How far will gold and silver fall?

I know there are a lot of threads about how high the two metals will go, but when the steam runs out and it all comes down, will we ever see the golden days of $300/oz gold and $5/oz silver again? (Golden days from a buyer's point of view).

Or do you think that even when they do depreciate there's little chance of them falling to such lows again?

 

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Depreciate against what?

The value of gold isn't changing. It's the value of the $ that is changing. If you instead ask the question, "Will the $ become strong enough to again purchase gold at $300 for an ounce of gold", it should become more clear.

 

Actually I just made that argument in another post...

I accept your rewording, so therefore I ask "Will the $ become strong enough to again purchase gold at $300 for an ounce of gold?"

 

NO. What you are seeing is the built in failure of the fiat money system. The inherent flaw of fiat money, that is debt based money, is they have to continuously increase the supply of the $s to pay back the people who are owed the interest on the debt. This is why there is a stated goal of the central banks to maintain an inflation rate of 2% to 3%. This sounds innocent enough until you sit down and do the math. Any system that grows at a constant linear percentage rate, ends up with exponential growth. Furthermore if you plot it, this growth all of a sudden explodes and the chart resembles a hockey stick laying on its long side. You will commonly hear from people who know this that we are entering the puck end of the curve.

This is easy enough to see if you plot US debt since 1971. We just had a lot of political theater where the end result was as predicted by the above, they increased the US $ debt by another $2.5T. (It took 300 years to spend the first trillion BTW) This $2.5T will run out in less than 18 months. What we see now are the major currencies racing each other to the bottom. This would be the Euro, the $ the British pound, Yen, and so forth. The rest are in dire straits because of it. This is why people, businesses and governments are buying gold.

So the answer to your question is that you will see $300 gold again when governments decide to pay off the debt and balance the budget.

 

Silver will never be $5 again, maybe $20 maybe $100, but not $5.

 

You are all talking about how bad inflation is. It affects us exponentially blah blah blah. If the inflation rate is 1-3% sure over time 3% in 10 years will be more than the 3% now. However there are many SAFE investments that pay much more than 3%. Many corporations such as Walmart and GE sell debt at much higher rate. There is almost no chance of default. They have better balance sheets than the government we live in. When you have your holdings in gold and silver the only thing you are basically fighting over in the long run is inflation. So it is like you are getting at most 3% of your money a year rather than 5+%. Just breaking even with inflation. Also gold and silver don't pay dividends; they don't make money. If anything it costs money to store these metals. The reason gold and silver have risen so much in the past few years is because of fear. You can't eat gold and silver in the time of a disaster! A bullet would have much more influence than a pound of gold would. In the long run holding stocks, that pay dividends, and bonds,that pay over the inflation rate, are a much better investment.

 

The value of gold is changing constantly. Else prices of goods and other commodities would follow in step with gold. But we know this is not true.

 

Going back to about 100 years of comparisons, I have seen the relative value of gold becoming today about $1500, and silver about $23. That is simply taking older prices and adjusting for inflation. With a normal bias to the downside expected, and giving a range, I simply see a "normal range" for gold about $1000-1500, and silver of $18-23, as historical values today.

The reason these metals fluctuate is because their demand DOES change. Anyone saying demand for gold and silver is not higher today than it was in 2000 is simply burying their head in the sand, and ignoring economics. Look at PM coin mintages the last three years versus the previous 20 and see what has happened to demand. What is unknown is what demand will be in the future, especially from "non-typical" investors who historically have never wanted to own silver or gold. How long they wish to own or buy more PM is anyone's guess. That is what will drive future price changes, along with purchases or sales by governments for gold.

Chris

P.S. Anyone wishing to say demand for gold does not change should read about what has happened when major gold finds are located. The price of everything stays the same except that the price per ounce of gold went down. If demand cannot change, then the price cannot change all things else being equal. During the CA gold rush, price of goods paid in silver or currency stayed the same, but the price per ounce of gold went down. Saying any "thing" is immune from economics is on its face silly, unless you live in a State controlled economy.

P.P.S To teh OP, no I do not see prices like then possible. They were seriously depressed by government selling, plus you have a lot of years of inflation to counteract as well. I would say silver in the teens and gold sub $1000 would be POSSIBLE. Not saying they will happen, or even likely, but possible. If evaluating a purchase, this should at least be ackowledge as a possibility if laying out a Monte Carlo simulation.

 

In my mind the answer to this question relies heavily on the reasons for why they drop. If it is because of margin hikes or a slowing economy I would see it as a temporary dip and buying opportunity. I would tentatively look at the Fibonacci numbers to try and identify the bear trap. I was just doing some number crunching last night on the substantial drop in silver in May, and it bounced precisely off the 38.2% Fibonacci retracement down from the $50 high, then hit resistance at the 38.2% Fibonacci retracement up from the previous $27 low, bounced around those lines for a while and has now broken above both of them which is bullish. The 61.8% number from $27 is around $43.50 so if we break that I would expect full steam ahead, otherwise I would want to see it break down through both of the other Fibonacci numbers I mentioned below $36 before I would be bearish.

However, if the reason prices drop is due to fiscal responsibility (although paying off all the debt would cause a deflation and probably still cause PM's to rise in purchase power even if the actual price drops) or due to some sort of monetized metal standard then I would look at it more as a top than a dip, but even then such a scenario would provide stability and I doubt the price would move much anyway after metals are pegged to the dollar.

As such I have a very hard time seeing VALUE going anywhere but up considering the ongoing bank runs in Europe, and the massive debt we have in the US which must grow at it's current pace to prevent a deflationary scenario. Even if we do see a deflation (which is seeming more likely to be inevitable to me unless the Fed is willing to hyperinflate to infinity which isn't really sustainable) precious metals will lose their value at a slower rate than other commodities, thus increasing buying power as price drops. So I don't really see how you can go wrong with PM's.

 

You incorrectly conclude that inflation is normal and required. It's not. Inflation is a created component of fiat money. For most of the USA's history, there was no fiat money and hence no inflation. Inflation is not a component of demand vs supply. It is a component of currency debasement.

 

But for the last 100 years, and for the foreseeable future all modern societies use, and will continue to use, fiat currency. I use inflation as a proxy for expected safe bond returns since they tend to coincide. US Dollars are expected to be in an interset bearing device to make any kind of comparisons rational, since that is the expected investment for cash.

It is simply people who use nominal dollars and then scare people by saying the dollar has lost 99% of its purchasing power who are using flawed logic. Like I have said before, any paper handed in by me to my professor, or to me as a professor, using nominal dollars over time would have been downgraded immediately. It is simply WRONG, and any discussion using nominal dollars over time is on its face erroneous, and I will not even bother to analyze any further, since the entire basis of the paper is utter trash.

Btw Fatima, have you even checked you assertions of no inflation? I have read many times of increasing land values, increased prices of goods and services, from the time of the Revolutionary War to the Civil War. There was inflation in that time frame that you always like to claim didn't exist. There was also inflation in Greek times, in Roman times, and in the Medieval era. There are tons of sources decrying the fact that bread used to cost half an aes, but now cost 2 aes. Where exactly do you conclude inflation has only ever been experienced in human history in modern times?

 

I didn't say it was limited to modern times. I said that it was a product of fiat money. Fiat money has certainly been used many times in history and each time, its end came from one of two results, economic collapse or war. Each time it failed it went down with the scholars and professors of the time citing economic theory that "it's different this time". Of course they are not around when there is nothing but ashes left.

During the period leading up to the Revolutionary War, the prevailing currency was Colonial Script, a fiat currency, not the official coinage. It was printed by the colonial states as a way to separate the local economies from the Bank of England and hence the King. Of course when Franklin, if I remember correctly, explained this to the British, they went nuts. Go look up what happened after this which explains how the currency became close to worthless and how it contributed to the war. During the Civil War, both sides issued paper fiat currency that promised to pay back the bearer in PMs after the war was over. Again inflation on both sides with the added pressure that whichever side lost, the promise would not be kept. It's always the same.

On your economics class. How would your professor answer this very simple question. Assume a fiat based system like the one we have here in the USA. Instead of the treasury issuing a $ into the economy, it "borrows" the $ from the Federal Reserve. So now there is $1 in the system. In one year, the US Treasury owes the interest for this $. If it is 5% then 5 cents is owed. Now the total amount of money in the system is $1.05. The question for the professor is "where did this 5 cents come from"? The answer to the question is not as easy as it first seems and it exposes the fundamental flaw in fiat money.

 

This analogy is one I read a few years ago that first peaked my interest in precious metals. The answer can be one of two things. It either comes from thin air, thus decreasing the buying power of existing currency if goods and services are not also increased by the same magnitude. Or it comes from the existing pool of money, meaning that somebody somewhere must lose wealth for the borrower to break even, thus increasing the overall level of debt. My understanding is that the banking system started out as the latter, and is now like the former. In either case it amounts to loss of wealth by those participating in the system.

 

That's probably a good working assumption. The prices could overshoot to the downside in a bear market panic in metals, but those ranges are reasonable after the crash.

 

I agree. http://en.wikipedia.org/wiki/Taylor_rule

 

Indeed. When the Nazi government engineered their fiat money system in the 1930s, this question confounded them. In the end, it doesn't matter that much whose hide it was taken out of or who ended up with it, because the money supply is now $1.05 instead of $1. At the end of year two, the money supply is $1.1025 and so forth. It has to be increased regardless of what the real economy is doing. This is exactly the reason central bankers and their governments have to have inflation. In the end, the money supply has to be expanded at an infinite rate just to keep up which, of course, is impossible. Boom.

The present generation thinks it can't happen to them but the simple math says otherwise.

 

This is a common story used to discredit the Fed, but it has a couple of flaws. First, the Treasury doesn't necessarily borrow from the Fed. The normal process is to borrow on the open market which takes a dollar out of circulation for each one put in, keeping the money supply stable. And regarding the interest, this would only be true of money was the only form of wealth in the economy, but it is not. If $1 is borrowed at 5% and is used by a business to generate an economic output that is, say 15% greater than the capital input [which is the whole purpose of business], then the 5% is paid back with 10% of economic value to spare in the form of goods and services. Remember, it isn't just the number of dollars in circulation that matters.

 

Actually this is the common mistake that people make who can't believe what I stated. Every dollar printed by the Fed is "loaned" into existence. It doesn't matter if the Treasury did it directly or indirectly. The end result is that the money supply has to be increased simply to cover the interest. It doesn't matter who pays it and who gets it. The supply has to be increased just for this reason and this is its fatal flaw.

The question for you is what completely fiat money system has lasted more than 100 years or even 50 for that matter.

 

China used fiat currency for most of the period between 1000 and 1450, but perhaps there are experts here on the history of China with more information. There is no inherent flaw in a fiat system. The flaw is in human nature. What you are missing is that the dollars in existence are a tiny fraction of the economic wealth measured by them. When a company repays an interest bearing bond, they don't use Federal Reserve Notes. It is an economic transfer of wealth electronically between borrower and lender. The lender most likely doesn't ask for paper money, but puts the wealth back to work in other bonds, stocks, etc... The point you miss is that the dollar represented by a Federal Reserve Note is a scorekeeping device. The vast majority of economic activities in the economy today do not involve actual currency. Banks order currency from the local Federal Reserve Bank, and return it to them based on local supply and demand.

If there was a static amount of wealth in the world, you might be correct. But as long as there is a growing amount of wealth in the world, your scenario is irrelevant.

 

Maybe you were saying this, but just to be clear - my understanding of fractional reserve banking is that the entire amount of the loan is conjured into existence as opposed to just the interest. This happens both when the Fed borrows from the north wind, and when national banks borrow from the Fed for regular loans, which amounts to a much larger disparity. The difference is that the monetary supply has to be increased to account for interest (unless we are to place the burden on participants on the whole), but incresaing the monetary supply to account for the entire loan is not necessary for that aim. As far as I can tell it is done just because they don't want to fork over their own savings to make the loan, and why would they if they don't have to. There is no risk involved and I don't see how it can be perpetually sustainable.