NEW HIGHS FOR GOLD?
All of the talk about new highs in the gold price seem to be wishful thinking unless one is focused on only nominal prices. Below is a chart of monthly average closing prices for physical gold since the summer of 2020…
Gold
Gold In The Aftermath of 2020
GOLD SINCE 2020
When gold was trading above $2000 oz. in the summer of 2020 the yellow metal was receiving its fair share of attention. After a low point just under $1050 oz. in December 2015, the gold price had doubled in four and one-half years and bullish optimism was at fever pitch.
Gold Is Up $300 Since November – So What?!
GOLD HEADLINES – UP $300
Advisors and marketers are ecstatic:…
“Nothing will be able to stop gold when it breaks to a new all-time high” or “On the cusp of a breakout where gold can go up to $5000” are two examples of recent exclamations about prospects for higher gold prices. The euphoria can be contagious.
Gold’s Nasty Divorce
Gold’s nasty divorce from the U.S. dollar was finalized in August 1971 when President Richard Nixon suspended any further convertibility of U.S. dollars into gold by non-U.S. citizens. That action removed any remaining links between the dollar and gold.
Without convertibility, any official price for gold became meaningless. At that time, the official U.S. dollar price of gold was raised from $40.00 oz to $42.50; but nobody paid much attention.
Gold, Inflation And The Federal Reserve
GOLD, INFLATION, AND THE FEDERAL RESERVE
Below are my comments and answers to various questions about gold, inflation, and the Federal Reserve. They are “for the record” so to speak, and are meant to be taken literally and specifically…
Demand For Gold – No New Highs
DEMAND FOR GOLD
As investors and others continue to jockey for position in order to announce that “the bottom is in for gold” or that “gold owners received an early Christmas present” or “crypto failures will translate to higher prices for gold”, it is clear that most of them are thinking that increased demand for gold will drive its price higher.
That is not the way it works.
Gold And The Normalcy Bias
GOLD AND THE NORMALCY BIAS
We think we know most (if not, all) of what we need to know about gold. Investors do their research and marketers spin their best yarn(s). Support is offered with an amazing array of fundamental and technical factors on display for all to see. But what are we not seeing?
Is $600 Gold Possible?
GOLD PRICE DECLINE – $600 POSSIBLE?
Over the past couple of months, since the posting of my article Gold Charts – $1450 the price of gold has done nothing to indicate a change in direction or reversal of any consequence.
Gold Cannot Exceed Inflation’s Effects
GOLD CANNOT EXCEED INFLATION’S EFFECTS
Making such an absolute statement may sound bold; even arrogant to some. There is, however, perfectly sound fundamental reasoning underlying the claim. So before you dismiss it out of hand, hear me out.
Gold – A Case Of Unrealistic Expectations
GOLD – WHAT DID YOU EXPECT?
Question No. 1. What’s wrong with gold?
Question No. 2. Inflation is roaring and gold is dropping in price. Since gold is an inflation hedge, why isn’t its price going up?
If you need to ask either or both of those questions, then you are likely suffering from a case of unrealistic expectations involving gold and its price behavior.
WHAT’S WRONG WITH GOLD?
Nothing. Absolutely nothing.
Only a few months ago, the gold price hit $2043 oz. and reflected a full ninety-nine percent loss in U.S. dollar purchasing power since the origin of the Federal Reserve more than a century ago.
There is only one reason the price of gold increases over time – to reflect the loss in purchasing power of the U.S. dollar. See the chart below…
Gold Prices – 100 Year Historical Chart
The cumulative loss in purchasing power of the U.S. dollar shows up in a continually rising price for gold. As can be seen on the chart, too, there are long periods of time when the price of gold remains relatively stable or declines.
The U.S. dollar price of gold does not tell us anything about gold. It tells us what has happened, or is happening, with the U.S. dollar – nothing else. Lately the U.S. dollar has been quite strong.
The US dollar is in a constant state of deterioration, punctuated with periods of temporary strength and stability. This action is reflected in the U.S. dollar price of gold.
INFLATION IS WORSE; WHY ISN’T GOLD GOING UP?
Gold is NOT an inflation hedge.
Inflation is the debasement of money by governments and central banks. Inflation never stops. All governments inflate and destroy their own currencies.
The higher prices for goods and services that most people focus on are the effects of inflation and those higher prices result from the loss in purchasing power of the currency (i.e., U.S. dollar).
Here are two critical points to remember…
- The effects of inflation are unpredictable (see The Fed’s 2% Inflation Target Is Pointless)
- Some of the higher prices we are currently seeing have nothing to do with inflation…
Higher prices resulting from supply chain disruptions have nothing to do with inflation; but they do provide a distraction which defers attention away from the real cause (see Simple Facts About Inflation).
GOLD IS NOT AN INVESTMENT
Gold is not an investment. Gold is real money and a long term store of value. It is original money and the measure of value for everything else.
Gold’s value is in its use as money. Period. It is immune and indifferent to wars, political and social unrest, natural calamities, etc.
Radical changes in the price of gold are a reflection of the currency in which it is priced. Again, those changes tell us nothing about gold.
Inflation, or expectations of inflation, do not impact the value of gold. The value of gold is constant and unchanging. (see Gold And Inflation Expectations)
Below is a second chart which shows the same price action of gold as in our first chart, except that the prices in the chart below are adjusted for inflation.
Gold Prices (inflation-adjusted) – 100 Year Historical Chart
Each time the gold price peaked in the above chart, it represented fully the accumulated effects of inflation – the loss in U.S. dollar purchasing power – up to that point. Those peaks will never be exceeded no matter how high the gold price goes.
SUMMARY AND CONCLUSION
The gold price is not declining because the Fed is raising rates. The gold price is declining because the U.S. dollar is strong. As long as the U.S. dollar remains strong, or strengthens further, then don’t expect higher gold prices.
False assumptions based on non-fundamentals lead to unrealistic expectations. For gold investors, the unrealistic expectations can lead to disappointment and financial loss.
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!