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Sam’s Exchange: The Great Gold Crash

The gold price is going to crash. Everything has its limit, and gold is way into bubble territory. Markets don’t go in straight lines, and when a market trade is all one way, all buyers and no sellers, the trade is usually over and it’s time to get out.

“Everything has its limit – iron ore cannot be educated into gold”, Mark Twain.

Gold will crash. Everything has its limit, and gold is far into bubble territory. Markets don’t go in straight lines, and when a market trade is all one way, all buyers and no sellers, the trade is usually over and it’s time to get out. Gold players are highly leveraged also, which means any sharp dip in the gold price, or a “flash crash,” as we have recently seen on the Dow Jones Index, will cause capitulation in the gold market as punters scramble to cover margin calls.

The last time we saw something like this was with the Hunt Brothers and silver. “Silver Thursday” was an event that occurred in the silver markets on Thursday 27 March 1980. A steep fall in silver prices led to panic on commodity and futures exchanges, when Comex (Commodities Exchange Inc NY) adopted silver rule number 7, which put heavy restrictions on the purchase of silver on margin – that is, buying with borrowed money using the future purchase as a collateral, in a hope of selling at a profit, in most cases without even obtaining anything material. The Hunt brothers had tried to corner the silver market, using margin. The silver market dropped 50% in 4 days, and the Hunt brothers’ little silver foray was over. The silver ounce price in 1979 shot from $6 to $48 – and then plunged all the way back down again. The silver price has never gone back up.

We are now in a deflationary cycle. Debt is going to be written off. The numbers just don’t add up. We should not be attempting to monetize debt by writing more debt. This means that banks are going to go bust, and mortgage debt - and in some cases sovereign debt - is going to be written off. Let’s follow the USD asset base cycle backwards for a moment, from debt, through real estate, to gold. Let’s unwind the trade, if you like, back to 1944.

The 1944 Bretton Woods Agreement created a gold-based currency system with the US Dollar (USD, aka the Federal Reserve Note), as the benchmark to facilitate international trade between capitalist states. Bretton Woods was never a global system. It was a capitalist system. It included some countries, and excluded others, like Eastern Europe and anything which looked socialist or communist.

Back then, the US economy was in good shape: it held 80 percent of the world’s gold reserves; it held the world’s only atomic bomb; and it had the world’s most powerful army. The US also produced half of the world’s coal, two thirds of its oil, and more than half of its electricity. It also produced great quantities of machinery, ships, airplanes, vehicles, armaments, machine tools, and chemicals. Britain and Europe were broke, Japan was decimated, and the rest were not part of the capitalist game.

Since the Bretton Woods Agreement, the US asset base has moved from gold, through real estate, to future debt obligations. By the 1990s, industrial production had moved offshore from the US, and credit market growth has been fuelled by credit itself as an asset to lend against, mostly in the form of CMBS (Commercial Mortgage Backed Securities), CDO (Collateralized Debt Obligations), and credit cards. This works as long as the credit cycle keeps growing, which, of course, it never does. Banks further exacerbated this credit leverage, by moving these credit products off balance sheet to reduce their capital adequacy requirements, further leveraging this debt.

Currency needs to be asset backed. A new, asset backed multi-currency system needs to be global from the outset; all inclusive. China, Russia, France and others are already publicly calling for an asset backed multi-currency system, which gold will no doubt be a key part of, just not at these current debt fuelled super leveraged prices. Other assets, or commodities, should also back currency. Silver, diamonds, gas, oil, uranium, rare earth minerals, or in some cases food and water. Currencies should be backed by tangibles, which have a finite supply, so they cannot be manipulated to such a degree.

Gold no longer underpins the USD, or indeed any other currency. If it did, using a crude calculation that says the money supply divided by the known gold supply, then gold today should cost $45,000 an ounce. Gold is currently $1,350 per ounce. The link between gold and the USD was completely broken 40 years ago, when in 1971 former US President Richard Nixon closed the gold window. The USD could no longer be exchanged for gold at the peg of $35 per oz, and the USD was no longer regarded as being ‘as good as gold’.

Beware the great gold crash.

Sam’s Exchange: Who are “They?”


Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.

Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.

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