The supply of dollars, of course, is rising much faster.
Alan Greenspan was quite candid when he admitted he didn’t know what the U.S. money supply really is. Is M-1, or the now censored M-3, or perhaps something else, the true measure of how many dollars actually exist? M-1 is currently reported at about $1.75 trillion. M-3 is estimated at about $17 trillion. U.S. government gold holdings come to 263 million ounces. Simple division gives us $6,650 per ounce as the number required to back each dollar in M-1 with a fixed amount of the metal. M-3 seems a bit outré at ten times that figure.

The projections become astronomical if you consider that after the coming inflationary crisis, most governments may find that the only practical course is to make their own currencies convertible into gold. It won’t just be dollars that will be linked to gold.

I’m not sure any of these numbers, bullish or bearish, any longer has the meaning it once did, before the crisis. It seems so quaint now, the statement by Sen. Everett Dirksen in 1966, “A billion here, a billion there, and pretty soon you’re talking real money.” It’s even quaint to think that the supposed “peace dividend” of $50 billion from the end of the Cold War in 1991 was supposed to be real money. Today it’s just a rounding error. The U.S. government, which is directly responsible for the number of dollars in existence, is now what gamblers call “on tilt” -- in way over its head, desperate, and acting irrationally.

I wish gold were still under $300, so I could still say (which I did, constantly) you were looking at a ten-to-one shot with little risk. It still seems to me that $3,000 is a reasonable objective in terms of today’s dollars. One reason is that, in real terms, gold would have to trade at over $2,500 to match its peak in 1980. And the world’s, and the dollar’s, situation is much more serious now than it was then. Another is that I simply can’t see a better alternative for holding wealth at the moment, and don’t expect that’s going to change until I can trade my gold for stocks. Although I can’t be sure if they’ll be stocks traded in New York, Hong Kong, Mumbai, Dubai, or someplace not even on my radar screen at the moment. In the meantime, there’s likely to be a panic into gold. A gold mania.

The world is full of fiat dollars that have no fixed value. It’s apparently dawned on some of the world’s central bankers that the dollars are going to start losing value rapidly. They want to get rid of them, but they understand that if someone starts running for the exit, there will be a panic. The Indians were smart to have bought 200 tonnes of gold (about 6,430,149 ounces) from the IMF, for about US$6.8 billion. It’s a small amount of money in today’s world and only about 2% of India’s foreign exchange reserves. But it appears to have let the cat out of the bag and started the run for the exits.

Here’s the bottom line, and something I will discuss more in the future. There are very few, if any, “screaming bargains” in the world today. We’re still early into this crisis, and the financial world (not to mention the world at large) is full of dangers. Even holding cash in the form of dollars is risky. So I remain very bullish on gold, despite the caveats listed above.

It is nowhere near a bubble; it’s only in the second (Wall of Worry) stage of a classic bull market. The Stealth stage is behind us, and the Mania stage is ahead of us. I think it would be very, very foolish to sell gold now. The time will come, but that will be when you can see some unbelievable bargains in stocks and real estate -- but you’ll be afraid to buy them. And your emotions will plead with you not to sell your gold. That will be the top. I suspect we’re at least a few years away from that point. Gold remains the best place I can think of to preserve capital.

Doug is a best-selling author and one of the foremost experts about investing during times of economic crisis. Casey Research is a leading independent, financial, and economic newsletter writer. It is well- known and respected within the junior exploration market, specifically among precious metals investors. Courtesy: Casey Report, December 2009

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