Thursday, November 5, 2009

Rozeff on Gold and the Dollar

"A truly major change in the global monetary system is beginning to materialize. The dollar is starting to be dethroned. Foreign governments and central banks are going to do the dethroning. ... The major dethroners, the Chinese, are on record as favoring a slow process. ... The catalyst for reducing the dollar's role is the insolvent US banking system combined with the massive government and FED efforts to reflate the system. The weakness of the emperor has been fully revealed. Foreign players are going to press their advantages. The US monetary system has failed. ... This movement is going to be BIG. ... But my focus here is on one part of the financial side of things, namely, central banking and gold. ... The dollar price of gold depends on two factors: the dollar exchange rate against other currencied and the world price of gold in those currencies. ..If the most important dethroning central banks add gold to their reserves while stemming their production of their own currencies, the world price of gold will stabilize and fall. ... I believe and argue below that the foreign governments and central banks have intentionally pursued dollar policies for decades that were exactly the opposite of what you or I and rational profit-maximizer lacking in political power would have done. WHY? Apparently they were rational from the point of view of those who did possess political power and certain of their supporters that included exporters. It is highly pertinent to the price of gold to understand what has been going on and how it now appears to be changing. ... I don't think that 'statesmen' are nice guys. They don't build up massive armies and navies with nuclear weapons because they are nice guys. ... This means that the government bondas carried as assets have no value to the FED. The present value of an asset with zero cash flows is ZERO. These bonds do NOT back the currency that the FED issues. ... [Fed] notes are backed, for all practical purposes, only by the GOLD that the FED carries, which is 261.5 million ounces. ... I define a new concept called the Zero Discount Value (ZDV) of gold. The ZDV of gold in a specific currency is the total number of currency notes issued divided by the total number of oz. of gold held as an asset against that note issue. ... I define inflation as an issue of central bank money (notes and reserves) not secured by additional assets of equivalent worth. ... There is no economics or finance in this calculation. It is all definition, but it is clear definition. The economic reasoning comes in when we try to understand how the ZDV of gold and its market price are related. ... In US dollars, gold's ZDV today is over $7,000 an oz. and rising", original italics, Michael Rozeff (MR) at Gold Eagle, 20 October 2009, link:

I have said things like MR since January 1980. See my 24 December 2007 post: Our monetary base is now $1,963 billion. Divided by 261.5 miillion ounces of gold gives $7,507 per ounce. Gold is cheap. Be patient gold bugs. As for China, see my 2 October 2007 post:


Lauren Foreman said...

So the dollar's going down, at least that means other currency is gaining value, but who cares if you're a broke American.

Anonymous said...

Patience is the state of endurance under difficult circumstances, which can mean persevering in the face of delay or provocation without becoming annoyed or upset; or exhibiting forbearance when under strain, especially when faced with longer-term difficulties. It is also used to refer to the character trait of being steadfast.

We're going to need a lot of this...

Gary said...

"If the most important dethroning central banks add gold to their reserves while stemming their production of their own currencies, the world price of gold will stabilize and fall."

In this scenario, would the dollar value of gold continue to rise? I think the answer is yes, but would like to know what others think. Thanks

Independent Accountant said...

Yes, the US dollar price of gold will rise. There was a post today at "Big Money" by Martha White. It was absurd. I will comment on it in the future.