Gold Prices – Inflation vs. Deflation

Inflation is the debasement of money by government. The expansion of the supply of money and its subsequent loss in value results in an increase in the general level of prices for goods and services.

Deflation is characterized by a contraction in the supply of money and a decrease in the general price level of goods and services. (What we are currently experiencing is called ‘disinflation’ which is a lower rate of inflation.)

The purpose of this essay is to clarify and explain accurately what to expect regarding gold prices if deflation occurs.

According to Wikipedia: “Inflation reduces the real value of money over time, but deflation increases it. This allows one to buy more goods and services than before with the same amount of money.”

The United States Government, via the Federal Reserve Bank, has been  practicing inflation regularly for over one hundred years. They are good at it. Their efforts have resulted in a ninety-eight percent “reduction in the purchasing power per unit of money.”

The reduction in purchasing power of the U.S. dollar is reflected in the higher price of gold.

In 1913, with gold at $20.65 per ounce, twenty U.S. dollars in paper money was equal to twenty dollars in gold. Today gold is at $1270.00 per ounce, more than sixty times higher than in 1913.

The higher price for gold does not mean that gold has experienced an increase in purchasing power. Rather, its higher price reflects the decline in purchasing power of the U.S dollar.

Deflation is different. It is the exact opposite of inflation.  And the results are different as well.

As we said earlier, deflation is characterized by a contraction in the supply of money. Hence, each remaining unit is more valuable; i.e. its purchasing power increases.

Government causes inflation and pursues it for its own selfish reasons.  A government does not voluntarily stop inflating its currency. And it certainly isn’t going to reduce the supply of money. So what causes deflation?

Government causes deflation, too. Deflation happens when a monetary system can no longer sustain the price levels which have been elevated artificially and excessively.

Governments love the inflation they create. But with even more fervor, they hate deflation. And not because of any perceived negative effects on its citizens. It is because the government loses control over the system which supports its own ability to function.

Regardless of the Fed’s attempts to avoid it, deflation is a very real possibility. An implosion of the debt pyramid and a destruction of credit would cause a settling of price levels for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than currently.  It would translate to a very strong US dollar.  And a much lower gold price.

Those who hold US dollars would find that their purchasing power had increased.  The US dollar would actually buy more, not less. But the supply of US dollars would be significantly less.  This is true deflation, and it is the exact opposite of inflation.

The relationship between gold and the US dollar is similar to that between bonds and interest rates.  Gold and the US dollar move inversely.  So do bonds and interest rates. If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining.  And, conversely, if interest rates are declining, the value of your bonds is rising.  One does not ’cause’ the other.  Either result is the actual inverse of the other.

Inflation leads to a U.S. dollar which loses value over time; hence, this is reflected in a higher gold price.

Deflation results in an increase in value/purchasing power for the U.S. dollar; hence, this is reflected in a lower gold price.

Those who expect gold to increase in price during deflation are wrong for several reasons.

Gold is not an investment. And it does not respond to the various headline items that journalists and analysts continue to repeat erroneously. It is not correlated with interest rates and it does not respond to housing statistics. It is not influenced by world events, terrorism, or the stock market.

Gold is real money. The U.S. dollar is a substitute for real money, i.e. gold.

If deflation occurs, there is no other possibility except for lower gold prices.

(to read more about gold and its relationship to the U.S. dollar, see here)

Gold Under $1000 Is A Very Real Possibility

‎After gold peaked in January 1980 at $850.00 per ounce, it dropped in price by two-thirds (66%) over the next five years. The low in February 1985 was $284.00 per ounce.

At that point it began a strong move upwards over a three-year span peaking at just under $500.00 ($499.75) per ounce in December 1987. That translates to an increase of seventy-six percent.

The advance was solid and well-defined. Those who had been waiting for the price of gold to go back up were confirmed fundamentally and technically. Or so they thought.  Continue reading “Gold Under $1000 Is A Very Real Possibility”

Gold – A Simpler & Better Explanation

The emotional adamancy which dominates most analysis of gold contributes to confusion and misunderstanding. For example, “Backdrop For Gold Today Is As Bullish As It Has Been In A Long Time”; or “Precious Metal Sector Is On Major Buy Signal”. These and other similar claims are often supported by reams of technical analysis – the best that money can buy.

And this is on top of general misstatements of fact. It would appear that there is virtually no justification for lower gold prices except when caused by manipulation associated with conspiratorial forces.

Otherwise world tension, terrorism, natural calamities, social unrest, economic weakness, interest rates, inflation, trade deficits, Indian jewelry demand, etc, etc. all put a ‘floor’ under the price of gold. At least this is what we are told.

And the timing. Oh, my word; the timing! “It’s now (or never).” “Gold has finally broken through its overhead resistance.” “$2,000/oz by the end of 2017.”

Does understanding gold require a degree in cyclical theory or financial mathematics? Or is it related to climate change?

A simpler and better explanation for gold exists. It only requires a bit of historical observation.

1) First, and foremost, is the simple fact that gold is real money.

Its value (purchasing power) is constant and stable. And its role as money came about through trial and error. Gold has stood the test of time.

2) Second, paper currencies are substitutes for real money.

Gold is also original money. It was stored in warehouses and the owners were issued receipts which reflected ownership and title to the gold on deposit. The receipts were bearer instruments that were negotiable for trade and exchange.

3) Third, inflation is caused by government.

One thing that should be clear from history is that governments destroy money. That might sound harsh, but it is true.  And when we say “destroy” we mean just that. Inflation is practiced intentionally by governments and central banks. Its effects are severe and unpredictable. The Federal Reserve Bank of The United States has managed to destroy the U.S. dollar by bits and pieces over the past century. The result is a dollar that is worth 98 percent less than in 1913 when the Fed began its grand experiment.

The relationship between gold and the US dollar is similar to that between bonds and interest rates.  Bonds and interest rates move inversely.  So do gold and the U.S. dollar.

If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining.  And, conversely, if interest rates are declining, the value of your bonds is rising.  One does not ’cause’ the other.  Either result is the actual inverse of the other.

A stable, or strengthening U.S. dollar means lower gold prices. A declining U.S. dollar means higher gold prices.

In other words, higher gold prices are a direct reflection of a weakening U.S. dollar. 

And please don’t confuse the U.S. dollar with the U.S. dollar index. The U.S. dollar index(es) do not tell us anything about the price of gold.  A dollar index reflects changes in the U.S. dollar’s exchange rate versus other currencies.

Actual changes in the value of the U.S. dollar show up in the ever-increasing general level of prices for all goods and services – over time. (See A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)

The threat of world war is ominously present today. Countries and municipalities are going bankrupt. And acts of terrorism are an almost daily occurrence. This is in addition to an economy that can’t seem to improve enough or sustain an acceptable rate of growth.

So let’s buy gold, right? Maybe, maybe not. You see, gold doesn’t care about those things. It doesn’t care whether or not somebody fires a rocket armed with a nuclear warhead or the state of Illinois declares bankruptcy. And it doesn’t react to comments by Janet Yellen or Donald Trump. Indian jewelry demand is not on its radar. Nor are housing starts.

Gold responds to one thing. Changes in the U.S. dollar. Nothing else.

A continually weaker dollar over time means higher gold prices.

Periods of dollar strength are reflected in a declining gold price.

Lets talk for a moment about North Korea and the threat of war.  Its a very scary situation. But even if things get worse, it won’t have an impact on gold prices. Here’s why:

In late 1990, there was a good deal of speculation regarding the potential effects on gold of the impending Gulf War. There were some spurts upward in price and the anxiety increased as the target date for ‘action’ grew near. Almost simultaneously with the onset of bombing by US forces, gold backed off sharply, giving up its formerly accumulated price gains and actually moving lower.

Most observers describe this turnabout as somewhat of a surprise. They attribute it to the quick and decisive action of our forces and the results achieved. That is a convenient explanation but not necessarily an accurate one.

What mattered most for gold was the war’s impact on the value of the US dollar. Even a prolonged involvement would not necessarily have undermined the relative strength of the US dollar.

All of which leads us back to a simpler and better explanation:

Insofar as gold is concerned, it is all about the U.S. dollar.

 

 

 

 

 

 

 

 

 

 

 

 

Gold And The Need To Explain Price Action

People are obsessed with the price of gold. And the demand for answers to the question “Why?” continues to grow. Why did gold go up/down $20.00 today? Why?

All too eager to provide the answer, journalists respond as follows:

Quote: “A weak U.S. inflation print may be just what gold prices need to finally stay above $1,300.” …WSJ Aug 2016

Seriously? I thought higher gold prices were the result of inflation.

Quote: “Negative interest rates are sweeping the world as countries try to devalue their currencies, and that’s helping the price of gold.” …Feb 2016

The ongoing devaluation of the U.S. dollar has been taking place for over one hundred years. Gold’s continually increasing price – over time – reflects that devaluation. There is no correlation between gold and interest rates.

Quote: “Gold prices were on track for a second straight day of losses Tuesday after United Nations sanctions against North Korea were less severe than many initially expected.” …WSJ Sep 12, 2017

Apparently more severe sanctions would have led (or did lead) to higher gold prices. Why? And why do sanctions that “were less severe” lead to lower gold prices?  The answer in both cases is: they don’t.

Quote: Analysts and investors have also said that demand for haven assets has weakened early in the week because damage from Hurricane Irma was less severe than expected. Many investors favor gold during times of geopolitical uncertainty. …WSJ Sep 12, 2017

Another case of unrealistic expectations being dashed on the rocks of reality. Unfortunately, the explanation after the fact is just as bad as the original expectation.  Contrary to the statement above, gold is not influenced or affected by “geopolitical uncertainty”; regardless of what investors think.

Quote: Gold prices climbed Thursday after the European Central Bank left its accommodative monetary policies in place. …WSJ Sep 12, 2017

Any other central bank’s actions are still secondary to the U.S. Federal Reserve Bank and its actions concerning the U.S. dollar. Actions by other central banks are more properly viewed in the context of their own respective economies and/or relative to the U.S dollar. Gold’s price is the direct inverse reflection of the value of the U.S. dollar.

The underlying problem is fundamental.  Most people either are unaware or refuse to accept the one basic principle that defines and explains gold: Gold Is Real Money.

It is necessary, of course, to understand the principle more fully before attempting to answer questions about the price of gold. Further enlightenment on the subject can found here and here.

The lack of knowledge regarding gold leads to answers and explanations for price action that are illogical and incorrect. In the above examples, another factor is that the explanations are headline driven.

It is presumed that any price action of consequence must have a clear explanation. When an explanation isn’t readily apparent, check the headlines; and make something up.

Why did gold go up? New hurricane offshore. Why did gold go down? Effects of storm after making landfall weren’t as bad as expected. Gold is up again.  Well, there is another hurricane offshore and it could be worse than the last one. Nah, find another reason.  How about this? The ECB held firm on interest rates/raised rates/didn’t raise rates/changed their mind, etc.  If that doesn’t work, reverse the facts to suit the circumstances. Inflation refuses to attend the party.  Maybe gold will defy all reasonable logic and ignore core fundamentals.  Maybe gold’s price will go up while the U.S dollar strengthens.

Let’s be clear.  There are short-term, temporary changes in gold’s price that are not the result of its basic identity as real money.  And changes in the gold price occur only when people (traders, investors, etc.) act on their expectations, faulty logic or not.

But those price changes are elusive and will revert to their place within the fundamental trend; namely that gold’s continually higher price over time reflects inversely the continually lower value of the U.S. dollar.

Further, gold’s price decline since August 2011 reflects a strengthening U.S dollar.  It is very possible that trend has not reversed yet, although eventually it will.

And the more recent gold price increase since the beginning of this year is tied directly to the decline in value of the U.S. dollar. Any other explanations are simply not applicable.

Beyond that it is mostly a guessing game; at least in the very short-term. And for good reason. A plethora of faulty logic, (non)correlations, and contradictions seem to indicate more than just an ignorance of gold’s fundamental(s).

It just may be that the day-to-day changes in gold’s price are not easily attributable to known facts.

The gold market is relatively thinly traded. Even so, there are many different reasons why someone bought or sold the yellow metal on a certain day. Any specific transaction could have been initiated after weeks or months of deliberation.  And if it is spontaneously correlated time-wise with other known events, we still don’t know the reasons or logic that went into that decision.

Also, it is possible (likely?) that the traders who provide explanations to the journalists, are just as much in the dark themselves for an answer.

The only visible, consistently reliable, fundamental indicator of gold prices is the U.S. dollar. The ongoing decline in value of the U.S. dollar is reflected in an ever higher gold price over time.

Periods during which the U.S. dollar shows signs of strength and stability are reflected in lower or more stable gold prices.

Those periods are temporary. And they can last for years. The previous temporary period of U.S. dollar strength lasted for twenty years from 1980 – 2000. Don’t be swayed by the clarion call of impending riches or the fear of missing out on wealth untold.

If you really want to understand gold, focus on the U.S. dollar.  And ignore the headlines.

 

What’s Next For Gold? Its All About The U.S. Dollar

What’s next for gold? Seems like a fairly simple question. Unfortunately, it  is nearly impossible today to get a simple answer.  That’s the problem.  Continue reading “What’s Next For Gold? Its All About The U.S. Dollar”

Predicting The Price Of Gold Is A Fool’s Game

It is frustrating at times to see the attention focused on predictions for the price of gold. The more sensational and spectacular the price forecast, the greater the cacophony.

It is worth taking a look back at a few of these predictions to help put things in perspective.  Continue reading “Predicting The Price Of Gold Is A Fool’s Game”

There Is Only One Gold Fundamental…

There have been several articles recently proclaiming and detailing the fundamentals for gold. A few of them have some excellent points. Most of them don’t.  Continue reading “There Is Only One Gold Fundamental…”

Gold-Silver Ratio: Debunking The Myth

A 16-to-1 gold to silver ratio has been the Holy Grail of some silver investors since the mid-sixties.

Unfortunately, fifty years later, it is a quest that continues unabated without success.

In fact, there is evidence that contradicts and widens the chasm that separates wishful thinking from reality.  Continue reading “Gold-Silver Ratio: Debunking The Myth”

Gold vs. Gold Mining Shares – Just The Facts, Ma’am

“…but what I do know is the people running the company are practically married to their shareholders and investors, like you.”

That’s good to know.  After two decades of sharing their bed(s) with investors “like you” since the honeymoon period and birth of gold’s bull market in 1999/2000, the management of this particular gold mining company is still committed.  And, presumably, other companies’ managements are similarly committed. Are you?  Continue reading “Gold vs. Gold Mining Shares – Just The Facts, Ma’am”

$10,000 Gold May Be Reasonable; Or Wishful Thinking; Or Meaningless

Is $10,000 gold reasonable?

Right now, from gold’s current price point of $1240.00 per ounce, we are speaking of an eight fold increase to get to that gloriously celebrated (at least by some) number.  Even if the specific price target is more modest – say $7000.00 per ounce – it is still a huge jump from where we are today.  Continue reading “$10,000 Gold May Be Reasonable; Or Wishful Thinking; Or Meaningless”