Is gold expensive or cheap right now?

People look at the spot price of gold @ 1231 USD and think to themselves that gold is expensive.  However, math has another story to tell which is that gold is actually cheap in USD terms.  In fact, it is only half as expensive today as it was in 1980 in inflation adjusted terms.  The chart below (sans EW numbering and modeling lines) is the price of gold adjusted for USD inflation. 

Of course all of this is relative.  Just because Inflation Adjusted (IA) price gold is half the price of IA gold back in 1980, that doesn't necessarily mean it is "cheap".  Cheap or expensive is always a relative thing and it is usually measured using hindsight ("I should have bought XYZ while it was cheap").  If the USD collapses, perhaps $5000/oz gold will be some day be considered cheap.  The Zimbabwe dollar once traded at the ratio of 1:7 relative to the USD.  Before it was cancelled completely (as in infinite:1), the Zim dollar traded at infinitesimal levels relative to the USD after suffering from inflation of, get this, 5 billion percent.  Just saying that truth aloud makes me laugh at the ridiculousness of treating any fiat currency as if it had value.  Fiat currency is a con job.  All fiat currencies, without exception, are confidence games.

Still, nothing goes straight up or straight down and in all truthfulness, this chart could actually pull back to touch the bottom most up-sloping orange line which marks the inclining double bottom between 1970 and 2000.  In other words, gold could go down in relative terms to form a triangle.  That simply cannot be ruled out from an EW perspective.  But the time that it would take to do that would imply that the boomers don't get defaulted on.  In other words, some magick would have to happen whereby additional value gets pumped into the system somehow and thus pushes the train wreck of fiat currency down the road for more years.

One example of this would be some major technical breakthrough that is a game changer like a super cheap energy source is discovered or someone figures out a real cure for cancer, etc.  These would instill new confidence in the herd and thus in the Ponzi itself.  In fact the very reason that the con men continue to kick the can down the road is in the hopes that some miracle like this occurs which will let them continue to paper over their fraudulent behavior indefinitely.



However, IMO the far more likely outcome is that wave 1 of 3 just finished and that we are working on 2 of 3 right now.  If this turns out to be the case, the next move would be a dramatic move up in this chart. The confirmation of this model would be a breakout at the blue circle.  Either gold would move up while inflation remained tame or deflation would take consumer prices down while having a dramatically lesser impact on gold (thus pushing the buying power of gold up relative to commodities).

If you have at least 15 years left in the work force there is no doubt, 0% doubt, that a program of dollar cost averaging into gold will eventually be a huge winner for you at these levels in terms of buying power.  Real savers in this situation actually prefer lower gold prices.  It means that they can acquire more of the stuff.  The only ones who get screwed by sudden volatility are leveraged gamblers, not real savers with long term horizons.  The lower gold goes, the more China will buy.   They are already at the point of buying the world's entire annual production.  Lower prices will only allow them to accrue more gold at less than the current production costs.  How long does anyone really think that will go on?

You have to be blind not to see that everything the government does eventually turns to $hit.  Detroit just went BK.  All promises to the public pension patsies were defaulted on without even so much as an "I'm really sorry but we planned to bend you over the log the whole time".  Do you really think that Detroit's BK was not well understood a long time ago?  By extension, do you really think that the coming bankruptcy of the US and the USD are not well understood for a long long time already?  

Look at Spain, an economy which is in the same range as California.  Spain is doing exactly what I predicted that all governments would end up having to do (401ks are a trap): raid the retirement accounts of the people.  The government really doesn't want to do this.  But with everything collapsing, the only funds left are retirement funds.  They would tax the workers even more but with Spanish unemployment near 25% (in an obvious 3rd wave up still), there is really no room to tax the remaining workers without making the best and brightest flee.  Spain will BK and so will Italy and this will bring down France and then Germany. 


And then there is Japan.  It has been a global exporter for decades but now it is getting killed off by the triple whammy of crushing debt, aging demographics and Fukushima.  Japan is Detroit waiting to happen.  Just like Detroit, Japan borrowed its prosperity.  To understand the truth of this one only has to look at the debt of Toyota Motors (Ticker: TM).  Today it has $49bn in cash and $193bn in debt.  This is happening as new players like Hyundai and Kia are turning out incredibly nice cars for the money while Toyota's quality slips in the rankings even in relationship to what's left of the US auto industry.

Bottom line: the seeds of massive global default are all around us.  When these defaults happen, paper money will lose its purchasing power just like the ZIM dollar did.  Nobody knows how long this will take to play out but I am sure of one thing: the majority of US boomers will have to get screwed in the deal.  That means that real trouble must show up fairly quickly because boomers are rushing for retirement right now in order to not be left holding the empty bag.  If the rip off takes too long to happen then the boomers will have collected on their promises and then be allowed to die in peace.  I do not believe that the value exists in the system to allow that to happen even if I thought it should happen.

When paper money loses its appeal, the herd will again turn its attention to the old money, the gold money.  When people used to refer to "cold, hard cash" they were certainly not referring to soft paper money.  Sounds more like something made out of metal I think.