"Everything you need to know about gold"
GOOD NEWS… The rebound in gold prices from their recent low has awakened new fervor among those looking for the elusive moonshot. The ‘obvious’ signs of much higher inflation have emboldened those who are inclined to predict ever higher gold prices.
Contrastingly, the chart of GLD prices pictured below doesn’t look all that great…
GOLD PRICES THEN
A year ago this past week marked the onset of the Covid-19 Pandemic. It also was the last full week of trading in the financial markets preceding crashes in all markets and a near-complete, albeit temporary, shutdown of economic activity.
Subsequent rebounds in stocks, bonds and real estate took valuations to levels as high or higher (much higher for stocks and gold) than before the turbulence took hold. Some might refer to those valuations as nose-bleed levels, although the summit for peak ascension is always moving when the effects of inflation are factored in.
Gold had its day in the sun, too.
STOCKS – BITCOIN – GOLD
Stock prices, according to the S&P 500, are up seventy percent from their lows last April. The Nasdaq Composite at its most recent high point was up even more, sporting a ninety-five percent increase from its nadir. A number of individual stocks have done even better.
For the entire year 2020, however, stocks were up a more modest sixteen percent (S&P 500) and only seven percent for the Dow Jones Industrial Average.
However, the outsized performance of the Nasdaq was even more apparent on a full calendar year basis. For 2020 the Nasdaq was up forty-three percent. Relative to its peers, the average Nasdaq stock was up more than three to four times as much as non-Nasdaq stocks.
An All-Asset Price Crash (AAPC) might be the next “Wow! Can you believe it?”
In the meantime, whether it be stocks, bonds, gold, or oil, investors are licking their chops and counting their profits before they are booked. And, they have reason to gloat. Let’s see what all the noise is about.
ABOUT MMT AND GOLD
According to MMT (Modern Monetary Theory), there are “four essential requirements that qualify a national currency as sovereign”.
Those four requirements include:
We listed the above requirements and talked about ‘sovereign currencies’ in the article MMT – Variation On A Theme.
But, there is a fifth (important) requirement regarding MMT and a National government which issues a sovereign currency. That requirement is stated quite clearly by L. Randall Wray, who is one of the leading spokespersons in behalf of MMT:
GOLD AND RIP VAN WINKLE
The “Rip Van Winkle Caper” was Episode No. 60 in the original Twilight Zone television series. It first aired in April 1961.
The show centered on the actions of four thieves who put themselves into suspended animation for 100 years, with the intention of waking to the prospect of enjoying, without concern, the spoils of their recent criminal actions.
The “spoils” happened to be one million dollars in gold bullion (bars) which they had recently misappropriated, i.e., stolen.
The entire plan was orchestrated by one of the men, who hired the others to perform specific tasks which depended on the execution of their respective and infamous talents. Now, they were in a cave located somewhere in the desert in the southwestern United States.
The gold price is not about gold. In fact, it tells us nothing about gold.
So why are people so obsessed with the price of gold? In most cases, it is because people likely view gold as an investment opportunity. “How much can I make and how quickly?”
However, the question which continues to plague gold investors and others is “Why didn’t gold respond the way we expected?”
The answer is found in the term unrealistic expectations.
When gold is characterized as an investment, the incorrect assumption leads to unexpected results regardless of the logic. If the basic premise is incorrect, even the best, most technically perfect logic will not lead to results that are consistent.
Here are some examples of inconsistencies when viewed through the lens of faulty logic based on incorrect assumptions…
Expecting higher gold prices? Read on…
From Wikipedia:
“In English, the phrase fly in the ointment is an idiomatic expression for a drawback, especially one that was not at first apparent, e.g.
We had a cookstove, beans, and plates; the fly in the ointment was the lack of a can opener.”
For four centuries, ‘a fly in the ointment’ has meant a small defect that spoils something valuable or is a source of annoyance. The modern version thus suggests that something unpleasant may come or has come to light in a proposition or condition that is almost too pleasing; that there is something wrong hidden, unexpected somewhere.”
In general, with gold prices currently at $1500-1600 per ounce, the expectation among participants in the gold trade today is for much higher gold prices going forward. And most of them, I think, seem to believe it will happen sooner, rather than later; and quickly, too.
Their enthusiasm rests on two assumptions: 1) That the new unlimited amounts of cheap credit made available by the Federal Reserve is hugely inflationary. 2) That the effects of the inflationary avalanche will destroy the US dollar, thus resulting in higher gold prices.
On the surface, both statements are logical and rooted in correct fundaments. But there is a fly in the ointment.
CASH IS KING FOR NOW
Amidst the fallout of stock markets crashing worldwide, gold (silver, too) and oil imploding, and the scare of coronavirus, the dollar itself stands tall. That is not what some were expecting. Nevertheless, unrealistic expectations abound today, so let’s see what we can learn from this.
When investors sell en masse, they generally turn to cash as a resting place for their money. Cash for most people today still means US dollars. This implies an increase in demand for US dollars. Gold investors and their advisors seem to have been expecting just the opposite.
GOLD AND STOCKS HEADED LOWER – NO CORRELATION
Gold and stocks are moving south together; but they are not correlated. Nor, are they inversely correlated, as some gold enthusiasts claim.
Reference to gold as a safe haven has some investors buying gold to hedge against a stock market crash. It is almost as if gold has become a pseudo defensive stock.
It seems investors actually expect gold’s price to go up when the stock market goes down; and vice-versa.
If that were the case, how do you explain the extended periods when both moved together; or the price action of gold relative to stocks in the past four days? Gold currently is lower in price than it was before stocks tumbled nearly 4000 points.