Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Sunday, September 2, 2018

Crises in confidence

Today we revisit the graph of US "confidence" through time, a concept formerly discussed here.

The confidence ratio is the ratio of the face value of US debt divided by the value of the US gold holdings. As always, we are assuming that the US holds all the gold it claims to. Estimated debt for 2018 comes from here, historical debt is from here, and the average gold price for 2018 up to the end of August from kitco.com. I don't have the record of original gold holdings, which actually changed in the early part of this graph, and adding such information would improve the pre-1960 portion of the graph.

The reason I call this confidence is that the higher the ratio, the more confidence is required in the country for its currency to hold value.

Even though this measure is economic, I think its value is affected strongly by non-economic factors. One obvious example is the peak of confidence observed in 2001. After that peak, the ratio declines sharply, suggesting a loss of confidence in the US. The destruction of the World Trade Centre and damage to the Pentagon (and America's irrational reactions) contributed mightily to this loss in confidence, in my view.

The earlier decline in confidence, starting in the 1960s was probably related to the closing of the gold window, but may have been exacerbated by oil shocks, the impeachment of Nixon, and the withdrawal from Viet Nam.

Jim Sinclair, of jsmineset.com, has long had a thesis that the confidence ratio graphed above will eventually return to 1:1. This would imply a much higher price for gold--about 60x the current price if you believe that US holds all that it claimes; higher if you don't. The $174,000 question is about timing--Sinclair says it is now.

What triggers are there in the geopolitical sphere like those in 1970? Apart from the usual economic difficulties, America does face the possible impeachment of its president, and to be nearing defeat in Syria; both of which are similar to political issues in the early '70s.

Once confidence is lost, it can take a long time to be restored. Plan accordingly.

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