How Gold Gets to $12,884 per Oz (Updated w/ Further Explanation)

In my last post I pointed out the relationship between gold and both the monetary base and the national debt. Gold prices in US dollars has an extremely high correlation to both. Today, via Zerohedge, I'll point out gold's value using the metric of the "coverage ratio" which is merely the price gold would have to trade at to back the amount of dollars printed 100% by the gold the Fed claims we hold in our national vaults.

As we will see, this historic average has been 40%. That is, we could back 40% of the currency outstanding with the national gold holdings we have. To be on a true gold standard would require 100% backing of our currency with gold. Today, as you will see below, the ratio is at the historic low of 17%. Which means we have printed so much money in recent years, we can only back 17% with gold at the current price. Below, the chart shows the required gold price at several ratios given the an anticipated $700 Billion of added dollars to the Fed's balance sheet through continued QE operations.

Even though we have presented comparable scenarios looking at the coverage of the US money base in gold terms previously, aka "gold coverage" ratio, including once from Dylan Grice, and once from David Rosenberg, now that we have drifted into a new, previously unchartered and very much open-ended liquidity tsunami, it is time to revisit the topic. Luckily, Guggenheim's Scott Minerd has done just that. Not only that, but he presents three distinct gold pricing scenario, attempting to forecast a low, medium and high price range for the yellow metal.

To wit: "The U.S. gold coverage ratio, which measures the amount of gold on deposit at the Federal Reserve against the total money supply, is currently at an all-time low of 17%. This ratio tends to move dramatically and falls during periods of disinflation or relative price stability. The historical average for the gold coverage ratio is roughly 40%, meaning that the current price of gold would have to more than double to reach the average. The gold coverage ratio has risen above 100% twice during the twentieth century. Were this to happen today, the value of an ounce of gold would exceed $12,000.” 

Gold Price Got You Down?

Here's just a reminder of one of the factors with the highest correlation to gold:

Now I may not be a genius, but I can see that as long as the national debt is increasing, so to must gold. And Where is our national debt at?


Click here for a live update

Jeff Clark from Casey Research also points out the high correlation with the monetary base:

The US Will Be the Last Domino to Fall

Michael Krieger is a former oil analyst for Lehman Brothers and writer of opinions about global macro economics for the investment community around the world. Many of his opinions reflect my own, though he is much better at articulating them than I am. For this reason I'm re-posting  his writing. Michael describes in the post below his surprise that the central banks have been able to hold things together as long as they have since the crisis of 2008 just as I have been. But unlike me, Michael sees a bigger picture and sees the collapse has already begun in other countries and will soon spread here. Markets can often seem completely calm on the surface just before things quickly go terribly wrong. This was the case with Greece sovereign bonds. Greece enjoyed low interest rates as a member of the EU until one day...they didn't anymore. Markets are like that. They can switch on a dime. Pay special attention to his analysis of the Dow:Gold ratio and his thoughts on Treasuries. The most important message though is that time is running out to prepare.

Titanic War in Gold Between East & West

As gold moves mostly sideways since the announcement of QEternity its worthy to note there is a titanic struggle in the gold markets between central banks of the West who want to keep gold prices down to hide the negative effects of unlimited printing and Eastern (mostly China) central banks that are using the artificially low prices to acquire huge amounts of gold to diversify their currency reserves and hedge their US dollar and Euro positions in government bonds. There's no way to know how long this struggle continues or which way gold might break in the short term but one thing is for sure: Western central banks must supply the gold that Eastern central banks are taking delivery of. Paper derivatives are not going to satisfy the Chinese. They know the game. So how much gold will Western central banks give up to preserve the current price? Who knows, but I'm sure this won't end well for those of us in the Western hemisphere. John Embry has more:

BLS strikes again. Jobless #'s Missing CA!

 

Just a quick note following the manipulated jobs figures. Today the BLS(BS) reported the number of new jobless claims dropped from an adjusted figure of 369,000 last week to 339,000 this week.

From the Department of Labor:

The Labor Department said weekly applications fell by 30,000 to the lowest level since February 2008. The four-week average, a less volatile measure, dropped by 11,500 to 364,000, a six-month low.

Applications are a proxy for layoffs. When they consistently drop below 375,000, it suggests that hiring is strong enough to lower the unemployment rate.

Only problem? The new numbers are missing a "large state" that did not submit their numbers in time.

From businessinsider:

• It is likely that some of the jobless claims in one large state--California--were not included in the claims reported to the Department of Labor this week.  This happens occasionally, our source says. When a state's jobless claims bureau is short-staffed, sometimes the state does not process all of the claims that came in during the week in time to get them to the DOL. The source believes that this is what happened this week.

• The California claims that were not processed in time to get into this week's jobless report will appear in future reports, most likely next week's or the following week's. In other words, those reports might be modestly higher than expected.

• The source believes that the number of California claims that were not processed totalled about 15,000-25,000.

Read more: http://www.businessinsider.com/what-happened-with-jobless-claims-2012-10#ixzz290yXKaQD

I'm sure this was just an oversight by the Democratically controlled state of California.

In normal times it would be absurd to think that agencies of the government would manipulate economic data. But one wonders, in light of a highly politicized EPA and National Labor Relations Board that has openly pushed a partisan agenda, just how far and deep does the rot go?

If you go back to my last post you'll see a list of mass layoffs announce by large companies. Ask yourself, "Do the unemployment numbers and new unemployment claims numbers make sense?"

UPDATE 10/12/12

Looks like California is denying the state is them, but businessinsider is holding to their guns.

Click below for more

More BLS(BS) and dead fish

Suspicion of the 7.8% unemployment rate is rising not waning.

From Trimtabs:

• Largest September one month gain in BLS data since 1948!
• Rarely in September do the number of employed increase.
• Has happened only six times. Four times it was less than 100k.
• 775k This time!
• Since 1955 every September the number of part time workers fell. This time it exploded.

Unemployment at 7.8%????

The Bureau of Labor Statistics (BLS) reported today that 114,000 jobs were created last month and the unemployment rate fell to 7.8% (U-3). Some have been a little more than skeptical. Rick Santelli of CNBC, who had predicted the rate would cross below 8% before the election said, "I told you so!".
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Jack Welch Tweeted: Unbelievable jobs number..these Chicago will do anything..can't debate so they change the numbers".

One might be excused for a little suspicion. The economy must add anywhere from 150-200K jobs per month to just keep up with the population increase. So how does an anemic 114K jobs lower the unemployment rate the most in 24 years??