Gold And Interest Rates – A Mass Of Confusion

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Over the past several months there have been numerous articles referencing a relationship between gold and interest rates. Most of them are well-meaning attempts to convey information about recent changes in the markets as interest rates head higher.

In several instances, however, the author(s) have tried to explain a ‘perceived’ correlation between rising interest rates and the value of the US dollar – in a very positive manner. And they have imputed a similar correlation – albeit negative – in other statements with respect to Gold.  In both cases they are incorrect.  

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Gold Price $700 Or $7000? (revised and updated 1/13/2019)

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GOLD PRICE $700 OR $7000?

Does either of the above preclude the other?  In other words, if we expect gold to reach $7000.00 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700.00 per ounce? Conversely, if we are predicting or expecting gold to continue its current decline, and even breach $1000.00 per ounce on the downside, can $7000.00 per ounce, or anything even remotely close to that number, be a reasonable possibility? 

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Warren Buffett Is Right (And Wrong) About Gold

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Warren Buffett is right – and wrong – about gold. And many others are, too.

Among their various characterizations of gold are the following:  it is an unproductive asset; it doesn’t ‘do’ anything; it just sits there; it’s too volatile; stocks are a much better investment.

And, of course, they are right.  Up to a point.  

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Silver Is Not Real Money

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Is silver real money?  I don’t think so.  But I know that my proclamation will likely draw vociferous contradictions  from others who consider themselves “hard-money advocates”.

That’s okay.  Let’s look at the facts.   

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Gold In The Headlines (a different perspective)

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GOLD IN THE HEADLINES…

Investors Ditch Gold After Trump’s Win  (Wall Street Journal 14Nov2016)

“Investors piled into gold when polls showed Donald Trump’s chances for victory were improving.  Now that he has won the presidential election, they are selling.”

It is true that the US dollar price for gold increased as much as three percent on foreign markets when early election results here in the US indicated a substantial improvement in President Elect Trump’s odds.  However, at that particular time, it likely heightened – in some people’s eyes – the possibility of a contested election.  As the evening wore on, and it became apparent that Mr. Trump would win the election,  the uncertainty lessened and prices retreated from those higher levels.  By early morning at the opening of the US markets the price of gold was back to where it closed the day before.  The entire activity was pretty much a non-event.

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Gold: It’s All About the US Dollar

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GOLD: IT’S ALL ABOUT THE US DOLLAR 

The relationship between gold and the US dollar is similar to that between bonds and interest rates.  Gold and the US dollar move inversely.  So do bonds and interest rates.

If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining.  And, conversely, if interest rates are declining, the value of your bonds is rising.  One does not ’cause’ the other.  Either result is the actual inverse of the other.

When you were a kid you probably rode on a see-saw or teeter-totter at some time.  When you are on the ground, someone on the other end of the see-saw is up in the air.  And, vice-versa, when you are up in the air, the other person is on the ground.  Again, one does not ’cause’ the other.   Either position is the inverse of the other.

Gold is stable.  It is constant.  And it is real money.  Since 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 ongoing subjective, changing valuations of the US dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in US dollars. But in the end, what really matters is what you can buy with your dollars which, over time, is less and less.

The US dollar has lost ninety-eight percent of its purchasing power over the last one hundred years.  And over that same one hundred years, what you can  buy with an ounce of gold remains stable, or better.  (See my article  A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)

Gold’s value is not determined by world events, political turmoil, or industrial demand. The only thing that you need to know in order to understand and appreciate gold for what it is, is to know and understand what is happening to the US dollar.

And what is happening to the US dollar?  It is in a constant state of deterioration, punctuated with periods of temporary strength and stability.  This is reflected directly in the US dollar price of gold.

The value of gold as priced in US dollars is a direct reflection of the value of the US Dollar. Remember, gold is the constant.  The value of the US dollar is continually declining over time but always fluctuating (both up and down).

From my article Gold Is Real Money :

The Federal Reserve Bank of the United States was established in 1913. At that time the U.S. dollar was fully convertible into gold at a rate of twenty ($20.65) dollars to the ounce. You could exchange paper currency of twenty dollars for one ounce of gold in coin form. The coins were minted by the U.S. government. Gold in other forms (dust, flakes, nuggets, etc) also had circulated as money at the same ratio of twenty dollars to the ounce once its purity and weight was established. Fast forward one hundred years. The U.S. dollar has lost 98% of its purchasing power over the last century. In other words, it takes fifty times as many dollars to buy today what one dollar would buy a hundred years ago. Whereas one ounce of gold will still buy today what it would a hundred years ago.

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 Mining Shares Are A Lousy Investment

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This year’s turnaround in Gold Mining shares had helped to buoy the hopes and dreams of investors who were ‘betting’ that their long, agonizing wait for euphoric, exponential gains is over.  They continue to believe that the future for the Gold Mining Industry is quite rosy. Unfortunately, they are probably wrong.

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A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold

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The average cost for a loaf of bread in 1930 was ten cents ($.10). The average cost for a gallon of gasoline was also ten cents.

With gold priced in U.S. dollars at $20.00 to the ounce, you could at that time purchase two hundred loaves of bread or two hundred gallons of gasoline (or some combination thereof).

Twenty dollars of paper currency OR one ounce of gold valued at $20.00, usually in the form of a U.S. Double Eagle ($20.00 gold coin, legal tender), were equal in “purchasing power”.

Over the next four decades the cost for a loaf of bread/gallon of gasoline  continued to increase such that in 1970 the respective costs were twenty-five cents/thirty-six cents.  An ounce of gold (at $40.00) would purchase  one hundred sixty loaves of bread/one hundred eleven gallons of gasoline.   That is considerably less than the two hundred units of either item which could have been purchased in 1930.  But the numbers are even worse when we look at what twenty dollars of U.S. paper currency would buy in 1970: eighty loaves of bread/fifty-five gallons of gasoline.  Both gold and the U.S. dollar lost purchasing power over the forty-year period 1930-70 but  the U.S. dollar was the “biggest loser”.

Time for a bit of history to help us understand what had happened historically over the course of that forty-year period.  In 1933, President Franklin Roosevelt issued an executive order prohibiting private ownership of gold by U.S. citizens and revaluing gold at $35.00 to the ounce.  Also, U.S. paper currency would no longer be convertible into gold for U.S. citizens.  Foreign holders (primarily foreign governments) could continue to redeem their holdings of U.S. dollars for gold at the “new, official” rate of $35.00 to the ounce.  But what does that really mean?

If you are a foreign holder of U.S. dollars, you had just been told that your stash of “money” (in the form of U.S. currency) was now worth forty-one percent less than previously.  It was a tacit admission by the U.S. government that they had been “inflating” the money supply aggressively as evidenced by the cumulative effects of that inflation showing up in the cost of goods and services (i.e. average cost of loaf of bread/gallon of  gasoline).

The Depression (1930s) and World War II (1940s) “conveniently” received much of the blame. But things progressed reasonably well (economically speaking) throughout the fifties and sixties. By the late 1960’s and early 1970’s foreign governments were demanding returns of their gold on deposit here in the U.S.  Some of that gold was the result of new redemptions of the accumulation of U.S. dollars which they held and which were promised as redeemable in gold.

In 1968, the United States Government again revalued gold “officially” at $40.00 to the ounce and at the same time acknowledged a “free market” price for gold which could operate on its own, independently. However, the U.S. would not recognize the free market price in any official dealings/transactions.

By 1971 things were getting a bit dicey.  Foreign governments wanted their gold, but the U.S. did not want to release it.  Or, they didn’t have it.  Probably some combination of both.  So, in August 1971, President Nixon suspended any further convertibility of U.S. dollars into gold by non-U.S. citizens.  All hell broke loose. Literally.

Prices of goods and services in the United States began rising rapidly (historically speaking) and the U.S. dollar price of gold peaked in 1980 at $850.00 to the ounce.  The average price for gold in 1980 was $615.00 to the ounce.

By 1980 the average cost of a loaf of bread was $.50 (double what it was in 1970) and the average cost of a gallon of gasoline had settled out at $1.19 (several years after the Arab Oil Embargo of early 1970’s).  The above stated average U.S. dollar price of gold ($615.00 to the ounce) would purchase twelve hundred thirty loaves of bread or five hundred sixteen gallons of gasoline.  And the good old U.S. dollar?  Twenty dollars in U.S. paper currency would buy forty loaves of bread/seventeen gallons of gasoline.

Ten years later, in 1990, a loaf of bread had increased to $.70 and a gallon of gasoline to $1.34.  With gold at $338 USD/oz you could purchase four hundred eighty-two loaves of bread/two hundred fifty-two gallons of gasoline. Twenty U.S. dollars would buy twenty-eight loaves of bread/fifteen gallons of gasoline.

So where are we today?  The average cost of a loaf of bread and a gallon of gasoline are approximately the same – about $2.50. With gold at $1300.00 to the ounce you can purchase five hundred twenty loaves of bread or five hundred twenty gallons of gasoline which is nearly one hundred sixty percent MORE than the amount you could have purchased with one ounce of gold in 1930.

And twenty dollars in U.S. currency will purchase eight loaves of bread or eight gallons of gasoline which is ninety-six percent LESS than the amount you could have purchased with twenty dollars in U.S. currency in 1930.

What else do you need to know?  Get some 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 “A Pet Rock”?

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Is gold “a pet rock”?

“A pet rock” is how a noted financial columnist has described gold on a couple of occasions within the past year or two. Which is not surprising given the premise for the logic used to arrive at his conclusion.  That premise, or assumption, is the reason that most people (financial writers, advisors, investors, and economists included) are incorrect in their analysis of the yellow metal.

That premise/assumption is that gold is an investment.  It is not.  It is also not insurance or a hedge against chaos.  It is real money.

There is only one thing anyone needs to know with regards to the value of gold.  And that is the value of the U.S. dollar.

Gold is quoted in U.S. dollars and the dollar is the worlds reserve currency.  The “price” of gold in U.S. dollars is an inverse reflection of the value of the U.S. dollar.  And yes, it does change continuously, and ongoing.  And yes, there are more extreme changes for short periods of time which don’t correlate exactly to changes in purchasing power of the U.S. dollar.  But the most extreme changes occur after longer periods of time when the cumulative effects of inflation are recognized more fully by holders of the depreciating paper currency (i.e. U.S. dollar).  And since paper currencies (including government debt) can be manipulated by government, expectations and reactions become more volatile.

Without a clearly explicit understanding of the above paragraph, we will continue to see unexpected results which defy our logic if we  ‘invest’ in gold as a “hedge against the chaos and resulting breakdown of society”; unless that chaos results in a significant decline and/or breakdown of the U.S. dollar itself.

What is particularly ironic is that the writer states in his article “gold has also preserved its purchasing power over remarkably long periods”.  Which is exactly the point.  Gold is a store of value and, hence, real money.  It is the U.S. dollar which is volatile, and which continues to lose value.

With respect to concerns about some of the more dramatic changes in the price of gold  over shorter periods of time, most of the time when those particular examples are cited, they are referenced to the exclusion of more telling facts.

For example, it is a  well-known fact that gold in January was priced at $800.00 to the ounce and that its price  in U.S. dollars some twenty years later was $275.00 to the ounce.  Sounds horrible if you are looking at gold as an investment, right?  Of course.  But lets assume that our logic based on a faulty assumption (i.e. that gold is an investment) is correct.  And then what would have happened if you had bought gold at $275.00 to the ounce in 1999?  Its recent price at $1250.00 to the ounce is a nearly three hundred fifty percent increase.  And what if you had bought gold prior to 1980?  What if you were prescient enough to exchange your U.S. dollars for gold in 1971 at $35.00 to the ounce?  By 1980 you would have a profit of nearly twenty-two hundred percent!  Are these examples any less valid? No. It is a matter of perspective.  And that perspective gets clouded sometimes depending on an individual’s point of view.

Quoting from the same article, “In the shorter term, gold fluctuates so wildly that it is a surprisingly poor hedge against increases in the cost of living.” Does that mean that stocks and real estate are also “poor hedge(s) against increases in the cost of living”?  How would your stock broker answer that question?

For most of my lifetime (sixty-eight years) I have owned gold for what I think are the right reasons.  It may be a ‘pet rock’ to some folks, but to me it is real money.

 

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!

History Of Gold As Money

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HISTORY OF GOLD

Gold emerged as money of choice through competition.  Many other things (beads, grains, various industrial metals, etc) were tried throughout history.  For one reason or another they didn’t work consistently over longer periods of time.

The first gold coins appeared around 560 B.C.  Over time it became a practice to store larger amounts of gold in warehouses.  Paper receipts were issued certifying that the gold was on deposit.  These receipts were negotiable instruments of trade and commerce which could be signed over to others.  They were not actual currency but are a presumed forerunner to our modern checking system.

The warehouse proprietors (‘bankers’) decided they needed to find a way to increase their profits.  Earning fees from their depository and safekeeping services wasn’t enough.  Since most of the gold remained in storage and most transactions involved exchange or transfer of paper receipts for the  gold on deposit, they decided to issue ‘loans’ of the gold/money to others and charge interest.  The cumulative amounts of gold loaned out could not exceed the amount of gold held in storage.  And, hopefully, not too many depositors would ask to redeem their physical gold at the same time.

By this time, there were reasonable indications of just how much gold needed to be kept available to meet the ongoing, day-to-day withdrawal  demand.  The warehouses (banks) began issuing loans in the form of receipts backed by the gold held on deposit.  Which shouldn’t be a problem as long as people continued to trade with their paper receipts.  And occasional redemptions of receipts (withdrawals of gold from storage) were met with smiling faces. Business as usual.

It seemed to be a workable system.  But apparently the ‘bankers’ were not content.  They soon started issuing more loans/receipts for gold which did not exist.  Of course they saw no need to inform anyone of their actions and the receipts still stated that they were redeemable in fixed amounts of gold.  And when some wanted to take possession of their gold on a physical basis they could still do so.  Up to a point.

Questions arose, however, as to the value of the paper currency. More and more individuals, companies, and countries opted for real money – gold.  There simply wasn’t enough gold to meet the redemption demands.  And to whatever extent it was available, the banks and the government didn’t want to release it.

GOLD IN THE 20TH CENTIURY

As late as the early twentieth century, U.S. paper currency was issued with a clear statement specifying that it was redeemable for specific amounts of gold (and silver) at fixed rates.  In addition, gold (and silver) circulated concurrently with U.S. paper currency and were interchangeable.  One was as good as the other. Supposedly.

In 1933 President Roosevelt issued an executive order “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”.  Then, in 1971, President Nixon suspended convertibility of the U.S. dollar into gold by foreign nations.

For the past fifty years there has been no fixed convertibility of U.S, dollars (i.e., paper) into gold (i.e., money).

What we call money today is really just paper which we can use to buy real money – gold;  if we’re smart.

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!