By Doug Casey Governments everywhere – prominently including the U.S., China, Britain, and Japan -- are creating hundreds of billions, even trillions, of new currency units. The backing, or “reserves,” for their various units are other currencies, mainly the U.S. dollar. The problem is that every one of the world’s currencies lacks an anchor in anything tangible; they’re all just floating abstractions. Central bankers talk, idiotically, about replacing the U.S. dollar with the IMF’s Special Drawing Rights (SDR) for use as an international reserve. The IMF isn’t even a government with police to prevent people from using alternatives to its SDRs. The idea is a complete non-starter. Entirely apart from that, the IMF will eventually be dissolved as a bankrupt shell. But that’s a story for another time. I’ve said for some years that the world inevitably will resume using gold as money in day-to-day transactions. Unfortunately, it won’t happen because it’s practical or honest (which it is). It’s going to happen because all the world’s major currencies are heading for a once-in-a-lifetime inflationary crisis. I don’t expect a major player, like the U.S., to be the first to switch to gold. But I wouldn’t be surprised if Russia, Singapore, Hong Kong, or the UAE (to throw out some examples) comes out with a 100% gold-backed currency. The question is: If gold is going to become everyday money, what will it be worth in terms of today’s dollars? I have to admit that the higher anything goes, the more prone I am to be a seller. I’m a gold bug (someone who believes the metal makes the best money), but I’m not always a gold bull. What is the most intelligent posture to adopt at the moment? Let’s look at a few data points to get our bearings. Get historic quotes on India gold, silver futures The bearish arguments on gold are: 1.Gold has about quadrupled in eight years -- not many things have done anywhere near as well. When it comes to a commodity, everything else being equal, I much prefer something that’s fallen 75% to something that’s quadrupled. 2.Ofcourse, that depends on your definition of “good.” But I think today $1,150 will get you a high-quality outfit. Based on that, gold is priced about where it should be. 3. A few years ago, my friend Paul van Eeden researched the price of gold back to 1900 and correlated the increase in the gold supply with the increase in the dollar supply over that time (http://www.paulvaneeden.com/the.gold.model.updated). He came to the conclusion that the metal should trade for about $800. 4.Commodity prices always tend to fluctuate around their marginal cost of production. You’ll recall that gold was being produced profitably all over the world in 1971 at $35 an ounce. Today average industry cost is more like $450 an ounce. That would imply miners are falling all over themselves to put new mines into production, and production should be rising. Which leads to some bullish factors. Counterintuitively, even though the price has been rising, production isn’t rising. Just the opposite is happening. Production peaked in 2001 at 83.7 million ounces and has been falling since then. Some of the production decline might come from miners turning to the lower-grade ore that higher prices have made profitable. But there may be something else going on. The case can be made that most of the large, rich deposits in the world have already been found: that currently minable deposits are depleting at the rate of 80 million ounces per year and that new deposits are being found at only a fraction of that rate; that Greens and other anti-growth types make it very risky, costly, and sometimes impossible to produce; and that most of the unmined deposits we know about are in politically problematic areas. That argument, termed Peak Gold, is analogous to Peak Oil. I’m philosophically disinclined toward both for reasons spelled out elsewhere. Ultimately, the price of all commodities is headed toward zero -- but ultimately is not at all the same thing as imminently. In any event, although all prices are determined at the margin -- so 80 million ounces of new supply every year have an effect – the gold market is not at all like the market for copper, aluminum, uranium, or other metals (including even silver). All the others are consumed, with the price tending toward the point where production and consumption balance. But gold, being money, is different. Almost all the gold that’s ever been mined is above ground somewhere, presumably waiting to be traded for something else. No one knows for sure, since gold has been mined since prehistoric times, but there are perhaps as many as 6 billion ounces above ground. With production near 80 million ounces, the supply is expanding at about 1.3% per year.

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