When I read the prediction that gold is going to go to $10,000 per oz from its current $1,650 price, I begin to lose the ability to think rationally. I, like many, become blinded by the prospect of making fantastic returns from buying gold. I am not aware of any other investment out there that is seemingly so obvious. No stock, no bond, not real-estate or any other asset or commodity is slated to make 700% returns from current levels. So I can only guess that everyone is buying gold. If that was the case though, then why is gold ONLY $1,650 per oz? The reason is that the fantastic prediction that gold will go to $10,000 is just that: Fantasy. In fact, when I get back to rational thinking, gold going to $10,000 is not simple fantasy, but more of a paradox.
The argument, I think, for gold going to go to $10,000 is that fiat currencies such as the euro or the U.S. dollar (money backed only by a promise to pay), are going to lose value, and we will return to the gold standard, which prices currencies against gold. But because the world left the gold standard in 1971, so much currency has been printed without gold backing, that gold will have to be revalued upwards to account for all the new currency. However, if this really was the case, then gold would actually rise to around $50,000 per oz, not merely $10,000. If this really was the case, and since banks, especially central banks, are the biggest buyers of gold, then revaluing gold upwards would mean that banks get an unfair advantage. They swap all their fiat currency for gold, gold prices skyrocket because the gold standard magically comes back into being, and the banks suddenly have enormous value. It is akin to printing money…but banks already print money, so going to the gold standard seems like the long way around. So this version of the return of the gold standard and therefore $10,000 gold to me seems like a paradox.
It seems that the reason we are even having the discussion about gold, the gold standard and $10,000 gold is because we are in the midst of a global financial crisis. This crisis is manifesting itself as a sovereign debt crisis cum banking crisis. It is the same thing really, because at the end of the day banks need more money and the taxpayer has been forced to provide it. If they did not, then the banks would go bust and we would lose all our money. That’s the fearful argument being promulgated anyway. This all means that the banks presumably cannot be trusted to balance their books, and we should therefore return to the gold standard so that banks don’t run out of money again and come to the taxpayer for more bailouts.
Let’s look at the gold market then. Where is the gold market, how does the market price gold and who are the big players? The gold market is not so much a market as it is a club. Gold is not priced, it is “fixed,” twice a day, in dollars, pounds sterling and euros. The club that fixes the price is called The London Gold Market Fixing Ltd. There are five members of this club, and they are of course all banks. Originally, the fix happened inside the premises of N M Rothschild & Sons, which was a founding member of the club. However, since Rothschild’s left the club in 2004 the fix happens via telephone, between the five current members, who are: Scotia Mocatta (Bank of Nova Scotia), Barclays Capital, Deutsche Bank, HSBC and Societe Generale. The afternoon fix price is used as the pricing benchmark for all gold and gold derivatives globally. So the banks need taxpayer funded bailouts because they have printed too much fiat money leading us to conclude we should return to the gold standard and $10,000 gold, which is based around a closed market wholly controlled by the banks. This fits my understanding of a paradox. In simply terms, it seems like the fox is guarding the chicken coop.
The gold market, like the oil market, was designed in the early 20th century, using 20th century technology. Going back to the gold standard as a solution to the current banking crisis and expecting $10,000 gold as a result is akin to the motor industry going back to producing cars from the 1920s in order to stop people speeding. 21st Century problems cannot be solved with 20th Century solutions. Gold is not going to go to $10,000 per oz any more than the Model-T will re-enter production.
Current markets are anything but global or integrated. What if we had a paradigm shift in the way we think and transact when doing business with each other? Balanced global trade can only occur if we have transparent, accessible and efficient markets. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company. Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.