"Everything you need to know about gold"
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…
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!
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.
EVERYTHING PEAKED IN 1980
Both gold and crude oil peaked at all-time highs in 1980. Those highs are still intact when the effects of inflation are accounted for. Below are the charts for both gold and crude oil…
FED HAS NO FEAR OF INFLATION
The Fed wants to have their cake and eat it too, but the cake is stale. Jerome Powell’s remarks in testimony before the Senate recently provoked considerable attention.
Responses, interpretation, and analysis by observers were many and varied. Unfortunately, no one learned anything different from what they thought they knew before Powell’s testimony.
The Fed is well aware of the problem. It is systemic in nature and goes far beyond corporate due diligence, bank liquidity, and the safety of your broker.
Most everyone else (with the exception of Janet Yellen, Ben Bernanke, and Alan Greenspan) thinks they understand the problem, but their limited understanding doesn’t allow for the subtleties of Fed Chair behavior.
CONSUMER PRICES NOT REFLECTING HIGHER INFLATION
As of November 30th, the annual inflation rate for the year 2020 is 1.17% (CPI). And it is not likely to get a whole lot worse anytime soon.
When the Federal Reserve responded to the financial crisis of 2007-08 with hugely unprecedented monetary expansion efforts, many thought that it would lead to runaway inflation and collapse of the U.S. dollar. It didn’t; and the expected higher inflation rates did not occur.
An All-Asset Price Crash (AAPC) might be the next “Wow! Can you believe it?”
In the meantime, whether it be stocks, bonds, gold, or oil, investors are licking their chops and counting their profits before they are booked. And, they have reason to gloat. Let’s see what all the noise is about.
A current headline says “fears of currency debasement drive gold price higher”. Seems reasonable; and it is. It is also reasonable, however, that a potential end of inflation is near.
Historically, governments have been “debasing” their currencies for centuries. The debasement leads to a loss of purchasing power in the currency in use.
Since gold is original money and has proven itself to be a true store of value, then it should not be unexpected that gold’s higher price over time reflects that currency debasement.
The debasement leads to a loss of purchasing power in the currency in use.
All currencies are substitutes for ‘real money’, i.e., gold; and all governments inflate and destroy their own currencies.
GOLD PRICES AND INFLATION
The latest actions by the Federal Reserve have led many to assume that much higher inflation is a foregone conclusion. This leads to a further expectation that much higher gold prices are imminent.
That sounds logical, but it is not that simple.
There is a relationship between higher gold prices and inflation, but the two are not directly related. The confusion results from a misunderstanding about inflation and its effects.
A Lesson About Gold
Apparently, there is no limit. This seems especially true right now with all of the “obvious” signs and indicators staring you in the face. It is almost blasphemous to speak cautiously. Better to let your imagination run wild and join in the revelry.
I can’t do that. I don’t choose to be dumped into the same cauldron of boiling fantasy with other analysts and advisors, who tout and promote based on the latest headlines. There has to be more to it. I think there is.