A. The price of gold is headed for extinction. I for one don’t believe that theprice of gold is headed for five digits. Long before that might happen,permanent backwardation* would shut down the gold futures markets. Goldcould no longer be purchased at any price. Gold would only be availablethrough barter. World trade is facing an avalanche-like transformationflattening out monetary economy into barter economy. Practically alleconomists, financial writers and market analysts have missed this possiblescenario. They don’t see the greatest economic contraction ever staring themin the face. They don’t see the coming tsunami of unemployment. Very few seedeflation as indicated by the progressive disappearance of cash gold. It neveroccurred to Bernanke that the new Federal Reserve notes he is printing galorecould also go to purchase physical gold, causing the gold basis to shrink. Oncethe gold basis* goes permanently negative, the total U.S. debt, all $16 trillion ofit, will not be worth one ounce of gold. That will pull the rug from underneaththe international monetary system. Barter is the ultimate in deflation, and thatis what the world economy is getting.
And why will the price of gold collapse? Hyperdeflation.
But there is also a second variety for which no precedent exists becausewe have no previous historic example of experimentation with global fiat papermoney. If breakdown occurs during the phase when the rate of interest isfalling and money flows from the commodity to the bond market, then we havewhat I call hyperdeflation. That is what we are apparently having right now. Itstarted over thirty years ago in the early 1980’s. When in January 1980 interestrates failed to break out on the upside (as appeared likely at the time, with thegold price hitting $875), the system went into the mode of declining interestwith such a force that put the Fed out of control. For the past three decadesinterest rates have been falling relentlessly. Of course, the Fed would like tohave us believe that this is the result of deliberate monetary policy. I suggest itto you that it’s not. It is runaway resonance in action – on the side of interestrates and the velocity of money falling to zero. Fall they do inexorably. It ishyperdeflation. The Fed is desperately trying to fight it, but all is in vain. We areon a roller-coaster ride plunging the world into zero-velocity of money and intobarter. In my lectures at the New Austrian School of Economics I often pointout the similarity with the collapse of the Tacoma Bridge in 1941.**
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