This question was posted in the “other thread”, i.e. before Chris Martenson moved this article to the main blog:
[quote=crash_watcher]
Re: Why Peak Oil Will Never Lead To $500/bbl Crude Oil
Eric,
I wonder if you similarly believe that gold will never be allowed to reach $5,000/oz or $20,000/oz without some government interference and controls, or, even a return of something like the Gold Reserve Act of 1934 or Exec Order 6102?
There are plenty of pundits predicting such high prices for gold, and even higher.
In other words, is there a price tipping point where the U.S. government (or other govrnments) will succumb to the temptation to confiscate gold, or, make it a criminal offense for U.S. citizens to own or trade gold?
In my opinion, this probably would not happen unless the dollar was rapidly losing value, and, the government felt the imperative to issue a new fiat currency backed by gold. Hmmm…that could happen, couldn’t it?
I’d be interested to hear your take…perhaps there simply is no investment that offers one a means of escaping from the coming loss of wealth.[/quote]
I think about this quite a lot, actually. I think that oil and gold are two completely different stories, but there are some similarities.
All of us who advocate investing in physical gold bullion would do well to occasionally remind ourselves that the whole rationale for our investment (most of us anyway) is that throughout history, when paper currencies have failed, it was always gold, because of its inherent scarcity, that took over as the “hard currency” store of value mechanism after fiat currencies failed. So that’s how it’s always been, and how it’s always been in the past is certainly something worth taking seriously. But past performance is not necessarily an indication of future results!
Society doesn’t really need gold. It’s nice for jewelery and for making certain electronic parts, and a few other industrial applications. But based on these needs alone, gold is already way over-priced. The reason many of us think gold will get much more expensive in coming years is that we assume that as with the past, when paper currencies fail, society will revert to what is in scarce supply (gold) as its currency and store of value. But society needs energy in order to function a lot more than it needs gold.
But just as paper money is “fiat”, in a certain way so is gold. Fiat means it has value just because the government says it does, i.e. paper money. Gold is “fiat” in the sense that collectively, everyone seems to agree that because gold is scarce, it should be the thing to serve as “real money” or a store of value. But if that collective viewpoint changed and everyone viewed gold as something that has value for jewelery and electronic parts only, then the price would collapse!
There is no doubt in my mind that oil would replace gold as the de facto store of value when paper currencies fail, if you could fit a million dollars worth of oil in a safe deposit box and store it indefinitely. But you can’t. So the only way oil could ever become “money” is if paper currency were backed by oil stored in a tank somewhere, the way banknotes used to be backed by gold in a vault. If paper currencies are collapsing, I doubt the population at large would feel inclined to trust the government to issue a “new kind” of paper money.
But my real point here is that the only reason to expect gold to appreciate markedly is that because it’s always been true in the past, everyone will accept gold’s scarcity as an implicit reason to consider it valuable.
To the question of government intervention in the gold market, it’s happened before (1933) and could happen again. But I think the odds are actually lower this time. In '33, gold was still money (gold standard) and the only way to achieve the intentional debasement of the currency was to confiscate all the gold. Today you don’t need to confiscate gold to debase the currency. All it takes is a few mouse clicks.
Government will intervene to affect outcomes it wants. In the case of oil, government will intervene to make sure “we get as much as we need at a reasonable price”, and if that stops working because there isn’t enough to go around, I expect the Military to be used to inform the other countries that “we come first, like it or not”.
I certainly wouldn’t “put it past” the US Gov’t to intervene in the gold market. But why? I suppose the reason would be that if the USD is collapsing and headed for zero, but privately held gold is still perceived as valuable and to have purchasing power, the government might deem it “necessary” to confiscate all the privately held gold for its own use. That’s why if I still lived in the USA, I’d keep my gold elsewhere.
Erik