"Everything you need to know about gold"
A Lesson About Gold
Apparently, there is no limit. This seems especially true right now with all of the “obvious” signs and indicators staring you in the face. It is almost blasphemous to speak cautiously. Better to let your imagination run wild and join in the revelry.
I can’t do that. I don’t choose to be dumped into the same cauldron of boiling fantasy with other analysts and advisors, who tout and promote based on the latest headlines. There has to be more to it. I think there is.
GOLD EXPLODES, THEN IMPLODES
It shouldn’t be a surprise to anyone, because it has happened before.
Gold’s quick roundtrip from $1540 to $1610 and back again ($1539 earlier today) had its roots in actions and words between the United States and Iran. Prognosticators say there is more to come. Maybe; maybe not. But there is historical precedent for gold’s action.
When gold’s price reached $850 per ounce in January 1980, it seemed as if nothing would stop the runaway train that was headed straight for $1000 per ounce. But it was stopped, and began sliding downhill quickly.
By June 1982, two and one-half years later, gold’s price had declined by sixty-five percent. At close to $300 per ounce, the price of gold seemed farther away from the $1000 mark than ever before.
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.
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.
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
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?
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…
“Modern Monetary Theory (MMT) is a heterodox macroeconomic framework that says monetarily sovereign countries like the U.S., U.K., Japan and Canada are not operationally constrained by revenues when it comes to federal government spending. In other words, such governments do not need taxes or borrowing for spending since they can print as much as they need and are the monopoly issuers of the currency.” Investopedia
Of course governments are not ‘constrained’ by revenues. They have always been able to “print as much as they need”.
Modern Monetary Theory is not ‘modern’. Far from it.
STOCKS, OIL, GOLD…
In late 1999, the hyper-bullish technology stock sector was nearing the end of its nearly decade-long run to unsupportable and overly optimistic highs. At the center of the hype and fascination were new companies, headed by twenty-something geniuses. They were referred to as startups.
The multiples of earnings that normally applied in order to assess value of these companies was thrown aside. That is because most of them did not have any earnings.
Nevertheless, they were attractive enough to garner huge crowds of support. Just the hint of a revolutionary idea could boost an unknown small private company into the spotlight of the new issue market with over subscription being commonplace.
Technology stocks collapsed in 2000, and were eventually joined by the broader stock market which began a two-year descent that saw the S&P 500 lose fifty percent of its value.
Nearly smack in the middle of this two-year decline in stock prices came the 9/11 tragedy. Shortly after that the market bottomed, but before it could get untracked and head back up in earnest, there was a mutual fund “scandal”.
Then in 2006, real estate prices peaked – and cratered. Most of the damage was in residential real estate where it seemed to be the most extensive. It was definitely the most obvious.
Foreclosures were rampant and an entire cross-section of the population was in transit, moving from their recently acquired new homes and into rentals, if they could find one.
Economic fallout spread to major investment banks and the stock market. Financial institutions with household names like Lehman Brothers, Merrill Lynch, Washington Mutual, and AIG were skewered.
The stock market finally recognized how bad things were. Beginning in August 2007, and continuing for the next eighteen months, stock prices declined with a vengeance. The overall market, as reflected by the S&P 500, lost nearly two-thirds of its value.
In February 2009, a bottom was reached. The past ten years has seen the market surge to new all-time highs, seemingly much higher than could have possibly been anticipated just a few years ago.
The S&P 500 has increased in value four-fold from its low of 735 ten years ago to its most recent high of 2945.
It seems hard to believe, and it strengthens the argument for long-term investing in stocks and staying the course. But maybe things are not quite what they seem. Lets take a look.
Below is a chart (macrotrends.net) of the S&P 500 for the past twenty years. The data are inflation-adjusted using the headline CPI and plotted on a logarithmic scale… 
From this chart we can see that, in real terms, stocks did not get back to their highs of 2000 until fifteen years later, in February 2015. Even without the adjustment for inflation, stocks did not reach and exceed their 2000 peak until thirteen years later, in March 2013.
Also, we see that six of the past ten years were spent in recovering lost ground. The new highs and additional growth has come only in the past four years.
Fifteen years seems like an inordinately long time to wait for the market to assert itself and return to any expected pattern of normal growth. And you would have had to endure pure hell to see it happen.
And while the six and one-quarter percent average annual real rate of return over the past ten years is not inconsistent with the stock market’s long-term average annual return of about seven percent on an inflation-adjusted basis, it is too convenient to describe it as a return to normal.
A clearer picture of the stock market’s performance is found in looking farther back on the time line. The stock market’s (S&P 500) total return for the nineteen years beginning in January 2000 and ending in December 2018 is about fourteen percent, on an inflation-adjusted basis.
This equates to an average annual real rate of return on stocks of slightly more than seven-tenths of one percent for the first two decades of this century. That is not even close to the seven percent average annual return on an inflation-adjusted basis that stock market proponents are fond of citing.
In other words, the stock market returns for the this century are ninety percent less than their long-term average.
Below is a chart (macro trends.net) of crude oil for the past twenty years. As with stocks above, the price of crude oil is also adjusted for inflation and plotted on a logarithmic scale…
For eight years between 2000 and 2008, the price of crude oil quadrupled in real terms. After that, and in concert with stocks above, it lost two-thirds of its value, bottoming in January 2009, one month earlier than stocks.
Unfortunately for crude oil, that was not the bottom. After recovering a major portion of its losses it began another extensive decline in price in mid-2014. Then, after bottoming in early 2016, the price of crude oil doubled and then fell back to its recent low of close to $45.00 per barrel in December 2018.
After nineteen years of exclamatory volatility, crude oil at the end of last year was exactly where it was in February 2000 on an inflation-adjusted basis – $45.00 per barrel.
Now let’s look at gold. The chart below, as with stocks and oil above, shows prices for gold over the past twenty years and is inflation-adjusted, too, and plotted on a logarithmic scale… 
It seems somewhat ironic, but gold appears to be much less volatile than either stocks or oil. For the first eleven years of this century, the price of gold was steadily increasing, as contrasted with the extreme action and counteraction in the prices of stocks and crude oil.
Also, in stark contrast to stocks and oil, the price of gold actually increased substantially over the past two decades. Even after a drop in price of almost one-third since its high in August 2011, the price of gold ended 2018 more than three times higher than where it started the century in January 2000.
The three-fold increase (two hundred percent total return) equates to an average annual increase of six percent, which is nine times greater than stocks for the same period. And it is infinitely greater than crude oil which ended the same nineteen year period unchanged.
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!