PREDICTIONS FOR GOLD
There seems to be an almost fanatical obsession with ‘fortune telling’ when it comes to the financial markets. Gold is no exception.
It is worth taking a look back at some earlier predictions to help put things in perspective…
Gold
Effect of Deflation On The Gold Price
The higher price for gold over time reflects the loss in purchasing power of the US dollar. The loss in the dollar’s purchasing power is an effect of inflation.
Over the past century, the US dollar has lost approximately ninety-nine percent of its purchasing power. The loss in purchasing power is reflected in a gold price that has increased one-hundred fold ($20.67 oz. x 100 = $2067 oz).
The effect of deflation on the gold price is different. To be more accurate, the effect of deflation on gold’s price is opposite to the effect resulting from inflation.
Gold – Nothing More, Nothing Less, Nothing Else
GOLD – NOTHING MORE
Gold is real money; nothing more. That is a hard pill for some investors and advisors to swallow. Actually, it is the second part of the statement that raises the most concern.
More than just a few people will readily affirm their belief that gold is real money. Beyond that, though, there is a tendency to get carried away with descriptions and analyses regarding “fundamentals” for gold.
Those fundamentals are many and varied; but they have nothing to do with gold or its price.
As the cumulative loss in purchasing power of the US dollar becomes more apparent, and as the price of gold continues to rise, more people take notice.
Investors and consumers are price conscious; which is fine. The problem is that most of them confuse price vs. value.
The only reason the price of gold goes up is to reflect the loss in purchasing power of the US dollar. In other words, the rising price of gold is correlated inversely to the US dollar’s actual purchasing power loss.
Specifically, this means that a higher gold price occurs after the effects of inflation have settled in and taken their toll – not before and not in anticipation of those effects.
Let’s be very clear about something: gold’s higher price in dollars at any time NEVER represents an increase in gold’s value and is ALWAYS indicative of dollar weakness that has already occurred.
Gold’s value is constant and unchanging. That is why gold is the perfect money. Gold is original money and a long-term store of value. (see Only One Fundamental For Gold)
GOLD – NOTHING LESS
Just as much as it is true that people focus on gold when its price is rising, they tend to ignore and disregard it when the price is declining. They become downright disinterested over longer periods when, in their words, “it isn’t doing anything”.
We are currently seeing some negative response to gold’s “failure to respond” to fundamentals and as a result of gold’s price not meeting or exceeding its expectations.
A similar thing happened after gold peaked in 1980. Many people were convinced that the dollar would be decimated by runaway inflation and that the price of gold would move well beyond $1000 oz (it peaked briefly at $850 oz.).
As the years passed, discouragement found a home and eventually apathy reigned. The effects of inflation became less and less of an obvious issue. Also, the stock market was rising rapidly and the economy was booming.
After twenty years gold was under $300 oz and as low as $250 oz. It was not uncommon to hear things like “gold is dead” and “who needs gold?”
This was another example of most people’s misunderstanding about gold’s value. Its price had dropped considerably so the inference of a “loss in value” and a “bad investment” were assumed.
However, all during 1980-2000 the US dollar was stable or stronger. With the apparent effects of inflation on the wane, the US dollar found favor on a world-wide basis.
Periods of rising gold prices and a weaker dollar contrasts with other periods of declining gold prices and a stable or stronger US dollar. See the chart below…
There are five major turning points for gold’s price that are reflected on the chart. All five turning points (1933, 1971, 1980, 2000, 2011) coincided with major turning points in the US dollar.
Gold is priced in US dollars and since the US dollar is in a state of perpetual decline, the US dollar price of gold will continue to rise over time.
There are periodic changes in US dollar valuations and these changes can last for years, such as 1980-2000 and 2011-2016. During such periods the price of gold can and does decline considerably. We are seemingly in such a period now.
Over the past year and one-half the price of gold has declined reflecting strength and stability in the US dollar. To what extent the decline continues depends on how the US dollar fares.
GOLD – NOTHING ELSE
Whenever I am asked about gold, I preface my remarks by stating that gold is not an investment. Most usually take exception to that proclamation. Some even get angry.
Nevertheless, it is true. Gold is not an investment; nor, is it a hedge against inflation. In fact, even gold is subject to inflation.
Gold’s price is not Influenced by political instability, social unrest, insurrection or war. It does not change in price or value due to headline economic statistics or a weak economy.
Gold is not correlated in any manner to interest rates, the stock market, inflation expectations, etc.
The ONLY reason for the higher price of gold over time is continual loss in purchasing power in the US dollar – nothing else.
CONCLUSION –
Believing in false fundamentals leads to unrealistic expectations. Those unrealistic expectations usually end in disillusionment; and they can be accompanied by financial loss.
As far as gold is concerned the entire precious metals arena is awash in proclamations and predictions that have no real fundamental basis.
(also see: The Gold Price And Inflation)
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 Lots Of Potential Downside
GOLD HAS LOTS OF POTENTIAL DOWNSIDE
Over the past year, the price of gold has made repeated attempts to move higher. Looking at a one-year price history of GLD in the chart (source) below, there is a series of progressively lower highs which seems to indicate staunch resistance to higher gold prices…
Even Gold Is Subject To Inflation
Yes, even gold is subject to inflation.
Most gold bugs think that a gold standard will solve our inflation problems. While it is true that gold acts as a restraint on governments’ and central banks’ desire to create and control money, it does not mean that inflation cannot happen just because gold is the money in circulation. The United States and most of the rest of the world, at one time or other, operated on a gold standard. In other words, gold was the money of choice.
Since gold cannot be fabricated (fabricate – to invent or concoct (something), typically with deceitful intent) into existence, the debasement of the money supply cannot be accomplished with the same ease as central banks enjoy today.
Several centuries ago, independent rulers might clip coins and melt the clippings down, recasting them in the usual fashion. This meant that there were coins with lesser metal content circulating with other coins that had not been altered. All were presumed to be of equal value.
Gradually, people became more aware of what was by then obvious – the two types of coins in circulation were not of equal value.
Also, there were more coins in circulation. The total money supply had increased considerably and the effects of inflation were apparent. Higher prices for most goods and services were taking their toll.
In order to allay the fears and suspicions of the general population, the rulers turned to dilution. All coins were cast and issued with a lesser proportion of precious metal (gold or silver) and a larger percentage of base metal (copper, nickel, etc).
The coins appeared to be identical, but further inflation was easier now; just reduce the precious metal content and increase the content of base metal in each coin. (see History Of Gold As Money)
GOLD, INFLATION, AND MANSA MUSA
Mansa Musa is considered by some historians to be the single most wealthy individual in history and his wealth is estimated to be the inflation-adjusted equivalent of four hundred billion US dollars in today’s money.
The following is from Wikipedia:
Musa made his pilgrimage (to Mecca) between 1324–1325. His procession reportedly included 60,000 men, including 12,000 slaves who each carried 4 lb (1.8 kg) of gold bars and heralds dressed in silks who bore gold staffs, organized horses, and handled bags. Musa provided all necessities for the procession, feeding the entire company of men and animals. Those animals included 80 camels which each carried 50–300 lb (23–136 kg) of gold dust. Musa gave the gold to the poor he met along his route. Musa not only gave to the cities he passed on the way to Mecca, including Cairo and Medina, but also traded gold for souvenirs. It was reported that he built a mosque every Friday.
But Musa’s generous actions inadvertently devastated the economy of the regions through which he passed. In the cities of Cairo, Medina, and Mecca, the sudden influx of gold devalued the metal for the next decade. Prices on goods and wares greatly inflated. To rectify the gold market, on his way back from Mecca, Musa borrowed all the gold he could carry from money-lenders in Cairo, at high interest. This is the only time recorded in history that one man directly controlled the price of gold in the Mediterranean.
The “sudden influx of gold” constituted an increase in the supply of money which resulted in “prices on goods and wares greatly inflated”. This is a classic, historical example of inflation.
The economies of the regions that Musa visited were relatively industrious with a reasonably stable economy. And the gold which Musa carried with him was not, for the most part, circulating as part of the money supply in the world at that time. In a short period of time, large amounts of gold (i.e. money) were put in circulation. With more money available, more aggressive bidding for various “goods and wares” drove prices for those items higher.
The ‘higher prices’ for goods and wares was an inverse reflection of the loss of purchasing power of the money (gold) in circulation.
Gold is not immune to inflation. This is not an indictment of gold. But it does serve to illustrate the vulnerability of money regarding the consequences of inflation.
Mansa Musa acted benevolently as an individual. His actions and the effects were basically a one-time event.
On the other hand, inflation, as practiced by the United States Government and the Federal Reserve, is intentional and perpetual – over one hundred years old and still going strong. The effects of those efforts are unpredictable and volatile. And the value of our money continues to erode.
Whereas Musa acted immediately to help alleviate the problem that his actions created by borrowing “all the gold he could carry from money-lenders in Cairo, at high interest”, the Federal Reserve purposely inflicts harm on the monetary system by continually expanding the supply of money and credit. This distorts every monetary measure of value we are inclined to rely on, and at some point, the system will implode.
The problems arising from Musa’s actions were systemic and not related to the ‘form’ of money in use. And those problems were limited because the money supply was limited. No one could produce more money (i.e., gold) by printing it.
That is why governments hate gold. It is a restraint on their free-spending, expansionary policies. Even the example of Mansa Musa does not diminish the role gold plays in this regard, or its rightful place as real money, original money. (also see The Gold Price And Inflation)
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 Is Not An Investment; Not An Inflation Hedge
WHAT GOLD IS NOT
After reading recent articles by others and listening to what continues to pass as ‘fundamentals for gold’, I think it might be helpful to restate, and elaborate on, two specific things which gold is not…
- Gold is not an investment.
- Gold is not a hedge against inflation.
Gold Is Cheaper Now Than In 1980
GOLD IS CHEAPER NOW
Most investors and others who follow the gold market are aware that gold peaked in January 1980 at $850 oz.
Gold is currently priced at $1772 oz., somewhat lower than its peak in August 2020 at $2060 oz. In either case, the gold price has increased considerably since 1980.
After forty years, though, one might be inclined to ask in all sincerity “Is that all there is?”
The question has merit. In inflation-adjusted terms, gold is actually cheaper today at $1772 oz. by twenty-three percent compared to it’s high in January 1980 at $850 oz.
Gold Facts And Fundamentals
GOLD FACTS AND FUNDAMENTALS…
After the gold price reached a high of $850 oz. in 1980, its price began a long decline that lasted over twenty years. But the decline was not just characterized by its lower price, which eventually bottomed around $250 oz.
More noteworthy was the lack of interest in the yellow metal, which continued for almost twenty-five years.
Gold Going Nowhere Slowly
“Gold going nowhere” seems to be a reasonable description of recent price action in the metals markets.
Below is a daily chart of GLD for the past year…
The Gold Price And Inflation
An understanding of the relationship between between the gold price and inflation requires historical observation and factual understanding. Below are three specific statements that are rooted in historical fact…
1) GOLD IS REAL MONEY
Lots of things have been used as money during five thousand years of recorded history. Only gold has stood the test of time. It has earned its role as real money because it is the only thing which meets the three specific criteria for money: a measure of value, a medium of exchange, and a store of value.
Gold is and has been easily incorporated into recognizable forms and amounts for use within various standards of weight and measure. Also, gold is scarce, malleable, indestructible and beautiful.
2) PAPER CURRENCIES ARE SUBSTITUTES FOR REAL MONEY
Gold is also original money. It is the original measure of value for everything else.
A medium of exchange needs to be portable, which gold certainly is. Gold is and has been easily incorporated into recognizable forms and amounts for use within various standards of weight and measure.
Gold was stored in warehouses and the owners were issued receipts which reflected ownership and title to the gold on deposit. The receipts were bearer instruments that were negotiable for trade and exchange. Some consider these negotiable receipts to be a precursor to our modern checking system.
3) INFLATION IS CAUSED BY GOVERNMENT
One thing that should be clear from history is that governments destroy money. Inflation is the debasement of money by government. It is practiced intentionally by governments and central banks.
The effects of inflation are volatile and unpredictable. The Federal Reserve Bank of The United States has managed to destroy the purchasing power of the U.S. dollar little by little over the past century. The result is a dollar that is worth ninety-nine percent less than in 1913.
MORE ALWAYS EQUALS LESS
When the Fed began its grand experiment, the price of gold was fixed and convertible at the rate of $20.67 per ounce. This fixed rate of exchange was supposed to act as a restraint on government to keep them from creating excess dollars to meet their spending needs.
Here is a historical example of how inflation was practiced with gold before the invention of the printing press and the advent of paper currencies…
“Early ruling monarchs would ‘clip’ small pieces of the coins they accumulated through taxes and other levies against their subjects.
The clipped pieces were melted down and fabricated into new coins. All of the coins were then returned to circulation. And all were assumed to be equal in value. As the process evolved, and more and more clipped coins showed up in circulation, people became more outwardly suspicious and concerned. Thus, the ruling powers began altering/reducing the precious metal content of the coins. This lowered the cost to fabricate and issue new coins. No need to clip the coins anymore.” (see Inflation – What It Is, What It Isn’t, And Who’s Responsible For It)
From the above example it is not hard to see how anything used as money could be altered in some way to satisfy the spending habits of government. But a process such as this was cumbersome and inconvenient.
Enter: Paper Money
With the advent of the printing press and continued improvements to the mechanics of replicating words and numbers in easily recognizable fashion, paper money became the “next big thing.”
At first, people viewed the new ‘money’ with skepticism. Coins with precious metal content continued to circulate alongside the new paper money. Hence, it was necessary, at least initially, for government to maintain a link of some kind between money of known value vs. money of no value in order to encourage its use.
Eventually, that link was severed; partially at first, then completely. And it was done by fiat (a decree or order of government).
Not only does our money today have no intrinsic value, it is inflated and debased continually through subtle and more sophisticated ways such as fractional-reserve banking and credit expansion.
Government causes inflation by expanding the supply of money and credit. And that expansion of the money supply cheapens the value of all the money. Which is exactly why the US dollar continues to lose purchasing power.
EFFECTS OF INFLATION
The ongoing expansion of the supply of money and credit by governments and central banks IS inflation.
This intentional debasement of money leads to a gradual loss in purchasing power of the US dollar.
The loss in purchasing power results in higher prices over time for most goods and services.(see “A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold” Revisited)
The loss in purchasing power and subsequent higher prices are the effects of inflation.
GOLD AND THE US DOLLAR
A declining U.S. dollar means a higher gold price. A stable or strengthening U.S. dollar results in a stable or lower gold price.
In other words, over time, a higher gold price is correlated inversely to the US dollar’s loss in purchasing power.
When the gold price peaked last August at $2060 oz., it was one hundred times higher than its original fixed US dollar price of $20.67 oz. a century ago. That indicates almost exactly the ninety-nine percent decline in US dollar purchasing power mentioned earlier and is indicative that gold is a store of value.
If you think the current effects of inflation are understated, that would mean the potential for a higher gold price is implied. Except…
The effects of inflation are unpredictable. And a higher gold price is predicated on seeing the actual price increases first.
The gold price doesn’t go up because people expect inflation to get worse. It only goes up to reflect the loss in US dollar purchasing power that has already occurred.
Furthermore, it can take years for the gold price to reflect any subsequent loss in purchasing power (1980-2011; 2011-2021).
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!