of a functional currency.

If you are a trader/investor who expects $10,000 gold, it might be a good idea to reevaluate your expectations with respect to timing, conditions (known and unknown), implications, and form of ownership.

Gold’s price is a reflection of the long-term decline in the U.S. dollar.

Gold is original money and a store of value. Owning physical gold is a means of preserving wealth.

More By This Author:

Will The U.S. Dollar Collapse?
The Nobility Of Central Bank Action
It Was Never About Gold – Always About The Dollar