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18 www.resourceworld.com o c t o b e r / n o v e m b e r 2 0 1 4 s p e c u l a t i o n s L e o n a r d M e l m a n I n early September, 2011, gold reached the highest price in US$ ever recorded, a figure in excess of $1,930/oz. At the time, that didn't appear really remarkable. After all, virtually every marker of a historic pre- cious metals bull market seemed to be in effect. We had runaway money creation by America's central bank, horrendous governmental deficits around the world and recently collapsed economies which appeared to require unending stimulation. If the historic high price in gold at that time seemed somewhat unremarkable, in the view of many analysts, what has happened since has defied rational explanation. In a nutshell, gold and silver began to decline from that peak and during those three years gold has fallen by an astonishing US $700/ oz despite the fact that there has been an almost relentless barrage of news which, by accepted historic guideposts, should have propelled gold and silver ever-higher. What are those norms and how did they come to be widely accepted? First is the fear of rapidly escalating currency debasement. This historic fear is well founded since currency debasement has generally accompanied every recorded incidence of hyperinflation with its normal concomitant of currency purchasing value destruction. Examples might include the collapse of the Roman Empire; the mas- sive printing and distribution of unbacked Assignats (paper money 1789-1796) in France; wild and uncontrollable printing of German marks from 1921-23 and the most recent episode, the destruction of the Zimbabwean dollar from 2007-10. Next is the idea of governmental debt. As debt grows out of control, governments are required to finance that debt and there are only two general means; selling gov- ernment debt into open financial markets or printing currency. Therefore, precious metals markets have generally regarded huge increases in debt, particularly gov- ernment debt, as being pro-gold and silver. International instability is also regarded by gold and silver advocates as being a gen- eral indicator of higher metals prices since wars usually involve the creation of massive amounts of new debt as well as increasing the potential for disruption of international commerce, particularly regarding the world- wide distribution of petroleum resources which are vital to economic stability. These situations also tend to increase levels of public fear. In the past, political instability has driven many to seek the presumed safe haven of gold and silver versus government trust-based currencies. When we look at the great golden bull market of 1976-80 which saw gold rise from US $103/oz in August 1976 to over US $850/oz by January 1980, we can see these ideas in action. Currency creation had been a factor in rapidly escalating inflation which by late 1979 threatened to 'morph' completely out of control into hyperinflation. The twin towers of government debt and deficits were ris- ing at unprecedented rates. International instability was rampant with the Soviet invasion of Afghanistan and the American reprisal announcement of their refusal to participate in the Moscow Olympics of 1980. In addition, confidence in the Jimmy Carter administration had been shattered by the Bert Lance banking scandals and an apparent inability to rescue America's hos- tages in Iran. As these factors continued to build in intensity, gold and silver skyrocketed – and those lessons were imprinted on many observers. With those ideas in mind, let us look at the present set of circumstances. Since 2008, we have had fiat money creation ongoing at truly staggering rates as measured by a quadrupling of Federal Reserve Bank assets in just a few years. Government debt and budgetary deficits have exploded sky high. Open battles have been taking place in the Ukraine; Syria is engaged in a civil war; Iran is being held a virtual hostage by terrorist groups and Israel and its Palestinian neighbour have been at each others' throats. The entire Middle East with its vast energy resources appears to be becoming unstable. In addi- tion, confidence in politicians, the US president himself and law-makers in gen- eral has plummeted. All of these above noted circumstances should have driven gold and silver prices higher – but they have not – and there is the paradox. One answer which might be suggested is that unlike the late 1970s, when secu- rities markets were dormant to falling, today's markets are vibrant and rising, thereby draining off investment mon- ies which might otherwise have headed toward gold and silver. In addition, many predictions of fiscal gloom and doom have simply not been fulfilled and the public may indeed have become immune to acting on such warnings of imminent peril. The question now is whether these historic guideposts will finally become dominant and ultimately lead to new and greater highs for precious metal prices. My own belief is that it is reasonable and logi- cal to expect gold and silver to eventually rise in value – perhaps even spectacularly – as noteworthy traumas around the world continue to develop. The big question is when? n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@ shaw.ca The prevailing irrationality of the gold market