GOLD BULLS TOO PRICE-DEPENDENT?
Theoretically, a higher price can indicate an increase in value for a good, a service, a stock, etc. That does not mean that a higher price is always indicative of an increase in value.
On occasion, the higher price tells us something else. For example, most people are quite sensitive to the higher prices they pay for groceries and gasoline. Since the forced shutdown of the economy in response to Covid, prices for food and energy have risen along with most other goods and services.
However, I don’t think anyone would say that the value of gas at the pump has increased; or that bread is more valuable today, than it was three years ago. That sounds silly, right?
Why then, do gold investors focus almost exclusively on the gold price?
PRICE VS. VALUE
Generally speaking, the price we pay for something is a measure of its value. In most cases, that price is determined in the marketplace; where buyers and sellers come together and bid for what they want or offer their goods and services for sale.
The value of an item is in its use. Fundamentally, for most companies and for stocks in general, their stock price is an indication of the sum of investor appraisals of that value.
Expecting the price of a particular stock to rise over time is more about a fundamental economic term called value added. Improvements in services, technology, delivery, and convenience are examples of benefits which add value to an item or process. Society benefits from these improvements. In other words, they add value.
Fundamentally, the potential for the price of a company stock to go up is tied to the value which that company (or companies) adds to the economy.
That being said, what is the value of gold?
THE VALUE OF GOLD
The value of gold is in its use as money. That value has been established and confirmed over centuries. Gold is real money because it is 1) a medium of exchange; 2) a measure of value; and 3) a store of value.
Gold is original money. Gold was the ‘medium of exchange’ and ‘measure of value’ for all goods and services BEFORE paper currencies. The prices for various goods and services was quoted in fractional units (grams, grains, etc.) of gold.
Because of a relatively fixed supply that is not consumed and is impacted very little by new supply, gold is a ‘store of value’.
As a store of value, gold retains its purchasing power. One ounce of gold today has the same purchasing power as one ounce of gold a hundred years ago, or a thousand years ago.
By the same token, one ounce of gold today is no more valuable than one ounce of gold was a hundred years ago, or a thousand years ago.
If an ounce of gold today is no more valuable than an ounce of gold a hundred years ago, why is it priced at $2000 oz. today compared to $20 oz. a century ago?
THE PRICE OF GOLD
Given our earlier comments about price and value, there is the possibility that gold’s price increase over time indicates an increase in value. We know, however, that sometimes increases in price have nothing to do with increases in value.
As far as gold is concerned, its higher price tells us nothing about gold or its value. Gold’s value is stable and unchanging. That is why an ounce of gold today has the same purchasing power that it did centuries ago. There is no fundamental reason to expect a higher gold price relative to its value.
A higher price for gold represents the loss of purchasing power in the U.S. dollar. Specifically, gold priced at $2000 oz. today represents a ninety-nine percent decline in U.S. dollar purchasing power compared to the dollar a century ago when gold was priced at $20 ($20.67) oz.
AN UNPREDICTABLE GOLD PRICE
The higher prices that we pay for goods and services are not inflation. They are the effects of inflation. The higher prices result from the loss of purchasing power in the U.S. dollar because of inflation (debasement of money by government) that was previously created. (see Higher Prices Are NOT Inflation)
Higher gold prices only show up after higher consumer prices are reflected in the economy – not before. Also, there can be long delays before the gold price confirms any additional loss of U.S. dollar purchasing power.
Finally, the effects (loss of purchasing power in U.S. dollar and higher consumer prices) of inflation are unpredictable and disproportionate to the amount of inflation created. Hence, accurately predicting a future gold price is theoretically, and practically speaking, impossible.
Owning gold for its singular value as real money (long-term store of value) is well-recommended and justified.
Buying gold based on false fundamentals and unrealistic expectations leads to price dependency, which is risky and costly. (also see 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!
Very interesting post. Especially as I am a “gold bull” about to launch a gold investment fund. I’m not fully convinced that one should be inflation-adjusting the gold price however, but perhaps one should look to adjust the USD gold price for USD interest rates. Why? Well, multiple reasons but if you buy some gold, you are foregoing fiat currency and the potential to earn some interest in the short term on the fiat currency foregone. It would be very interesting to see this chart – I suspect the chart would show the increases in gold price (as adjusted) as less dampened than the inflation-adjusted gold price chart indicates.
Great bit of analysis though. Nice one.
Reg,
Thanks for your comments. I am posting them now, but I don’t have any response (yet) on your suppositions. I am planning to do an article on inflation-adjusted pricing so possibly this could be the trigger.
Best,
Kelsey