Below is Fitzwilson’s exclusive piece for KWN:

“Potential energy is a scientific term that relates to real world phenomena, many of which we encounter in our daily lives.  Gravity is a prime example.  If you elevate a bowling ball to the top of the table, you have performed work.  If the bowling ball were to fall to the ground, the impact it might make is one measure of the potential energy transferred to it through your efforts.

Potential energy is also relative.  From the table perspective, there is simply a ball sitting on it.  There is no potential energy relative to the table, only to the floor.  When stopping to ponder this, it made me think about the price of gold relative to the massive increase in the monetary base....

Continue reading the Robert Fitzwilson piece below...  


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“As many people are aware, the value of gold is one of the great questions debated in the financial community.  We have used the example of currencies sitting on bar stools, including gold.  On a stable floor, there would be no potential energy between the currencies, just personal preference and perhaps diversification considerations. 

However, if the fiat currencies sitting on their respective stools start to sink, there is financial potential energy being created relative to the gold stool that had not moved and the currency stools that are sinking (dropping in value).

Below is a chart that shows the Adjusted Monetary Base.  It is a frightening picture and representative of the financial abyss into which we are sinking.  From the post-Paul Volcker Fed era, you can see that the base more than doubled from 1984 to 2009.  In 2009, the increase in the monetary base was and remains dramatic and unprecedented.

Answering the question about the value of gold relative to the massive increase in the monetary base, we created the chart below.  This chart shows the price of gold divided by the value of the monetary base.

By definition, the chart will be driven by a rising or falling price of gold relative to an increase or decline in the base.

As you can see, gold was very overvalued at the start of the period.  The graph plunged from 1984 until roughly 2002, as did the price of gold.  Our suspicion is that the correction in the price of gold was not only driven by the corrective forces brought on by the overvaluation, but was turbocharged by the introduction of gold leasing and other non-market forces in the very early part of the 1990s.

As gold bottomed early last decade, the value of gold was extraordinarily undervalued relative to the monetary base.  As gold move steadily higher, it’s relative value declined when compared to a steadily increasing, but non-exponential rise in the monetary base.  The line then plunged in late 2008 as the monetary base exploded to the upside.  The explosive growth in the monetary base has never abated.

What the wiggle to the right of 2009 represents is a battle between forces maintaining a trading range for gold and a mushrooming monetary base.

Keep in mind that the lower this indicator is on the chart, the greater the value of gold.  It is clear that we are nowhere near the overvaluation of the 1980s.  Given that there is no end in sight for increases in the monetary base, the financial potential energy contained in the current price of gold is extreme.  Once that force is unleashed, the price of gold will rise in a dramatic fashion.  The bottom line is the downside for gold is miniscule, and the upside is many times the current price.”

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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Eric King

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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