"Everything you need to know about gold"
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES
No amount of wishful thinking and baseless proclamations will change that. Owning gold stocks (miners) instead of the actual physical metal (in other words, processed and refined with appropriate hallmarks and in tradable form) is a losing bet. Investors should ignore the siren song of gold mining shares.
Recent articles trumpeting silver’s outperformance relative to gold and some ridiculous price projections are a bit too much. Missing from most of the extremely positive commentary is a dose of reality. Below are three charts (source) which should provide some needed perspective. The charts show average monthly closing prices (inflation-adjusted) for the periods August 2020 – July 2024; April 2011 – July 2024; and January 1980 – July 2024. Here is the first chart…
The latest gold charts are pictured below and show a series of descending price peaks dating back to 1980. There are four charts. The first two charts are for the period following the August 2011 peak. The third and fourth charts are for the period after the gold price peaked in 1980. Prices on all charts are monthly average closing prices.
For example, the average closing price for gold in the month of January 1980 was $677 oz. This price ($677) is shown on Chart #3 below. During that same month, the intraday high for gold was $843 oz. The spike in price above $800 was very short-lived and not a reliable indicator of where gold traded during the month of January 1980. Average closing prices are more representative and more realistic for comparative purposes and analyses.
There are two charts for each time period. The first chart plots nominal prices; the second chart shows inflation-adjusted prices. Here is the first chart…
The average closing price for gold in August 2011 was $1825 oz. After declining for more than four years, the gold price bottomed at $1060 oz. and began rising. The 2011 high was eclipsed and a new high price for gold was set at $1971 oz. in July 2020. After a sharp decline in 2022, the price of gold rose to another new high of $2327 oz., which is also the current closing price on June 28, 2024. The gold price has more than doubled (119%) since its December 2015 low. That is quite impressive, but, there are some caveats.
Gold’s recent price performance, in total, looks very good if you are short-term oriented. The shouts of joy might be a bit overdone, though, if you have been holding gold since its peak in 2011. In that case, the total price increase for the entire thirteen-year period is only 27%. That is an annualized gain of 1.86%, which is more indicative of a slow-moving wagon, rather than a rocket ship in blastoff mode.
The numbers in both cases are made worse when the effects of inflation are factored in…
In Chart #2, the effects of inflation have turned the 2011 high and subsequent new highs in 2020 and 2024 into a series of descending peaks. Each successive peak almost matches, but doesn’t quite reach the previous high point. The total gain of 119% referenced in Chart #1 is almost halved, down to 66%. The meager nominal price increase of 27% is now a net loss (-8%). The $1825 oz. nominal price peak in 2011 correlates to a real (inflation-adjusted) price of $2529 oz. in today’s cheaper dollar(s),
Now, let’s look at gold’s price performance over a longer time period. Here is Chart #3…
When the gold price peaked in January 1980, it correlated to the effects of inflation that had depleted U.S. dollar purchasing power by 97% over the previous half-century. At $677 oz., the gold price was thirty-three times higher than it was when gold and the dollar were interchangeable, i.e., convertible, at a fixed ratio of $20.67 per ounce. The next major peak for the gold price was in 2011 at $1825 oz., followed by 2020 and 2024. Now, lets look at inflation-adjusted prices dating back to 1980…
In Chart #4, the ever-ascending nominal price increases shown previously in Chart #3 are more severely subdued when the effects of inflation are factored in. In addition, both volatility and time become more apparent. While the nominal price of gold continues to rise reflecting actual loss of purchasing power in the U.S. dollar, the gold price in real (inflation-adjusted) terms has yet to exceed any of its previous price peaks; and likely never will. That is because gold’s value is in its use as money and is basically constant.
Each price peak in gold beginning in 1980 and including the peaks in 2011, 2020, and 2024 is a reflection of the intervening loss of purchasing power in the U.S. dollar since the previous peak.
CONCLUSION
After allowing for the effects of inflation, an ounce of gold at $2400 today is no more valuable than it was at $2000 in 2020, or $1825 in 2011, or $677 in 1980. For that matter, the purchasing power of one ounce of gold is the about the same today as it was a century ago when it was priced at $20.67. In other words, if you bought gold at any of those prices and held it until now, you do not have real profits. The higher gold price is not a profit. It represents the dollar’s loss of purchasing power. (There are possible short-term trading opportunities for traders. See Understanding Profit Potential In Gold)
Gold is real money and a long-term store of value. Holding gold provides a measure of protection against depreciating currencies. Over time, the increasing price of gold matches the loss of purchasing power in the U.S. dollar that has already occurred. (also see Gold Has Done It’s Job – Isn’t That Enough?)
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 HAS DONE ITS JOB
For most of us who understand what gold is (and, what it isn’t), gold continues to perform as reasonably expected. Rather, its price continues to reflect the ongoing loss of purchasing power in the U.S. dollar. Gold, itself, isn’t doing anything at all. (see Not About Gold; All About The Dollar)
Short term nominal profits notwithstanding, gold’s value is the same as it is always. Gold is real money and its value is in its use as money. Gold is a medium of exchange, a measure of value, and a long-term store of value.
There has been no decoupling or modification of any link between the gold price in dollars and the value of the U.S. dollar. Part of the confusion about the link between the U.S. dollar and the gold price results from the tendency of analysts and others to cite current strength in the U.S. dollar index.U.S. DOLLAR INDEX
“The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies. The Index goes up when the U.S. dollar gains “strength” (value) when compared to other currencies.” (Wikipedia)
The “basket of foreign currencies” includes the Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona, Swiss franc. Nowhere is there any reference to gold. The only thing the U.S. Dollar Index tells us is how the U.S. dollar compares to a select group of other currencies. The U.S. dollar index tells us nothing about gold.
It is also a fact that the U.S. Dollar Index doesn’t provide any measurement of the dollar’s value on an absolute basis, but only on a relative basis. Any or all of the various currencies can be gaining or losing value (purchasing power) at any particular time. All that is indicated by changes in the index is how well the dollar is faring on foreign exchange markets against the group/basket of other currencies which comprise the index.
A CENTURY OF INFLATION
Before the inception of the Federal Reserve in 1913, and for a couple of decades afterwards, gold and the U.S. dollar both circulated as money mediums on a convertible, fixed-exchange rate basis. Both gold and paper dollars were used interchangeably at a fixed rate of $20.67 to one ounce of gold.
Whereas, inflation previously was the domain of governments, the practice of money creation and inflation was eventually granted to central banks. Acting in its authorized capacity, the Federal Reserve embraced its role in assertive fashion and has become the leading exporter of inflation on a worldwide basis.
After more than a century of continuous, intentional inflation (expansion of the supply of money and credit), the U.S. dollar has lost more than ninety-nine percent of it purchasing power. That actual loss of purchasing power in the U.S. dollar is reflected in a gold price which is more than one hundred times higher than its $20.67 oz price when gold and the dollar were interchangeable and convertible.
The loss of purchasing power in the U.S. dollar shows up in higher prices for the goods and services we buy. Those higher prices are NOT inflation. The higher prices are the effects of inflation; inflation which was previously created by the Federal Reserve. (see Gold, Inflation, And The Federal Reserve)
KEY TO THE GOLD PRICE
The effects of inflation are the key to the gold price. Specifically, the ongoing higher price for gold reflects the actual loss of purchasing power in the U.S. dollar that has already occurred as a result of the inflation created by the Federal Reserve.
For example, in January 1980 the average closing price for gold was $677 oz., which is representative of a ninety-seven percent loss of U.S. dollar purchasing power. The average closing price for gold in August 2011 was $1825 oz. By then, the additional effects of inflation after 1980 had brought the dollar’s cumulative loss of purchasing power to almost ninety-nine percent. Nine years later, in August 2020, a nearly-full ninety-nine percent loss of purchasing power resulted in a gold price of $1970 (monthly average closing price). As of the end of April, 2024, additional effects of inflation resulted in a gold price of $2285 oz.
Here is what all of this looks like on a chart (source)…
The chart above shows an ever higher gold price as the ongoing effects of inflation progressively manifest themselves in a U.S. dollar that continues to lose purchasing power. The chart below shows the same action with the gold prices adjusted for the effects of inflation…
As can be seen on the second chart, the higher gold price over time, no matter how extreme it seems in the short term, nor how high it goes, is simply a reflection of the long-term effects of prior inflation. The higher gold prices come after the effects of inflation have shown themselves in the form of the U.S. dollar’s actual loss of purchasing power, i.e., higher prices for goods and services.
Also, on the second chart, what shows up as new, ever higher, nominal prices for gold, are not new highs at all after allowing for the effects of inflation.
A very important point of note is that a higher gold price reflecting the dollar’s loss of purchasing power comes only in hindsight – after the fact. Also important is the fact that the effects of inflation are delayed and unpredictable. Until the effects of inflation show up and are absorbed into the economy, there is no reason to expect a new, higher gold price.
LATEST PRICE ACTION FOR GOLD – CONCLUSION
What most investors refer to as a new high in the gold price is a reaction to the effects of inflation that have occurred since August 2020 when gold was priced at $1970 oz. A new nominal high, yes; but, after allowing for the effects of inflation, the gold price has not exceeded its previous peaks in 2020, 2011, and 1980 (see the second chart above for verification).
There is no historical precedent for any expectations that gold will ever exceed its inflation-adjusted price level. This means that the gold price is probably at or near its peak nominal price for now. Only after further clear losses of purchasing power in the U.S. dollar can a higher nominal price for gold be expected. (also see Viewing Gold In Its Proper Context and Understanding Profit Potential In 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 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…
…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.
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!
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.
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.
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…