Gold

Gold Stocks vs Gold – Choose Gold

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GOLD STOCKS VS. GOLD

The long-term underperformance of gold stocks compared to gold itself is clear and indisputable. A matter of remaining contention is whether or not beleaguered investors in the not-so-shiny metal stocks will ever recover from more than twenty years of disappointing and largely negative results. It isn’t just the poor relative performance, though; holding gold mining stocks has been a losing proposition in its own right.

Below is a chart which shows the relationship of the HUI (NYSE Gold Stock Index) relative to the price of gold…

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I Bought A Stock (AU) At 20; Now It’s 23 – Am I Rich?

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I BOUGHT A STOCK (AU) AT 20…

…Now, it’s 23. I must be rich. That sounds ridiculous and it is. But, that is how some gold bulls sound when talking about “new highs” for the yellow metal. At least one analyst mentioned the “four year wait” for gold’s breakout, so let’s go back to 2020. More precisely, August of 2020. If anyone had bought a stock which was predicted to “break 20 and go straight to 30” would it have generated the same excitement that predictions for gold to go from $2000 to $3000 did? Not likely; but that did not stop the torrent of predictions and hyped expectations for the rocket launch that some expected. Calls for $5000, $10,000, and higher stoked the fever and emotions of anxious investors.  Alas, we all had to wait for almost four years. Now, those same anxious investors are hoping the rocket launch hasn’t aborted – again.

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What Happens To Gold Price If The Fed Doesn’t Cut Rates?

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GOLD PRICE IF THE FED DOESN’T CUT

With the increasing gold price of late comes the assumption that the expected cut in interest rates will open a torrent of cheap money that will bring the U.S. dollar down with a thud.  But, what would happen to the gold price if the Fed doesn’t cut interest rates?

What seemed like a universally expected event may not be as likely as some have assumed. In fact, the Fed has a history that includes examples of pivots and re-pivots; or, ignoring the presumed pivot and staying the course.
You can read more about the possibility that the Fed might not cut interest rates in my article Investors Are Too Anxious For Rate Cuts.

In this article we will address the implications for gold if the Fed doesn’t cut interest rates. It matters not what the reasoning is behind such a possibility. What matters is that much of what has happened to prices for gold, stocks, bonds, etc., is based on the presumption that several interest rate cuts are forthcoming, possibly before the end of the year. Hence, there is a potential shock for investors who have relied on that presumption, as well as the particular logic mentioned in our opening paragraph above, should the Fed not follow through.

IMPLICATIONS AND POSSIBILITIES

Ignoring for now the finer (and more critical) point of inflation-adjusted returns, both gold and stocks are at all-time highs. What might happen to gold if a “potential shock” becomes a reality? It depends.

To the extent that a more significant portion of money used to fund the purchase of gold recently was done so based on the presumed cuts in interest rates and a clear change in direction, then we could see a significant decline in the gold price; at least temporarily. This might also happen if interest rate cuts are delayed. Market participants in both stocks and gold would likely see any inaction or hesitancy by the Fed regarding interest rate cuts as negative for their investment outcomes and expectations.

Another possibility is that any effects on the gold price could be muted. That has more to do with other factors, not interest rates. For example, if the prevailing thoughts dominant in the minds of those placing a larger portion of the money flowing into gold is not based on concern about interest rates, rather on anything else, then it is entirely possible that the gold price might show little reaction to non-cuts in interest rates.

OTHER FACTORS, SUMMARY

Some buyers in the gold market are not thinking so much about interest rates. Their concerns have more to do with the continual loss of purchasing power in the U.S. dollar. The erosion of U.S. dollar purchasing power is the result of ongoing inflation, which is the intentional debasement of money by governments and central banks. The continuous expansion of the supply of money and credit for more than a century has resulted in a dollar which has lost ninety-nine percent of its purchasing power.

Over time the gold price is historically correlated to that decline in the purchasing power of the dollar. Gold is real money and a long-term store of value.

Whether buyers of gold are individuals (retail investors), speculators, hedge funds, governments, or central banks; and whatever the reasoning behind their purchases, which reasoning is quite often temporary; in the end, it is still all about the U.S. dollar. (also see U.S. Dollar Best Of The Worst; Gold Best Of The Best)

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!

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

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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.

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Justification For Gold

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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.

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Both Gold And Silver Peaked In 1980

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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…

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The ABCs Of Gold Prices

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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

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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!

You Might Get A Higher Gold Price, But…

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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!

Gold Price, Inflation, Dollar Collapse, & BRICS

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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.

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