"Everything you need to know about gold"
It is pretty much expected today that any investment analysis with justifiable conclusions will be steeped in technical study that includes lots of charts.
This seems especially true of gold.
Which is all well and good, I suppose; except for the obfuscation:
GOLD UNDER $1000
After gold peaked in January 1980 at $850.00 per ounce, it dropped in price by two-thirds (66%) over the next five years. The low in February 1985 was $284.00 per ounce.
At that point it began a strong move upwards over a three-year span peaking at just under $500.00 ($499.75) per ounce in December 1987. That translates to an increase of seventy-six percent.
The advance was solid and well-defined. Those who had been waiting for the price of gold to go back up were confirmed fundamentally and technically. Or so they thought.
With the “clear, technical confirmations” of a “new, bull market in gold” came a deluge of predictions regarding $1,000.00 gold and higher. At the time that would have marked a nearly four-fold increase from its previous low of $284.00. (That equates similarly to today’s predictions of $4000.00 gold assuming that $1040.00 was the low in December 2015.)
It was not to be. In January 1988, gold began a long an arduous decline which lasted fifteen years. Trading in gold was confined to a range between $300-400.00 per ounce for the next ten years. Then, seemingly as a result of sheer exhaustion, gold broke down through $300.00 per ounce and traded as low as $252.00 per ounce in September 1999. From its temporary peak at $500.00 per ounce to its ultimate low of $252.00 per ounce, gold’s price had dropped fifty percent.
Even after reaching its ultimate low of $252.00 per ounce, gold continued to trade mostly at under $300.00 per ounce for nearly three more years (April 2002).
Let’s see how this compares to more recent history regarding gold.
From its peak in September 2011 at $1895.00 per ounce, gold declined to $1040.00 per ounce over a period of four and one-half year.
Subsequent to that, gold’s price increased by almost thirty percent to $1363.00 per ounce in a period of seven months. Almost fifteen months later, gold has not traded any higher.
Question No. 1: Are we in the midst of a three-year period similar to that which occurred between 1985-88 (with respect to the price of gold)?
Question No. 2: If so, what might we possibly expect going forward?
It is certainly a realistic possibility that the answer to question no. 1 is yes. This is possible even if gold’s price goes higher first.
It seemed a well-known fact that after dropping in price by two-thirds, gold had seen its ultimate low at $284.00 per ounce. With three successive years of incredibly profitable gains, who would proclaim otherwise? And the technical signals confirmed it.
The situation today is not entirely dissimilar. Whether $1360.00 per ounce is a long-term intermediate/reaction top or not, the prospect for gold to resume a longer-term price decline would not be out of context with its earlier history.
Gold’s initial decline from its peak price in January 1980 lasted for five years and totaled sixty-six percent. Its initial decline from the recent peak in September 2011 lasted for four and one-half years and totaled forty-five percent. Reasonably similar.
Gold’s price increase from its low in February 1985 lasted for three years and totaled seventy-six percent. Its price increase from the recent low in December 2015 has lasted for twenty-two months. At its peak of $1360.00 last summer and again recently this represents an increase of thirty percent. Considerably smaller percentage gains, but not entirely dissimilar when considering the broader picture.
And if gold were to move higher soon it would not negate the possibility of going much lower again and disappointing lots of people.
The additional technical confirmations and increased comfort level that came as gold increased in price from $284.00 to $500.00 between 1985-88 did nothing to stop the subsequent fifteen-year decline to new lows.
If gold were to decline back towards $1000.00 per ounce, how low might it go? What might we expect?
One possibility is that it could trade between $1100.00 and $1300.00 for several years. And then break down below $1000.00. And depending on how quickly it establishes its eventual low point, it might trade for several years under $1000.00. Gold might settle out somewhere just above its previous all-time high in 1980 at $850.00 per ounce. Say $875-$975.00 per ounce.
There are also technical studies that point to a gold price as low as $700.00 per ounce before a resumption of the “eternal” bull market.
Ironically, none of the above is about gold. It is about the U.S. dollar.
Whatever you think or expect regarding gold, you need to make sure your expectations for the dollar are inversely similar. (see here)
During the entire fifteen year period of gold’s price decline between 1988-2002, the U.S. dollar was gaining in value. When the U.S. dollar peaked in January 2002, gold was priced at $282.00 per ounce (gold had posted its low price of $252.00 a year or two before this but was still trading under $300.00).
At that point, gold and the dollar reversed directions simultaneously. Over the next eleven years, the U.S. dollar gave up nearly thirty percent of its peak value. Gold, meanwhile, gained five hundred and seventy percent in price. That increase seems a bit outsized on the surface, but it is not dissimilar to the outsized declines gold suffered during the previous twenty years while the dollar was gaining in value.
Between September 2011 and January 2016 the U.S. dollar gained significantly and gold’s price declined in similar fashion. The low so far for gold was the $1040.00 per ounce in December 2015. The peak for the dollar occurred just a few short weeks later in January 2016.
After January 2016, both reversed directions again. The dollar headed lower and gold reversed and went higher. Similar turning points occurred in the summer of 2016 and December 2016.
Which brings us to the present. If gold moves higher from here it will be because of continuing weakness in the U.S. dollar. Conversely, if the U.S. dollar moves higher, it will be reflected in a lower gold price.
(for a scenario about possible gold prices see Gold Price – US$700 Or US$7000?)
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!
People are obsessed with the price of gold. And the demand for answers to the question “Why?” continues to grow. Why did gold go up/down $20.00 today? Why?
All too eager to provide the answer, journalists respond as follows:
Quote: “A weak U.S. inflation print may be just what gold prices need to finally stay above $1,300.” …WSJ Aug 2016
Seriously? I thought higher gold prices were the result of inflation.
Quote: “Negative interest rates are sweeping the world as countries try to devalue their currencies, and that’s helping the price of gold.” …Feb 2016
The ongoing devaluation of the U.S. dollar has been taking place for over one hundred years. Gold’s continually increasing price – over time – reflects that devaluation. There is no correlation between gold and interest rates.
Quote: “Gold prices were on track for a second straight day of losses Tuesday after United Nations sanctions against North Korea were less severe than many initially expected.” …WSJ Sep 12, 2017
Apparently more severe sanctions would have led (or did lead) to higher gold prices. Why? And why do sanctions that “were less severe” lead to lower gold prices? The answer in both cases is: they don’t.
Quote: Analysts and investors have also said that demand for haven assets has weakened early in the week because damage from Hurricane Irma was less severe than expected. Many investors favor gold during times of geopolitical uncertainty. …WSJ Sep 12, 2017
Another case of unrealistic expectations being dashed on the rocks of reality. Unfortunately, the explanation after the fact is just as bad as the original expectation. Contrary to the statement above, gold is not influenced or affected by “geopolitical uncertainty”; regardless of what investors think.
Quote: Gold prices climbed Thursday after the European Central Bank left its accommodative monetary policies in place. …WSJ Sep 12, 2017
Any other central bank’s actions are still secondary to the U.S. Federal Reserve Bank and its actions concerning the U.S. dollar. Actions by other central banks are more properly viewed in the context of their own respective economies and/or relative to the U.S dollar. Gold’s price is the direct inverse reflection of the value of the U.S. dollar.
The underlying problem is fundamental. Most people either are unaware or refuse to accept the one basic principle that defines and explains gold: Gold Is Real Money.
It is necessary, of course, to understand the principle more fully before attempting to answer questions about the price of gold. Further enlightenment on the subject can found here and here.
The lack of knowledge regarding gold leads to answers and explanations for price action that are illogical and incorrect. In the above examples, another factor is that the explanations are headline driven.
It is presumed that any price action of consequence must have a clear explanation. When an explanation isn’t readily apparent, check the headlines; and make something up.
Why did gold go up? New hurricane offshore. Why did gold go down? Effects of storm after making landfall weren’t as bad as expected. Gold is up again. Well, there is another hurricane offshore and it could be worse than the last one. Nah, find another reason. How about this? The ECB held firm on interest rates/raised rates/didn’t raise rates/changed their mind, etc. If that doesn’t work, reverse the facts to suit the circumstances. Inflation refuses to attend the party. Maybe gold will defy all reasonable logic and ignore core fundamentals. Maybe gold’s price will go up while the U.S dollar strengthens.
Let’s be clear. There are short-term, temporary changes in gold’s price that are not the result of its basic identity as real money. And changes in the gold price occur only when people (traders, investors, etc.) act on their expectations, faulty logic or not.
But those price changes are elusive and will revert to their place within the fundamental trend; namely that gold’s continually higher price over time reflects inversely the continually lower value of the U.S. dollar.
Further, gold’s price decline since August 2011 reflects a strengthening U.S dollar. It is very possible that trend has not reversed yet, although eventually it will.
And the more recent gold price increase since the beginning of this year is tied directly to the decline in value of the U.S. dollar. Any other explanations are simply not applicable.
Beyond that it is mostly a guessing game; at least in the very short-term. And for good reason. A plethora of faulty logic, (non)correlations, and contradictions seem to indicate more than just an ignorance of gold’s fundamental(s).
It just may be that the day-to-day changes in gold’s price are not easily attributable to known facts.
The gold market is relatively thinly traded. Even so, there are many different reasons why someone bought or sold the yellow metal on a certain day. Any specific transaction could have been initiated after weeks or months of deliberation. And if it is spontaneously correlated time-wise with other known events, we still don’t know the reasons or logic that went into that decision.
Also, it is possible (likely?) that the traders who provide explanations to the journalists, are just as much in the dark themselves for an answer.
The only visible, consistently reliable, fundamental indicator of gold prices is the U.S. dollar. The ongoing decline in value of the U.S. dollar is reflected in an ever higher gold price over time.
Periods during which the U.S. dollar shows signs of strength and stability are reflected in lower or more stable gold prices.
Those periods are temporary. And they can last for years. The previous temporary period of U.S. dollar strength lasted for twenty years from 1980 – 2000. Don’t be swayed by the clarion call of impending riches or the fear of missing out on wealth untold.
If you really want to understand gold, focus on the U.S. dollar. And ignore the headlines.
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!
PREDICTING THE PRICE OF GOLD
It is frustrating at times to see the attention focused on predictions for the price of gold. The more sensational and spectacular the price forecast, the greater the cacophony.
It is worth taking a look back at a few of these predictions to help put things in perspective.
HEADLINE: Gold Forecast $6000, And Gold Mining Analysis Through Visualisation 23Jan2012
Quote: “If the current gold bull market was to follow the timing and extent of the 70s bull market, the gold price would reach $6000 before 2014.”
Gold price on 23Jan2012: $1679.00 per oz.
Gold price on 14Mar2014: $1382.00 per oz.
Gold price on 31Dec2014: $1181.00 per oz.
How far off base can a price prediction be? Not only did gold not reach the target price, it went in the opposite direction – beginning that same month – and proceeded to decline by thirty percent over the next two years, ending at $1205.00 per ounce on December 31, 2013.
The problem is not the plausibility of $6000.00 gold. It is very plausible, and possible; maybe even likely. However, the prediction was specifically time oriented and horrendously misjudged in terms of direction and timing.
All that is excusable. Unless you are the proprietor of a subscription service and/or making investment recommendations to others, or dispensing trading advice.
HEADLINE: JPMorgan Forecasts Gold $1,800 By Mid 2013 01Feb2013
Quote: “JPMorgan Sees Gold At $1,800 By Mid 2013 As South Africa “In Crisis” And “Escalating Instability” In Middle East J.P. Morgan Chase & Co. said gold will rise to $1,800 an ounce by the middle of 2013, with the mining industry in South Africa “in crisis,” according to Bloomberg.“
The price of gold on the date the headline appeared was $1667.00 per ounce. Five months later on June 29, 2013, the price of gold was $1233.00 per ounce.
The call for $1800.00 gold was a ‘safe’ prediction. Only an eight percent increase from the existing (then) level of $1667.00 would have resulted in a gold price of $1800.00.
But, as in the previous example, the price went south with a vengeance; this time dropping twenty-six percent in five short months.
HEADLINE: Trump Win Signals $1,500 Gold… 10Nov2016
Quote: “A Trump US presidential victory signals US$1,500 an ounce for gold…in the intermediate term.”
Gold price on 10Nov2016: $1258.00 per oz.
Gold price on 31July2017: $1268.00 per oz.
Apparently gold did not see the ‘signal’ since its current price is nearly identical to its price on the day the prediction appeared in print just after the elections last November.
And what does the writer mean by “intermediate term”? The longer the time frame, the less value in the prediction. The projected dollar increase amounts to twenty percent. If it takes two years, that amounts to roughly ten percent annually. In that case – or if it takes longer than two years – is it worth the bold-face headline?
HEADLINE: Trump to Send Gold Price to $10,000 10Nov2016
Gold prices and dates are the same as in the above example. With gold right where it was ten months ago, when might we expect some progress towards that price objective?
A price prediction of this magnitude deserves a more complete analysis and evaluation. See $10,000 Gold May Be Reasonable; Or Wishful Thinking; Or Irrelevant .
The more outlandish price predictions usually center around a breakdown or collapse of the monetary system. The breakdown occurs as a result of complete repudiation of the U.S. dollar after decades of value depreciation. People simply refuse to accept and hold U.S. dollars in exchange for their offered goods and services.
Now suppose at that time you own gold. Would you sell it? At what price? For how many worthless U.S. dollars would you part with an ounce of gold?
If someone offered you one billion monopoly dollars for an ounce of gold today, would you take it? How about ten billion?
Okay, so what if we see a precipitous decline in the value of the U.S. dollar over the next several years? Lets say that decline amounts to a loss in purchasing power for the dollar of fifty percent from current levels. This would equate to a gold price of approximately $2500.00 per ounce, a doubling from current levels.
This is valid if gold and the U.S. dollar are at equilibrium currently (I think they are). In other words, the current price of gold at $1250/60 is an accurate reflection of the cumulative decline in the value of the U.S. dollar since 1913.
The fifty percent decline in the purchasing power of the U.S. dollar would be reflected in higher prices for other goods and services; a pattern which has become all too familiar over the past one hundred years.
If there is a functioning market, and assuming you sell some gold and take profits, how much more will it cost for whatever else you might decide to buy? Do you really think you will be able to buy other items of value at ‘discounted’ prices at that time?
Gold, in 1913, was $20.00 per ounce. Currently it is $1260.00 per ounce. That is an increase of more that sixty-fold. But it does not represent a profit. Because the general price level of goods and services today – generally speaking – is sixty times higher than it was in 1913.
There are times when you can profit from sharp moves in gold in short-term situations. Generally, these are just before major movements in its U.S dollar price that reflect a realization of the cumulative decline in purchasing power of the dollar. And, to a lesser extent, recognizing when the expectations of others take the gold price well beyond equilibrium vs. the U.S dollar.
In 1999/2000 gold hit price lows of $250-275.00 per ounce. Soon thereafter it embarked on a decade long run culminating in a peak price of close to $1900.00 per ounce in 2011.
After its peak in 2011, gold declined over the next five years to a low of just above $1000.00 per ounce. A short-lived rebound in early 2016 brought it back to near current levels ($1200-1300.00) where it has generally remained without breaking either up or down to any significant degree.
Where were all these ‘experts’ in 1999/2000 and what were they predicting then?
And since 2011/2012? They have been saying pretty much the same thing over and over again. Buy now! Buy more! Before its too late!
One day, it WILL be too late. But it is more a matter of financial survival now than ever before. The obsession with profits, predicting and trading has obscured the real fundamentals.
And one way or another, most people’s profits are likely to go up in smoke before they do anything meaningful with them.
Gold – physical gold – is real money. It is real money because it is a store of value. And its value is constant. The U.S. dollar’s value continues to decline over time. The constantly declining value of the U.S. dollar and people’s perception of it, as well as their expectations for it, determine the price of 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!