As central banks around the world begin to consider how to extricate themselves from years of unconventional monetary policy, a delicate surgery indeed, there is a link to the value of gold that Myrmikan Capital founder David Oliver thinks might be best understood at this moment in history.

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Myrmikan Capital: The value of gold remains the same, it is all assets around it that change

Don’t be fooled by watching the rising and falling price of gold, Oliver writes in a May 19 research report. It is not the price of gold that changes, it is the value of all other currencies and assets that surround it that change.

“Gold has the most stable value of any substance, the reason the market has chosen it as money over thousands of years,” he wrote.

When the United States abandoned the gold standard in 1971, allowing it’s now fiat currency to freely float against other currencies based largely on perception, this created a new world. Central banks and governments were given wider freedom to plunge into monetary expansion experiments, and government debt significantly grew.

There is a relative value relationship that endures and stretches the limits of monetary expansion into charges of currency debasement.

“Any short squeeze on currency that prompts levered selling of gold, however, will be short-lived: we already know that central banks will print all the paper that is required to steady the financial system… and it will require a lot,” Myrmikan Capital writes. “Investors learn, of course, and it is likely that the next round of crash/print/recovery will occur at a much faster pace, making it difficult to time any draw-down in gold stocks if, indeed, one happens at all.”

Gold is most often denominated by factoring it relative to the world reserve currency of choice, the US dollar. To understand where the “price” of gold is to recognize the relative value of the dollar. This is importantly “defined as a unit of liability of the Federal Reserve’s balance sheet.”

The Fed’s balance sheet is backed by US government bonds, the value of which could “collapse when interest rates finally rise in earnest” as the price of the bond is negatively correlated to yield.

Myrmikan Capital Monetary Debasement Gold value of gold

Myrmikan Capital – Get ready for the monetary debasement

Pulling back from the US-centric view of the world, one of the largest importers of gold is China, a system Oliver and other analysts including Kyle Bass point it is a leveraged system sitting on top of margin risk. When the “spinning plates that are the Chinese financial system fall and shatter” where will the relative value of gold land when it’s the biggest customer no longer has the same appetite?

From Oliver’s standpoint, this could vary depending on what type of gold is being held:

China imports a great deal of gold as well, of course, which opens the question as to how gold will fare once the credit system really starts to unravel. Again, gold’s value changes very little—rather it is currency that becomes scarce in a credit crunch, and assets are dumped indiscriminately to meet margin calls. Levered entities getting the squeeze generally sell their most liquid assets first, not what they want to, and enormous selling of paper gold can indeed shift gold’s value temporarily. In 2008, for example, gold’s paper price collapsed, briefly, while the premium on physical coins surged, demonstrating it was not gold that was in trouble but the paper markets.

Although it is somewhat out of favor, Oliver likes playing the mining stocks as a hedge for excessive monetary experimentation. He says “the very reason to play the end of the credit cycle in the gold mining stocks is that the companies have their own, embedded operational leverage, yet can survive short, sharp drawdowns in gold with little damage to the assets or the ownership of those assets.”

While equity prices may have violent short-term swings, the insurance value of gold persists.

While gold has done well lately, this could only be the start. “Gold stocks are still digesting the extraordinary gains of last year, but conditions seemed to be cumulating for the next step higher.”

Get your gold while it lasts.