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Why gold MUST hit £10,000 in the long run

Tom Winnifrith
Wednesday 24 October 2012

Dominic Frisby asks in a piece on Moneyweek (you can read it here ) if gold could hit £10,000 ounce in the long run? A lot of worthy analysis goes to explain why it could. But this is not an IF, gold MUST hit £10,000 oz at some stage. That is not because gold is fantastic but just because our politicians (like those across the West) always destroy the value of paper currencies. You think I am mad? Well, okay I might be. But on this one the evidence is staring you in the face.

In 1971 the world abandoned the Gold Standard. Politicians thereafter had free rein to try and buy votes by running vast budget deficits and by printing cash. That inevitably debases a currency. And so in 1971 you could buy an ounce of gold for £14 or $35. Today that same ounce will cost you £1,067 or $1,708. In other words the real value of the pound in your pocket has, over the 41 years since the abolition of the gold standard fallen by 98.7%. The US dollar is down by a mere 97.7%. You will see that while the US has massively debased its currency, we in the UK have gone even further so reducing the purchasing power of the pound against the dollar from $2.5 to c$1.6 in the process.

But the debasement against the one currency not destroyed by politicians has been on a different scale.

So having managed a 98.7% debasement in the past 41 years to achieve another 89% debasement and take the price of gold to £10,000 should be easy enough to do given time and the abject failure of the entire political class to grasp reality. With record Government debts and debt/GDP ratio and the deficit out of control I would be very surprised if it took us close to 41 years to achieve the next 89% debasement.

But in case you think that this trick of debasement is new, it is not. Man never learns from his mistakes and so I take you back to the Roman era. In the 1st Century BC the Emperor Augustus introduced a coin the denarius which was 95% silver. By the time of Trajan in 117 AD, the coin was 85% silver and by the time of Marcus Aurelius in 180 AD it was 75% silver. By the time that the Emperor Caracalla was assassinated in 217 AD the coin was just 50% silver and in the period of instability that followed ( 26 Emperors in 100 years) all hell broke loose and by 268 AD the denarius was just 0.5% silver as ever more, ever less valuable coins were minted. Prices in the 100 years leading up to 268 AD rose by around 1000%. So it is not as if anyone was better off, they just ever more coins worth ever less. Eventually the silver coin became like the old British ½ pence piece or 100 million Zimbabwean dollars – worthless. No –one would accept because they lost faith in its value.

Of course the world moves at an ever faster pace, such is the progress of man. It may have taken the Romans 100 years up to 268 AD to deliver 1000% inflation. It takes us far less time these days. How clever we all are.

£10,000 ounce gold. It is just a matter of time.

NB: I just posted a 5 gold stocks to buy piece a couple of days ago and so if you are a convinced gold bull you can read it here

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About Tom Winnifrith
Tom Winnifrith is the editor of When he is not harvesting olives in Greece, he is (planning to) raise goats in Wales.
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