Silver is definitely cheap. By almost any standard of measurement, the price of silver is cheap. It is cheap relative to gold, it is cheap compared to its recent peak in 2011, and it is cheap historically. For some, that apparently means that silver is a bargain, too. I’m not so sure.
Investors Act Like Spoiled Children
When a small child wants some candy or a treat, they usually ask for it. When they don’t get it, they might throw a temper tantrum. They might also throw a tantrum when they want more: more candy, more dessert, etc.
What If Gold Is Not In A New Bull Market?
What if it’s not a new bull market for gold? What if gold prices are going lower – not higher?
Think it can’t happen? Think again.
In December 1987, gold prices stood at just over $500.00 per ounce. They had been on a tear for the previous three years after hitting a post-peak low of just under $300.00 per ounce in February 1985.
The increase in gold’s price of $200.00 per ounce may not sound like much, but it represents a sixty-seven percent increase over that three year period. Coming on the heels of a similar percentage decline after reaching an all-time high of $850.00 per ounce in January 1980, it was a welcome salve for those who had been wounded so severely.
Proclamations of a new bull market were abundant. Expectations for exceeding the old highs had some investors fantasizing rabidly. They were rudely disappointed.
Prospecting For Silver During Recessions
PROSPECTING FOR SILVER
I am continually amazed at how every turn in the numbers and the economy seems to present new information that is bullish for gold and silver. The train of logic becomes downright laughable at times.
Other than entertaining in a perverse sort of way, the various proclamations and conclusions end up sooner or later in confliction with each other.
One of the more glaring examples involves buying gold and silver because of the possibility of a recession. Why?
Price Of Gold Is A Reflection of US Dollar; Not US Dollar Index
Several articles by others recently have pointed out the apparent inconsistency of the US dollar’s action relative to the price of gold. For example, over the past year the US dollar Index has continued to strengthen, while gold has also risen in price.
That would seem to indicate that the US dollar’s value is not a primary factor in determining the price of gold. As we have said, though, the US dollar Index is not the same thing as the US dollar. The two are not interchangeable.
US Government Is Beholden To The Fed; And Vice-Versa
US GOVERNMENT IS BEHOLDEN TO THE FED
We hear quite a bit today about the issue of Federal Reserve independence. The crux of the argument usually centers on monetary policy executed by the Fed versus opinions of politicians and others who want and expect something different, which they believe will provide more favorable results.
President Trump has been ardently vocal in demanding that the Fed be more aggressive in cutting interest rates. He also wants, and is encouraging, action that would result in a weaker US dollar. He believes that it would be good for American businesses. His reasoning is that a weaker US dollar would make American-made goods more competitive.
Whether or not the President is correct doesn’t matter for purposes of this article. What is important is that there is a wide difference of opinion between the Federal Reserve and its current policies (re: Jerome Powell) as compared to the wishes of the United States government (re: President Trump).
For Gold, The Fed’s Decision Didn’t Matter
THE FED’S DECISION
Pretty much everyone got it wrong. Yes, they got the rate cut they were expecting; but as far as the price of gold is concerned, the Fed’s decision didn’t matter. The reason for this is that the focus on the Fed’s decision was misplaced.
It was a case of simple logic. But the logic was based on a faulty premise and led to unrealistic expectations.
Gold’s Breakout And The US Dollar
GOLD’S BREAKOUT
If you are bullish on gold prices right now, you are running with the crowd. That is perfectly fine, unless the crowd is running in the wrong direction. Or, maybe the race hasn’t started yet.
With all of the talk about fundamentals for gold, it would be nice if someone could set their emotions aside and look at some facts that might bring some clarity to the subject.
Has Gold Broken Out Or Not? Technicals And Fundamentals
HAS GOLD BROKEN OUT?
A casual glance at the latest short term chart for GLD would tend to support the notion that, yes, gold has decidedly broken out of its trading range and is headed higher.
Below is a two-year chart of GLD (bigcharts.marketwatch.com) with the latest activity (June 21, 2019) updates…
Gold Standard And The Federal Reserve
GOLD STANDARD AND THE FEDERAL RESERVE
In a recent opinion by Sebastian Mallaby, published in the Washington Post, the author and columnist says the following:
“Money is an abstraction, a political confection, a set of castles built on air. No wonder it makes people feel queasy. Gold is tangible, immutable, somehow reliable and real; there will always be people who believe in it. But the truth is that modern central banking is one of those elite inventions that generally works. The gold standard has given way to the PhD standard, and we are all the better for it.”
In his article, Mr Mallaby presents his arguments as to the reason and logic that a gold standard will not work and that it is an idea which is out of date and inferior to the current system, i.e., “modern central banking”.
The opinions are a response to statements made by Judy Shelton, currently under consideration for appointment as one of the seven governors on the Federal Reserve Board.
Mr. Mallaby refers to former President Reagan’s “nostalgia” abut the gold standard as being “curious” and says that “survival of this sentiment in 2019 is even more baffling”.
How so? What is so baffling about recognition of the ill effects of the current system and the realization that there is a better way?
He goes on to state that “…the Fed has a remarkably good record in delivering price stability”. Seriously?
In the lifetime of the Federal Reserve, the U.S. dollar has lost more than ninety-eight percent of its value. Is the fact that it costs sixty times more today than it would otherwise without the the effects of inflation a sign of “a remarkably good record in delivering price stability”?
Further, why is it necessary to manage and administer price stability? It is necessary for central banks because they are the ones who create and foster instability in prices.
Inflation is the debasement of money by government. It leads to a loss in purchasing power in currencies and price instability. The effects of this inflation are cumulative, volatile and unpredictable.
All governments, with the help of their central banks, inflate and destroy their own currencies. It is intentional and ongoing.
“Modern central banking” embodies operation and actions that are refutations of fundamental economic law.
Paper currencies are substitutes for real money. They have no intrinsic, or inherent value. Paper money is a debt, an I.O.U that is irredeemable, except for more money substitutes.
These things are also true of any amounts of dollars (or other currencies) that are held in the form of credit (U.S. Treasury securities, for example) and are denominated in dollars.
Ms. Shelton and others have suggested that fixing the dollar’s value to a specific quantity of precious metal will keep the Fed from creating money at will. No, it won’t.
Sorry goldbugs. If that were true, then it would have been entirely unnecessary for President Roosevelt to declare it illegal for U.S. citizens to own gold. And for President Nixon to refuse further convertibility of U.S. dollars into gold by foreign governments.
Those executive orders were the result of people’s preference to hold gold, rather than paper dollars. The reason for their preference was because the dollar was no longer “good as gold”, regardless of fixed ratios, or any supposed backing by gold.
That is because the government continued to issue dollars, paper money, that was in excess of the amount of gold which was used for the backing. It is called counterfeiting.
That does not mean that a gold standard cannot work. It can work. And it is certainly preferable to fiat money and modern central banking. And sooner is better than later.
But there are problems which seem to escape the proponents of a sound-money system.
One is the fact that, as with all illnesses, a recovery period is necessary. A withdrawal period might be a better term.
One hundred years of illness will require a long period of withdrawal. And it will be very severe. That is due to the fact that most of the inflation effects by the Fed are built into unrealistically high prices for nearly everything we buy and sell. Also, most of those prices and nearly all economic activity today are supported and funded with credit.
The credit is in the form of mortgages, student loans, auto loans, business and corporate loans, leveraged investments, etc. And the credit is growing exponentially.
Our financial and economic systems are top-heavy and will likely collapse under their own weight. That is what happened in 2007-08. Then the Fed rescued us.
Per Mr. Mallaby, “Without the Fed’s prodigious quantitive easing the economic recovery after the 2008 crisis would have been even more sluggish.”
The 2008 crisis would not have just “been even more sluggish”. It would have led to a full-scale depression. And we would likely still be mired in it, deeply. Which nobody wanted, then; nor do they want it today, or ever. I get that.
When people get sick, they generally don’t want to do what they need to do in order to get better. Rather than let nature take its course and have the body heal itself, they resort to drugs and other quick fixes.
Then they resume some mediocre level of activity, and go back to whatever they were doing before they got sick. In many cases they suppress the symptoms that indicate the system is purging itself and ridding the body of toxins. But the pathogen which might be the cause of the illness doesn’t go away. It remains in the body in a relatively dormant state until it awakens sometime later in full fury.
The Fed’s response to the 2008 crisis was similar to a drug addict who is hooked on higher and higher doses. When his body rejects further infusions (voluntarily or not) he enters into a period of withdrawal. If he refuses further ‘fixes’ he has the possibility of healing himself and curing his addiction. But it will be difficult. And it will take time.
The Fed responsed to the 2008 crisis with “more of the same”. Rather than face an undetermined period of withdrawal and potential healing, the patient received huge repeated doses of a similar drug that had been made available since 1913, and coincided with the origin of the Federal Reserve.
In support of the supposedly valiant efforts by the Federal Reserve in their response to the 2008 crises, Mr. Mallaby said that “the alleged downside of QE — a surge in inflation — has failed to materialize”.
With all due respect to Mr. Mallaby, the inflation did materialize. And it was huge. The combination of cash and credit issued to stave off economic collapse was the inflation.
The effects of that inflation – higher prices – also showed up. Stock prices have quadrupled since their lows in early 2009. House prices have recovered and exceeded previous high points from a dozen years ago. In some cases, house prices have doubled from their recession lows. And the levels of outstanding credit are at all-time highs.
As long as governments issue fiat money, there will always be inflation and currency manipulation. And the intent and actions (including inflation and currency manipulation) of governments and their respective central banks are attempts to control economic activity out of self-interest and perpetuation of power.
We don’t need “a global monetary system tethered to gold”. We need the freedom for participants in all trades and transactions to accept or refuse whatever form of money they choose.
Gold is real money. It has earned that distinction over five thousand years of recorded history.
It is real money because it meets the test of qualifying criteria: it is a medium of exchange, a measure of value, and a store of value. Nothing else meets the test.
Whether it is recognized officially by governments or not, whether a gold-standard monetary system is in place or not, gold is money. It is real money, original money.
All paper currencies are substitutes for gold. And there is historical precedent for that claim.
Therefore, editing Mr. Mallaby’s summation from his article, here is a more factual and suitable conclusion for this author’s opinions:
“Paper money is an abstraction, a political confection, a set of castles built on air. No wonder it makes people feel queasy. Gold is tangible, immutable, always reliable and real; there will always be people who know and understand this. The truth is that modern central banking is one of those elite inventions that is guaranteed to fail; all similar attempts in history have also failed. Unfortunately, the gold standard has given way to the PhD standard, and we are all the worse for it.”
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!