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.
Kelsey Williams
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…
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
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
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
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!
Gold Price, Inflation, Dollar Collapse, & BRICS
GOLD PRICE, INFLATION, DOLLAR COLLAPSE
Expectations for gold to move higher in price are often tied to worsening inflation and a possible collapse in the U.S. dollar.
That sounds logical and there is historical precedent to support such expectations; but, some clarification is necessary first.
DEFINITION OF INFLATION
Inflation is the debasement of money by governments and central banks. The inflation is intentional and all governments inflate and destroy their own currencies.
What We Know About Gold
What we know about gold is simple and straight forward. Gold is real money and a long-term store of value.
Gold’s value is in its use as money. Its price has nothing do with its value. In fact, the price of gold has nothing to do with gold at all.
The higher price of gold over time is a reflection of the loss of purchasing power in the U.S. dollar.
The U.S. dollar and all paper currencies are substitutes for real money, i.e., gold. All governments inflate and destroy their own currencies.
As the dollar and other currencies lose purchasing power, the ‘price’ of gold increases. This price increase does not mean that gold is more valuable.
The value of gold is constant and stable. As original money, gold was the measure of value for everything else. Prices for various goods and services were denominated in fractional weights of gold (ounces, grams, grains).
In order to encourage the use of dollars, a ratio of convertibility was fixed at $20.67 to one ounce of gold.
With the inception of the Federal Reserve and central banking, the use of fiat money was expanded and amplified. Eventually, the United States government suspended convertibility and cancelled any official link between the U.S. dollar and gold.
Subsequently, the gold price rose dramatically between 1971 and 1980. The increase in the gold price to an average monthly closing price of $677 in January 1980 reflected an accumulated loss of purchasing power in the U.S. dollar totaling ninety-seven percent.
This represented several decades of ongoing inflation and its effects which had previously not been factored into the fixed gold price. For the gold price it was a period of catch up and realignment with the actual purchasing power of the U.S. dollar.
There was nothing predictive or subjective about it. The value of gold had not changed. The change in its price was due to the effects of inflation that had previously occurred and their impact on the purchasing power of the U.S. dollar. (see Gold Is Cheaper Now Than In 1980)
GOLD SINCE 1980
When the gold price peaked in 2011 at $1895 ounce, it represented a nearly ninety-nine percent loss of purchasing power in the U.S. dollar and accounted for the effects of inflation that had occurred between 1980 and 2011. It was another catch-up period for the gold price.
Likewise, the 2020 gold price high of $2048 was a reflection of further loss of dollar purchasing power and confirmed an accumulated total loss of ninety-nine percent.
The price of gold increases in hindsight to reflect the effects of previous inflation that have shown up in a loss of U.S. dollar purchasing power. The three major peaks (1980, 2011, and 2020) in the gold price are shown on the chart below…
Gold Prices (inflation-adjusted) 1970-2023
GOLD AFTER 2023 – NEW HIGHS?
Predictions for new highs in gold should be viewed with skepticism. Any substantial and lasting new highs in the gold price will come only after a further loss of purchasing power in the U.S. dollar that is maintained for a reasonable period of time.
Inflation never stops. Its effects are sometimes quite mild and, at other times, more severe. Even so, gold might take several years to reflect the ongoing, cumulative effects of inflation.
For example, gold has approached (and briefly exceeded) its nominal peak price of $2048 several times since August 2020. However, the effects of inflation and loss of U.S. dollar purchasing power since then are such that gold would need to be $2340 in current dollars just to match that previous peak.
At $1950-80, gold is almost $400 oz. below its August 2020 peak. That doesn’t sound like gold is “knocking at the door of new highs”. Any declines in the gold price would widen the gap.
WHAT WE DON’T KNOW ABOUT GOLD
“What we don’t know about gold” might be better phrased as ‘what we don’t know about the U.S. dollar and the effects of inflation”.
We don’t know the end result of the Fed’s attempt to raise interest rates to a more normal level. What is more important is that we don’t know how the U.S. dollar will respond and whether or not it can continue its pattern of relative strength versus other currencies and gold.
We also cannot see the effects of inflation before they show up in the system, regardless of how bad or how mild they might be.
After the hugely inflationary efforts of the Federal Reserve in 2008-2010, most expected a big jump in the effects of inflation and a speedy resumption of economic activity. Not so. It took almost a full decade to get back on track. And, even then, the effects of inflation remained muted.
After Covid, the effects of inflation combined with disruptions in the supply chain sent consumer prices up dramatically. This led to a new round of projections and predictions for the price of gold.
CONCLUSION
The potential for extreme inflation is a very real possibility. So, too, is the potential for deflation. Then, again, things could continue in muted fashion for years. We won’t know until after the fact.
The gold price will not reflect any of those scenarios until after they happen. Gold is not forward-looking.
In addition, as can be seen on the chart above, there can be long periods of time before the gold price catches up to the effects of previous inflation.
To whatever extent the price of gold moves higher, it is only to catch up to the effects of previous inflation and to compensate for the actual loss of purchasing power in the U.S. dollar. (see Gold Bulls Are Too Price-Dependent)
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!
Government Default Could Mean Lower Gold Price
GOVERNMENT DEFAULT
In the world of “all things gold”, every event is viewed within the context of how it will affect gold prices – on the upside.
Earlier this year, it was bank failures. Before that and since then, the focus was/is on the Fed with regards to a possible reduction of interest rates.
Two years ago, it was Russia vs Ukraine. Last month, it was Hamas vs Israel (see Gold Price And Geopolitical Concerns).
The Gold Price And Geopolitical Concerns
GOLD PRICE AND GEOPOLITICAL CONCERNS
Investors and others often use the term geopolitical to describe investment risk arising from various conflicts between individual countries and, also, among nations in general on a worldwide basis.