Exter’s Pyramid

exter-inverse-pyramid

Source: Wikipedia:

John Exter (September 17, 1910 – February 28, 2006) was an American economist, member of the Board of Governors of the United States Federal Reserve System. He is also known for creating Exter’s Pyramid.

In Exter’s scheme, gold forms the small base of most reliable value, and asset classes on progressively higher levels are more risky.

John Exter believed that all fiat and paper based contracts would eventually liquidate and collapse into gold and silver. In other words, money will move down the pyramid from more risky assets into more reliable forms of assets. Asset classes higher in the pyramid are more levered and risky.

Looking at the chart you can see that derivatives (layers in white) are at the top of the pyramid. The financial crisis of 2007-2008 saw derivatives imploding, destabilizing many banks and brought down Lehman Brothers and AIG.

Today, we are seeing a bubble in the government bond markets. Bond prices are at all time high with yields at all time low. A lot of money is now parked in this asset class. Should confidence in bonds collapse (due to high inflation, excessive debt and potential default – sounds familiar?), the next asset class would be paper currencies. The world has no problem in understanding and having confidence in the value of paper currencies. But when (not should) the day comes when the masses lose confidence in paper currencies keeping their value, money will go to the next asset class – gold.

Gold and precious metals today are still undervalued because they are under-owned. They cannot be produced at will and out of thin air like how paper currencies can be printed. It has a limited quantity available for purchase. Imagine money rushing to this final asset class in the Exter Pyramid. Unlimited quantities of paper currencies chasing after a limited quantity of gold.

Draw your own conclusion.

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