System Liquidity Risk – Cash Is Preferred & Appreciated

SYSTEM LIQUIDITY IS THE BIGGER RISK – “CASH IS PREFERRED AND APPRECIATED”

There is quite a bit of debate right now about whether inflation’s effects will worsen again soon; or, whether the inflation threat has been minimized and “disinflation” will prevail. Don’t look now, but the specter of a liquidity crisis is looming in the background.

The situation is such that a liquidity crisis of epic proportion might overtake all of us in our arguments about the quantity and extent of inflation’s effects. My concern was heightened this past weekend when I drove to a small, local restaurant to pick up a take-out order.

Read more

Two Reasons The Fed Manipulates Interest Rates

There are two reasons the Fed manipulates interest rates. Before we talk about those reasons, though, it is important to understand that the Fed does not actually control interest rates. Interest rates are set in the bond market. Buyers and sellers (traders) bid for and offer bonds for sale. When a buyer and seller agree on a price, the trade is finalized. The specific price, in conjunction with the face value of the bond (always $1000) and the stated coupon rate attached to the bond (and the length of time until the bond matures for yield to maturity) factor into the formula which determines the current yield, or what might be called the bond’s current interest rate.

In addition, the Fed does not set the fed funds rate. The fed funds rate is the rate which member banks (banks which belong to the Federal Reserve system) pay to borrow money from each other in an overnight market. What the Fed does is announce their “target range” for fed funds.  The Fed hopes that member banks will limit their lending activity with each other to the publicly announced target range.

The Fed has direct control over only one specific interest rate – the discount rate. The discount rate is the rate which member banks pay to borrow money directly from the Federal Reserve. The specific rate which the Fed charges to member banks at its “discount window” can and does influence trading in the fed funds market.

The extent of the Fed’s influence is limited mostly to short-term rates, such as those above. Since they do not actually control interest rates, particularly long-term rates, how do they influence trading activity in the bond markets? They talk a lot. This should be obvious to most observers. A more critical factor, though, is the Fed’s active participation in the bond market, buying and selling huge amounts of U. S. Treasury securities (and CMOs more recently).

TWO REASONS THE FED MANIPULATES INTEREST RATES

The history of the Federal Reserve is a history of interest rate manipulation. Specific interest rate policy of the Fed, and subsequent compliance (go along to get along) in the credit markets, resulted in a trend of lower interest rates dating back nearly four decades. The trend began in the 1980s and continued until just a couple of years ago. Unfortunately, the collateral damage from “cheap and easy money (credit)” led to crisis conditions in the credit and foreign exchange markets.

The specter of inflation seemed ready to overwhelm the markets and the economy; and, as they have done in the past, the Fed reversed direction on interest rates. Rightly so, some would say; except that the Fed has been playing the same game since its inception in 1913 – and they have a losing record. (see Fed Interest Rate Policy – 2008, 1929, And Now). So, why does the Fed continue to play a game they keep losing?

There are two specific reasons. The first is because it is in their own self-interest.

The Federal Reserve is a private institution. It is a banker’s bank. The Fed provides an environment which allows banks to create money in perpetuity and collect interest ad infinitum.

Fed manipulation of interest rates is a misguided effort to extend and control the prosperity phase of the economic cycle. Over the past century, the effects of inflation created by the Federal Reserve has increased the volatility and frequency of financial catastrophe and economic dislocation. Hence, the Fed spends most of its time putting out fires. This, of course, conflicts with and limits the Fed and member banks abilities to grow their lending capacity and income stream from the interest they collect on their “funny money”.

The second reason for ongoing Fed manipulation of interest rates is related to the first reason; and, it involves the U.S. government.

Before the Federal Reserve was authorized by Congress, representatives of the cabal of bankers and politicians that were trying to get specific legislation through Congress and to the President’s desk for signature met with some highly placed government officials. At that meeting, a promise was made that guaranteed the U. S. government would always have the funds it wanted – if the bill passed which authorized the origin and operation (private) of the Federal Reserve. The legislation passed.

When you hear politicians today, or at any time, complain about the Federal Reserve, you can be relatively certain that any attempts by Congress to thwart the Federal Reserve and its operations won’t get very far. Bite off the hand that feeds you? Kill the golden goose? I think not.

The Federal Reserve is very happy with the arrangement, too. Biggest source of income to the Federal Reserve? Interest on U.S. government securities. That is not a coincidence. It is the perfect example of a win-win situation. (see US Government is Beholden To The Fed And Vice-Versa)

CAUTION FOR INVESTORS 

The reason the Fed began its attempt to raise interest rates is because they were at a juncture where continued easing could again trigger huge declines in the dollar. On the other hand, rising interest rates increases the risk of potential implosion in the credit markets.
We said earlier that the Fed spends most of its time putting out fires. Federal Reserve activity for the past several years is based on fear. They are afraid of triggering a complete collapse in the U.S. dollar, yet they are also afraid that their efforts to restore interest rates to a more historically normal level will be rejected and the credit markets will collapse and usher in economic depression.
The irony is that they are trying to manage the effects of inflation that is of their own making. And doing a poor job of it.
With history as a guide (see The Fed’s Changing Game Plan) and allowing for the lack of Fed success over the decades, it seems that betting on a “Fed pivot” to trigger investment profits amid new bull markets holds more potential risk than reward. (also see Federal Reserve – Conspiracy Or Not?)

Three Things That Are Killing Silver

Over the years (and decades) silver travels a path fraught with excitement and disappointment. Both the excitement and the disappointment stem from three things that are killing silver – unrealistic expectations, inflation, and time.

UNREALISTIC EXPECTATIONS

The unusual conditions leading to the explosion in the silver price in the late 1970s are unlikely to happen again in a similar context…

Read more

U.S. Dollar Best Of The Worst; Gold Best Of The Best

Among the major fiat currencies in the world today, the U.S. dollar is “the best of the worst.” What that means is that there are no better alternatives.

BRICS – QUESTIONABLE MOTIVES

That is especially true when one considers all of the nonsense and suppositions stemming from statements made by member nation representatives of BRICS. Both Russia and China are foremost in their efforts to talk the dollar into disrespect and disrepute. Their motives, however, have nothing to do with providing a better alternative.

Read more

Justification For Gold

Justification for gold to move substantially higher in price continues to press the boundaries of imagination. In this article we will try to filter the noise in the headlines and also simplify what has been marketed as something much more complex.

Read more

Both Gold And Silver Peaked In 1980

In real (inflation-adjusted) dollars, prices for both gold and silver peaked in 1980. We’ll look at charts for the two metals and discuss their applicability to current price expectations. Silver first…

SILVER 

The first chart (source) for silver is a history for the past century based on average monthly closing prices…

Read more

The ABCs Of Gold Prices

GOLD PRICES – A HISTORY

The chart below is a history of gold prices since 1980. There are four peaks/points noted on the chart above which are designated by the letters A, B, C, and D. The letters correspond in sequence to the dates: January 1980 (A); August 2011 (B); August 2020 (C); and December 2023 (D)…

                                                                  History Of Gold Prices 1980-2023

History Of Gold Prices 1980-2023

The prices are average closing prices for the respective months. In other words, in January 1980 (A), the average closing price for gold was $677 oz. Yes, the gold price did peak on an intraday basis that same month at $843 oz.. but using monthly average closing prices is more representative of the ongoing price action and smooths out some of the more extreme short-lived activity. The other dates and corresponding prices are as follows: August 2011 (B) – $1825; August 2020 (C) – $1970; and December 2023 (D) – $2065.

The price of gold tripled between January 1980 (A) and August 2011 (B), but it took almost thirty-two years. The next peak in succession came in August 2020 (C), a decade later, but the gains were marginal ($1825 – $1970). Finally, the most recent peak (D) at $2065 came last month after three years. Again, the gains were quite small.

GOLD PRICES (INFLATION-ADJUSTED)

Now, let’s look at a second chart. This one is also a history of gold prices from 1980-2023. In fact, it is the same history. The prices shown on the chart below are the same as those shown on the first chart above except that they have been adjusted for inflation…

                                                History Of Gold Prices (inflation-adjusted) 1980-2023

History Of Gold Prices (inflation-adjusted) 1980-2023

The peaks on the second chart immediately above correspond exactly to the peaks on the first chart. The different prices are due to adjustments for the effects of inflation, i.e., inflation-adjusted prices.

Therefore, the 1980 price peak of $677 (A) is now $2673 (A) as shown on the second chart; the 2011 price peak of $1825 (B) is now $2471, and so on.

As the dollar continues to lose purchasing power over time, the price of gold continues to rise reflecting that loss of USD purchasing power. This is seen in the first chart above. Now, however, by viewing gold’s price action with adjustments for the effects of inflation in the second chart, we can see the gold price action with additional clarifying perspective.

What is important to focus on is that the gold price comes back each time to near its previous  inflation-adjusted peak. At each of those successive peaks, the gold price at that time reflects the actual loss of U.S. dollar purchasing power that has occurred since the previous peak.

For example, when gold peaked in 1980 (A) at $677 oz., it reflected the effects of inflation that had occurred over the previous several decades. The increase in gold’s price from $677 (A) to $1825 (B) accounted for the additional inflation effects after 1980 and up to 2011 (B). The increase from 2011 (B) to 2020 (C) accounted for the additional effects of inflation after 2011 and up to 2020.

THE ABCs OF GOLD PRICES 

A. The price of gold continues to rise over time to reflect the actual loss of U.S. dollar purchasing power. This creates the perception that gold is gaining in value as its price rises when what is really happening is that the U.S. dollar is losing purchasing power and more dollars are needed to buy the same ounce of gold as before.

B. Gold’s price is subject to significant declines after periods of peak action. This happened after 1980, 2011, and 2020.  It also happened after geopolitical shocks such as the invasion of Ukraine in 2022 and Israel 2023. (see The Gold Price And Geopolitical Concerns)

C. Gold is real money and a long-term store of value. As the dollar loses value (purchasing power), gold gains in PRICE. Gold’s recent peak price at $2060 oz. is one-hundred times higher than its original fixed price of $20.67 oz. and reflects a ninety-nine percent decline in U.S. dollar purchasing over the past century.

(Also see The Significance Of 1980 Gold Price Peak)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Viewing Gold In Its Proper Context

Viewing gold in its proper context seems to be difficult for most gold bugs. The excitement associated with anticipation of gold at $3000, $10,000, or higher tends to overide real fundamentals and common sense.

Not a few of the predictions for a new, higher gold price are just wild guesses. Some of the reasons given to support those guesses include a Fed pivot and reduction in interest rates, geopolitical concerns, a recession and weak economic activity, and a collapse in the U.S. dollar. There are others, but for now, lets look at these.

GOLD AND INTEREST RATES 

Financial writers in the media continue to refer to “gold’s correlation with interest rates”. The theory is that higher interest rates are negative for gold (the gold price) because gold doesn’t pay interest. Hence, investors tend to shun gold when interest rates are rising and look elsewhere for a higher return.

Time and again, the following statement or something similar finds its way into gold commentary:

“…prospects of higher US interest rates have the ability to limit upside gains. It must be kept in mind that Gold is a zero-yielding asset that tends to lose its allure in a high-interest rate environment”  

A variation of that statement:

“Because gold doesn’t bear interest, it struggles to compete when interest rates rise.” 

The statements imply a correlation between gold and interest rates. The implied correlation suggests that higher interest rates result in lower gold prices, however…

Between 1970 and 1980, the price of gold increased from $35.00 per ounce to $850.00 per ounce. Rather than declining, though, interest rates were rapidly rising.

Gold galloped ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments including U.S. Treasury Bonds. The 10-year U.S. Treasury bond yield exceeded 15%!!! This contrasts markedly from what happened thirty years later.

During the ten-year period 2001-2011, the price of gold increased from $275.00 per ounce to a high of almost $1900.00 per ounce. Yet, interest rates, which had been declining since the 1980s, continued  their descent (helped along by the Fed, of course).

Two ten-year periods of outsized gains in the price of gold while interest rates were doing something exactly opposite during each period. There is no correlation between gold and interest rates.

GOLD AND GEOPOLITICAL CONCERNS 

Any apparent effects from geopolitical issues are temporary at best, and there is no reason to expect them to have any measurable or lasting impact on the gold price unless the U.S. dollar is affected negatively.

(See my article The Gold Price And Geopolitical Concerns for examples; i.e., Russia vs. Ukraine, Israel vs. Hamas, The War with Iraq, etc.).

GOLD AND RECESSION FEARS

A recession is a period of weak economic activity. Even a severe recession will not have an appreciable effect on the gold price.

If the recession deepens and economic activity declines severely,  the result could be a full-scale depression.

In most cases, events of this nature are accompanied by deflation. Deflation is the opposite of inflation and results in a stronger currency (USD) which gains in purchasing power.

The gain in purchasing power means you can buy more with your dollars – not less. The downside is that there are fewer dollars to go around. There would be a huge price collapses in prices for all assets, investments, goods and services. The gold price would be similarly affected.

GOLD AND DOLLAR COLLAPSE 

There are expectations by some for a complete collapse in the U.S. dollar resulting in hyperinflation; similar to Germany in the 1920s, Zimbabwe, or Venezuela.

That is possible, but it is unlikely.  A credit collapse and deflation are more likely since the Federal Reserve fuels inflation with cheap credit. A credit collapse would trigger huge price declines in all assets, including gold. The most likely result would be a full-scale depression that could last for years.

Even if the U.S. dollar were to collapse, the price of gold in dollars would be meaningless.

VIEWING GOLD IN ITS PROPER CONTEXT 

Gold is real money and a long-term store of value. It is also original money. Gold was money before the U.S. dollar and all paper currencies; and, all paper currencies are substitutes for gold, i.e., real money.

The higher price of gold over time reflects the ongoing loss of purchasing power in the U.S. dollar. In other words, the price of gold tells us nothing about gold.

The gold price tells us only what has happened to the U.S. dollar. The same thing is true if gold is priced in any other fiat currency.

Over the past century, the dollar has lost ninety-nine percent of its purchasing power. This means that it costs one hundred times more for the things you buy today than it would absent the effects of inflation.

The original fixed price of gold was $20.67 oz. Convertibility allowed exchange of $20.00 in paper money for one ounce of gold and vice versa.

At $2000 oz., gold today is one hundred times higher and reflects the actual ninety-nine percent loss of USD purchasing power.

The gold price only moves higher to reflect the dollar’s loss of purchasing power after the fact;  never before.

Expectations for a much higher gold price based on anything other than the loss of U.S. dollar purchasing power will not be realized.

A much higher gold price can only present itself after further, significant loss of U.S. dollar purchasing power.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Destruction Of Money Keeps Inflation In Check

DESTRUCTION OF MONEY 

The “biggest collapse in the money supply since the Great Depression” continues unabated at this point. (See Ryan McMaken’s article here.)

The decline in the money supply is nearly three years old and dates back to April 2021.

This decline is a destruction of money and is the opposite of what might be expected if one is looking for evidence that could support some of the more extreme expectations and projections for inflation and its effects.

That is because most, if not all, of the analysis about inflation and its effects focuses on the supply of money and its seemingly unlimited growth.

Discussion about money creation by governments and central banks almost universally excludes mention of the demand for money.

DEMAND FOR MONEY 

Money has a demand side, too. We are not talking about the demand for goods and services. We are talking about the demand for money, itself. People need money to pay taxes and transact business; to save and invest.

As long as the supply of money is relatively stable and sufficient to finance existing normal economic activity, then the result is price stability. Without price stability, the economy cannot function reasonably.

Since the inception of the Federal Reserve, excessive growth in the money supply has led to a ninety-nine percent loss of purchasing power in the U.S. dollar.

Currently, though, the money supply is not growing. It is shrinking.

A SHRINKING MONEY SUPPLY 

A shrinking money supply is directly opposite to that which has happened which has made the U.S. dollar nearly worthless compared to a century ago.

It is also not supportive to arguments that the U.S. dollar is about to collapse and that hyperinflation is on the way.

Without the continual infusions of “new” money,  the previous inflationary “highs” cannot be maintained, let alone increased.

If a shrinking money supply continues, the end result is deflation. (see An End To Inflation – Three Possibilities)

WHAT IS DEFLATION? 

Deflation is the exact opposite of inflation. The result is a stronger currency. Instead of losing purchasing power, your dollars would buy more – not less.

Deflation is not bad. However, some of the accompanying economic effects would be very difficult to endure. The U.S. dollar would go further, but there would be fewer dollars to go around.

There would be huge price reductions in real and financial asset prices, depressed economic activity and high unemployment. Conditions would rival and probably exceed those of the Great Depression of the 1930s.

Fortunately, at least for now, we are not there yet.

CONCLUSION 

An infusion of new money might temporarily reverse the shrinking money supply and its negative economic effects, but that is not necessarily a good thing.

Think of it this way. Would you recommend a new fix to a drug addict who is undergoing withdrawal symptoms resulting from curtailing their drug use and attempting a return to sobriety?

Intentional inflation by government and central banks in the form of cheap and easy credit has created artificial financial highs, bubbles in asset prices, and a false sense of economic security.

You cannot ignore fundamental financial and economic law forever. Sooner or later (more likely sooner), we will all pay the price. (also see Gold And The Shrinking Money Supply)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

 

You Might Get A Higher Gold Price, But…

A HIGHER GOLD PRICE

We are currently in the midst of the latest round of projections for new highs in the gold price. Those projections are more the result of anxious anticipation and elevated emotions rather than real fundamentals.

Expectations for a reversal in Fed interest rate policy were given a boost last month with indications from Chairman Powell that there will eventually be some cuts in rates. That was all that investors needed to bid up the prices of financial assets.

Two of the biggest beneficiaries were bonds and gold. (I consider gold to be a financial asset since it is real money.)

The logic for bond bulls is reasonably straightforward and fundamentally correct. A decline in rates correlates inversely to higher bond prices; just the opposite of the action we have experienced over the past couple of years as rising interest rates were directly reflected in bond price declines which totaled as much as fifty percent.

As far as gold is concerned, its price action is a typically knee-jerk reaction based on assumptions that the next round of cheap and easy money is already here.

That is certainly not the case. First of all, the Fed spent nearly four full decades engineering interest rates to abnormally low levels of historic proportion. The current attempt to return interest rates to a higher, more reasonably normal level is only 2-3 years old.

Is it reasonable to think that’s all there is? Back to business-as-usual now? For most investors and analysts, it is difficult to view things in proper perspective when your entire life has been lived in a make-believe world of endless money creation available at artificially low rates.

Current projections for the gold price to move substantially higher are based on the assumption that gold will respond affirmatively to the expected onslaught of cheap money. That is not the way it works.

WHAT CAUSES A HIGHER GOLD PRICE?

The only reason the price of gold increases is to reflect the actual loss of purchasing power in the U.S. dollar. It reflects this decline only in hindsight – after the fact, and never before.

When the price of gold peaked in 1980, it reflected the effects of inflation that had previously eroded ninety-seven percent of the dollar’s purchasing power.

At that time, people were no less fervent in their expectations for a complete collapse in the U.S. dollar. Along with that expected collapse came predictions for the gold price to exceed $1000 oz.

Eventually, it did so; but, it took nearly thirty years to happen. Meanwhile, the U.S. dollar did not totally collapse. It did, however, continue to lose purchasing power from the effects of inflation.

The gold price declined from an average closing price of $677 in January 1980 to a low of $250 during the summer of 2000.

Beginning in 2000-01 and continuing until August 2011, the gold price marched upwards to a new high of $1895 oz.

The “new high” for the gold price was a three-fold increase from its 1980 high and reflected at that time a nearly ninety-nine percent loss in U.S. dollar purchasing power. In inflation-adjusted terms, the prices were similar. In other words, the “new highs” of 2011 reflected the same inflation-adjusted value for gold evidenced in 1980.

Similarly, the “new high” for gold at $2048 in August 2020 reflected the additional loss of purchasing power in the U.S. dollar that had occurred after 2011 and also reflected the same inflation-adjusted value for gold referred to previously.

Here is what the price action looks like on a long-term chart…

Gold Prices (inflation-adjusted) 1980 -2023

New Highs in Gold Chart

As you can see on the chart above, the ending gold price of $2062 for the year 2023 is not a “new high” in real dollars. In fact, the current gold price is actually cheaper by almost $300 oz. compared to its previous peak in August 2020.

The price peak of $2048 oz. for gold in August 2020 cannot be exceeded until the gold price in current, inflation-adjusted dollars exceeds $2336 oz.

PERVERTED LOGIC FOR SOME GOLD BULLS 

When the Fed announced its plan to orchestrate higher interest rates for the expressed purpose of reducing the effects of inflation to a more acceptable level (supposedly in line with their oft-missed 2% target), their efforts resulted in a stronger dollar and a lower gold price; at least temporarily.

The Fed has now indicated that recent evidence is indicative that progress has been made on that front and that the effects of inflation have been reduced measurably, if not entirely subdued; and that continuing to increase rates may not be necessary.

Question: If the reasoning for a stronger dollar and lower gold price was based on the announced efforts by the Fed two years ago; and, since their recent statements indicate they feel they are approaching their goal, even if they haven’t reached it yet; doesn’t that mean that the perception of the inflation threat is not what it was and hence, a stronger dollar and lower gold price are justified?

My purpose in asking is that gold bulls seem to have a tendency to view conflicting evidence through rose-colored glasses.

Here is what it sounds like in sequence: 1) Inflation is very bad; the dollar is going to collapse, so buy gold. 2) Inflation isn’t as bad as previously thought; the Fed may not need to keep raising interest rates, so buy gold.

CONCLUSION

The gold price is always playing catchup to the previous effects of inflation which are manifest in the continual loss of purchasing power in the U.S. dollar.

The current gold price of $2060 oz is one hundred times higher than its original fixed price of $20.67 oz. and reflects the ninety-nine percent loss of $USD purchasing power that has occurred over the past century.

The potential for a gold price increase is always there because the effects of inflation continue indefinitely, however…

The price of gold will not move appreciably higher until after there is further, significant loss of purchasing power in the U.S. dollar.

Since the gold price is currently at or near its inflation-adjusted peaks from 1980, 2011, and 2020, expectations for a much higher gold price at this particular time seem premature.

(Also see What We Know About Gold)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!