"Everything you need to know about gold"
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 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.
Just how much is gold worth? Lots of varying opinions, but is there a consensus?
Everyone has an opinion as to what something is worth, whether the object of consideration is their home, a late grandfather’s pocket watch, or a specific stock.
The price of a specific item or asset at any given time is a reflection of all those varying opinions.
Some are based on fundamentals, some are based on technical factors. But the combination of all the opinions, and the resulting expectations (some expect the price to go up, others expect it to go down or remain the same), plus all of the other known factors at the time that might possibly impact the price, provide us with the clearest possible indication of current value for the item in question: its market price.
If we believe that gold is money, we might have a different opinion or expectation than someone who sees gold as an investment; or someone else who deems gold to have no useful value.
If we don’t believe that gold is money, then we are saying that something else is. That something else, practically speaking, is fiat, paper currency issued by a government or central bank (dollars, euros, yen, etc.).
With that in mind, let’s rephrase our original question: “How much is money worth?”
In the simplest of terms, money is worth whatever it can be exchanged for. This means that the value of money is in its purchasing power.
With that fundamental understood, the logic leads to a clean and simple statement: Gold, or any other money, is worth what we can buy with it.
So, what can we buy with it? And how do we know that our gold/money is realistically priced?
With gold currently priced at $1750 oz., the value of gold today is what we can buy with seventeen hundred fifty dollars.
But, is $1750 oz. an accurate reflection of gold’s purchasing power? Are there reasons why we might expect that price to rise or decline to any substantial degree that would influence our choice to hold money in gold vs. US dollars?
Let’s go back to a time when the US dollar and gold were both money and equal in value (i.e., purchasing power).
SOME GOLD PRICE HISTORY
In 1913, both gold and US dollars were legal tender, and interchangeable. Either was convertible into the other at a fixed price. A one ounce (.9675 ounces) gold coin was equal to twenty US dollars and vice-versa. (note: the official gold price was $20.67 per ounce, which multiplied by .9675 ounce of gold in a gold coin equals $20.00).
On the surface, it would seem that one ounce of gold over the past century has increased in value by eighty-four hundred percent ($20.67 in 1913 vs $1750 today). If that is true, we should be able to buy eighty-five times as much with one ounce of gold today as we could in 1913. However, that is not the case.
We said earlier that the value of money is what we can buy with it, or what we can acquire in exchange for it. What should be obvious by now is that even though the price of gold increased by eighty-four hundred percent, we don’t know whether there was an increase in actual value or possibly a decrease in value if gold was unable to maintain its original purchasing power.
We can however, draw some conclusions about relative performance. The specifics are that gold gained in price by eighty-four hundred percent relative to the US dollar’s loss in value/purchasing power of almost ninety-nine percent. (see A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)
Gold has maintained its value, and increased its purchasing power in absolute terms, over the century-long period under consideration.
What we don’t know is the extent to which the current price of $1750 oz. reflects accurately the loss in US dollar purchasing power. How much value has the US dollar lost since 1913? Is it ninety-eight percent, or less; ninety-nine percent, or more?
The current market price for gold of $1750 oz. indicates a fairly specific loss of 98.8 percent in US dollar purchasing power. A full ninety-nine percent decline translates to a one hundred-fold increase in gold’s price, or $2060 oz.
In August 2020 gold traded at $2057 oz., which indicates a loss in purchasing power in the US dollar of ninety-nine percent since 1913.
As recently as January 2016, gold traded as low as $1040.00 per ounce. That price indicates a decline in US dollar value closer to ninety-eight percent. In fact, it is nearly exactly equivalent to that mark. A ninety-eight percent decline in US dollar value equates to a fifty-fold increase in the gold price since 1913 (100 percent minus 98 percent = 2 percent; 100 percent divided by 2 percent = 50; $20.67 per ounce times 50 = $1033.50 per ounce)..
HOW MUCH IS GOLD WORTH TODAY?
Gold, in US dollars, is worth somewhere between $1000.00 and $2000 oz. That may seem like a broad range for price-conscious investors, but it is consistent with gold’s price action historically.
The current price of gold at $1750 oz. reflects a specific loss of 98.8 percent in US dollar purchasing power.
The US dollar is the only barometer you need to watch. The elements of surprise and timing are critical. Most especially so, if you are short-term oriented in your thinking.
Items for consideration that could have a substantial impact on the US dollar include 1) new and unexpected actions by the Federal Reserve; 2) accelerated or delayed effects of inflation previously created by the Fed; 3) complete repudiation of the US dollar; 4) a credit implosion; 5) Fed’s reaction to a credit implosion.
Some of the listed items, or variations of them, can affect the value of the U.S. dollar positively, too; which is why you need to keep your eye on the dollar, and not the specific event.
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 AND UNREALISTIC EXPECTATIONS
Gold has been characterized as insurance, a hedge against inflation/social unrest/instability, or, more simply, just a commodity. But it is treated most of the time, by most people, as an investment.
This is true even by those who are more negative in their attitude towards gold. “Stocks are a better investment.” In most cases, the logic used and the performance results justify the statement. But the premise is wrong.
GOLD AND MANSA MUSA
From Wikipedia…
Musa Keita I (c. 1280 – c. 1337) was the tenth Mansa, which translates as “sultan” (king) or “emperor”, of the wealthy West African Mali Empire.
During his reign Mali may have been the largest producer of gold in the world at a point of exceptional demand. One of the richest people in history, he is known to have been enormously wealthy; reported as being inconceivably rich by contemporaries, “There’s really no way to put an accurate number on his wealth” (Davidson 2015).
GOLD IS STILL ABOUT US DOLLAR PART II
In my original article I made the following statements:
“It means that holders of any non-USD currency who want to exchange it for gold, must first exchange it for US dollars and then exchange the US dollars for gold.
When anyone is selling gold, the proceeds are always paid in US dollars. The dollars can be held as such, or they can be exchanged for other currency.”
Another professional labeled the above statements as “fiction”.
I do not agree. But I do see the possibility for others to infer something other than what was intended. Therefore, I apologize. And I have replaced the statements in question with the following:
GOLD IS STILL ABOUT THE US DOLLAR
The US dollar is the world’s reserve currency. And that isn’t likely to change in any radical way, anytime soon. Unless there is some kind of calamitous implosion of the dollar. I am talking about outright rejection and repudiation. And that could happen. The problem is that there isn’t another currency that could likely take its place.
Any analysis of gold must have a correct premise. And terms used in that analysis must be clearly understood. For example…
“Are you pro-gold?” Just exactly what does that mean? Is it a political or moral issue? In other words, does someone’s position on gold indicate ideology or lifestyle choice? Can a political liberal be pro-gold? And if someone answers the original question in the affirmative, does that mean they are anti-something else?
Over the past several months there have been numerous articles referencing a relationship between gold and interest rates. Most of them are well-meaning attempts to convey information about recent changes in the markets as interest rates head higher.
In several instances, however, the author(s) have tried to explain a ‘perceived’ correlation between rising interest rates and the value of the US dollar – in a very positive manner. And they have imputed a similar correlation – albeit negative – in other statements with respect to Gold. In both cases they are incorrect.
GOLD PRICE $700 OR $7000?
Does either of the above preclude the other? In other words, if we expect gold to reach $7000.00 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700.00 per ounce? Conversely, if we are predicting or expecting gold to continue its current decline, and even breach $1000.00 per ounce on the downside, can $7000.00 per ounce, or anything even remotely close to that number, be a reasonable possibility?
Warren Buffett is right – and wrong – about gold. And many others are, too.
Among their various characterizations of gold are the following: it is an unproductive asset; it doesn’t ‘do’ anything; it just sits there; it’s too volatile; stocks are a much better investment.
And, of course, they are right. Up to a point.