The gold and silver rally began two days ago. But this rally portends even more dire changes in our society. Only a miracle can stop them.

The latest on gold and silver

Yesterday, gold and silver closed down slightly at the New York Commodity Exchange. Then came the news of a “new” debt ceiling deal by the “Gang of Six.” Gold lost $20 an ounce in after-hours trading on that news. Silver lost more than $1.50. The gold-silver ratio changed very little.

None of this means that either metal will fall back to anything like a historical average. In fact, historical averages mean almost nothing now. Those averages date from a time when the Federal Reserve sensibly kept the money supply nearly stable. It is not doing that now. Neither is the European Central Bank, or any central bank.

The old rules on gold and silver

This 1998 study, by Stephen Harmston for the World Gold Council, shows how gold used to behave. It came out during the one time in modern memory when the United States government ran a surplus and was paying down its debt. It looked at centuries of history in the United States, the United Kingdom, France, Germany and Japan. (The US history starts in 1796, George Washington’s last year as President. This was after Alexander Hamilton convinced Congress to pass a law to pay off the debt from the Revolutionary War. Before then, not worth a Continental was a common proverb for something worthless.)

Harnston showed that, over centuries, gold stays even with other commodities. In wartime, the metal is worth less than certain items of war materiel. Its price comes back with peace. The metal excels over investment instruments, like stocks and bonds, during high inflation. Issuers of stock or bonds (including sovereign bonds, that governments issue) always denominate those papers in some fiat currency. That could be dollars, sterling, euros (formerly francs, marks, pesos, drachmas, etc.), yen, or some other money.

But fiat currencies are shares of debt. Any central bank, including the Fed, issues shares of the sovereign debt of its country (or other authority) of origin.

In 1971, President Richard M. Nixon stopped redeeming US dollars for gold. Naturally, gold rose sharply on that news. Harnston missed one reason that gold did not rise to $1000 an ounce in that era: Nixon and Secretary of State Henry Kissinger brokered the petrodollar system. Anyone selling oil must take payment in US dollars. That’s why US dollars have been in enough demand to keep their value.

But that assumes that the Fed will control its natural urge to print more money. President Ronald Reagan controlled it. The man now holding office as President, Barack H. Obama, has removed all such restraint.

Silver almost broke those rules. Its all-time record is $50 an ounce, a record it set in the 1980s. But the only reason why silver set that record was that Nelson Bunker Hunt and William Herbert Hunt tried to corner silver. The government arrested both men and broke up their holdings. Silver fell back to historical averages.

Supply and demand for gold and silver

Most of the demand for gold is in jewelry. Prosperous people buy jewelry. Not-so-prosperous people do not—or if they do, they buy imitations, not genuine treasures. So if not for inflation, gold would rise or fall slightly in times of boom or panic.

Besides jewelry, the yellow metal has a few industrial and medical uses—to “crown” broken-off teeth, or as an active ion to treat rheumatoid arthritis.

The greatest supply of the metal is what people dig out of the ground. Next comes scrap—when people sell their jewelry to someone who will melt it down.

Until last year, the central banks sold gold. That’s not true anymore. As of 2010, central banks are buying it. And what the goldsmiths have not been turning into jewelry, others have been buying to invest in.

How much more gold is still in the earth’s crust, no one can guess. The first countries to mine the yellow metal have exhausted their mines. Other countries have opened theirs. American and South African mines are near exhaustion, and China is now the world’s leading miner.

Silver has many more industrial uses. So silver prices usually rise and fall even more sharply with boom or panic. Silver is almost as sensitive to inflation.

Where gold and silver stand today

A Weimar-era householder wheels a barrow full of worthless Reichsbanknotes to the corner baker to buy a loaf of bread. Will the US economy reduce people to this, if they don’t have gold and silver?

Gold is worth forty times as much as silver. When people look for a store of value, they always buy the most scarce commodity. And now people have more reason than ever to look for a store of value.

Franklin Sanders at The Moneychanger understands this. Two days ago he said of government officials everywhere,

They cannot, dare not stop inflating, and that will keep driving gold and silver prices to the stars.

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He said that on the day that gold closed above $1600 an ounce for the first time. He still believes that now, even after both metals fell in after-hours trading yesterday evening. He finds very little to like about the Gang of Six debt ceiling “deal.” It would cut the budget by only a trifle.

Sanders sees a much more fundamental problem in the basic philosophy of the government. To him, the government must:

1. Get out of the way,
2. Let people go bankrupt,
3. Write off bad debts,
4. Suffer the consequences for two years (as the country did in 1981-3, when the economy then took off and didn’t look back), and:
5. Permanently give up Keynesian economics.

He also calls for ordinary people never again to borrow money to buy things. Other economic pundits (like Jane Pauley) said long ago that an ordinary person has three and only three good reasons to borrow money:

1. To go to school.
2. To start a business.
3. To buy a house.

The third reason doesn’t hold today.

Donald R. Laster Jr told your editor one other problem that Sanders does not see. The Gang of Six are all Senators. Yet their deal needs tax raises to work. The Constitution plainly says that the House of Representatives must first pass any such deal. If the Gang writes their deal into a Senate bill, and that’s the bill that passes, then anyone whose taxes go up will have standing to sue.

Sanders predicts a Weimar-like scenario. He does not call it that, but he does speak of hyperinflation, and a dictator who will arise and find people to blame—and execute.

When a money commentator actually predicts a Hitler—as Sanders has just done—you know that society is in trouble. He even invokes God, when he says,’

Pray for a better outcome.

So now a staid green-eyeshade man has invoked God and gold. The only thing he didn’t invoke was guns. Though he hasn’t invoked that, others have.

Recommendations

As Sanders says: Buy both metals and keep buying them. Neither metal will correct for long.

Featured: gold from a rumored pirate’s cache.

Related:

• Gold breaks $1600 intra-day
• Gold and silver at temporary peak
• Gold and silver: another opportunity
• Gold and silver legal tender in Utah
• Gold and silver still waiting
• Gold and silver come back
• Gold and silver sell off, but not forever
• Gold might become dollar standard
• Wait a few days to buy gold and silver
• Buying opportunity in gold and silver
• Returning to a store of value

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