"Everything you need to know about gold"
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?
CHAIRMAN POWELL
In 1970, an R&B vocal group called Chairmen of The Board debuted their first single – Give Me Just A Little More Time…
When I see Chairman Powell responding to questions about the Fed’s efforts to raise interest rates, including how effective their efforts are and when the expected/hoped for results will begin to show up, I hear the song playing in my mind.
What are the ‘hoped-for results’? In the Chairman’s words, “to return inflation to a range more in line with the Federal Reserve’s 2% target” or similar words to that effect. (see The Fed’s 2% Inflation Target Is Pointless) The implied purpose is to suppress inflation (more correctly, the effects of inflation) before it turns into something much worse, like runaway inflation or hyperinflation.
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
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.
SILVER IS DEAD IN THE WATER…
…and cheap; it’s a bargain! Buy it now before it goes to – $500? Seriously? One thing for sure; silver is cheaper now than it was the last time we heard such exuberant (irrational?) calls for action.
In fact, the lower the silver price goes, the more fervent are the claims and projections for ever higher and seemingly ridiculous prices. After more than forty years of calls for $100 silver (see $100 Silver – Nothing Has Changed) now we are being treated to fantasy projections of $500 oz.
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…
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…
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.
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!
When the gold price declines or doesn’t go up according to expectations, analysts and investors begin looking for explanations. As the price drops further, claims are made that gold is undervalued.
Gold is not undervalued; and we might see further, larger price declines very soon.
DEFAULT – DEFLATION – DEPRESSION
Inflation is the primary game plan of governments and central banks. Its effects have left their mark on societies throughout history. As the effects of inflation continue to dominate headlines, financial and economic activity is scrutinized and analyzed with the intent of planning, projecting, and predicting it.
Most people think they understand inflation – they don’t – but for now, let’s look the other way. There is a triple-decker bus coming straight at us.
Default can happen three different ways:
1) Credit default
2) Bank failures
3) Asset price collapse
Universal credit default happens when individuals, corporations, and countries can no longer sustain the debt they have assumed on a scale that overwhelms ordinary financial and market activity.
This happened in 2008 with education loans, mortgages, and auto loans. The price of all this non-performing debt sank into a deep hole, until the government and Federal Reserve embarked on a new experiment of making more and cheaper credit available and buying up the non-performing debt.
Bank failures happen when banks violate the reserve requirements set by the Federal Reserve and are unable to meet the ongoing demand for money from their customers.
Bank failures were a common occurrence during the early 1930s and are evidence of the ongoing risks associated with fractional-reserve banking. (see Fractional-Reserve Banking – Elephant In The Room)
An asset price collapse is more often than not associated with stock prices. The stock market collapse in 1929 is the most prominent example; and it was a factor on three occasions in this century (2000-02, 2007-09, 2020).
An asset price collapse, however, includes all assets denominated in dollars and includes stocks, bonds, commodities, and real estate. We are currently in the early stages of another asset price collapse.
DEFLATION
Deflation is the opposite of inflation; it is a contraction in the supply of money and credit.
The effects of deflation result in fewer currency units (dollars) in circulation and an increase in purchasing power of the remaining units. In other words, your dollars will buy more – not less.
As the deflation takes hold, the prices of goods and services will decline, rather than increase. In and of itself, deflation is a good thing; however, when deflation is severe enough, the result would be a catastrophic economic depression.
Any single one, or combination, of the three types of default (credit default, bank failures, asset price collapse) can result in deflation. This happens because of the huge sums of money involved which are subsequently wiped out.
DEPRESSION
According to Investopedia, “A depression is a severe and prolonged downturn in economic activity.”
The stock market crash in 1929 did not cause the Great Depression. The Great Depression was the result of a flip-flop in Federal Reserve policy.
During the Roaring Twenties, the Fed pursued a generous approach to loans and interest rates. Because of concern about the rampant stock speculation fueled by their own generosity, the Fed became more restrictive and economic activity slowed. This slowdown in economic activity was underway before the stock market crash in October 1929.
It is quite possible that the Fed’s current efforts to raise interest rates could trigger a credit collapse, ushering in deflation and a New Great Depression. (see A Depression for the 21st Century)
MORE ABOUT DEFLATION, DEPRESSION
Deflation occurs when the system can no longer sustain itself on cheap and easy credit. The more aggressive the creation of the credit, the more horribly destructive are the effects of deflation when it occurs.
The effects of deflation are not nearly so subtle as those from the long years of inflation preceding it.
An implosion of the debt pyramid and destruction of credit would cause a settling of prices for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than current levels. It would translate to a very strong U.S. dollar and a much lower gold price.
The most severe effects would be felt in the credit markets and in any asset whose value is primarily determined and supported by the supply of credit available.
Conditions would be much worse than what we experienced in 2008-12. The biggest difference would be that the changes would result in another Greater Depression on a scale most of us can’t imagine. And the depression would likely last for years, maybe decades.
CAN’T THE FED STOP DEFLATION?
They will try, of course, just as they tried and failed in the 1930s. The Great Depression lasted much longer than necessary because the U.S. government and the Fed persisted in efforts to counter the natural effects of deflation.
The effects of a credit collapse and deflation now would overwhelm any efforts by the Fed to re-inflate and stimulate.
The Federal Reserve, in its current attempt to avoid a complete and total rejection of the U.S. dollar, is trying to raise interest rates. Recent strength in the U.S. dollar indicates a measure of success thus far.
Unfortunately, the Fed’s efforts might backfire and trigger another credit collapse. In fact, a collapse might already be underway.
CONCLUSION
We are all hooked on the drug of cheap credit. But cheap credit was not buoying economic activity to the extent hoped for. Now, higher interest rates are choking off more of the activity that would normally have been there.
The Federal Reserve does not act preemptively. They are restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making.
The problem is that the bond market is telling us that a credit collapse, deflation, and economic depression are on the horizon. The Fed knows this and can’t do anything about it.
The three Ds – default, deflation, depression – are upon us. If you are focusing on inflation, you need to look the other way.
(also see Effect Of Deflation On The Gold Price)
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!
LATEST GOLD CHARTS
When the gold price peaked at $2058 oz. in August 2020 it reflected a full ninety-nine percent loss in U.S. dollar purchasing power over the past century. The gold price has not been any higher since then.
The chart (source) below uses monthly average closing prices and shows gold price action for the past five years…
GAS IS CHEAP
It hurts to pay $5 per gallon for gasoline. It hurts more when we are used to paying a lot less for it.
For a brief time during the spring of 2020, the price of regular, unleaded gasoline dropped below $2.00 per gallon. I filled my tank at the time and savored the moment for a couple of weeks.