Kelsey Williams

Has Gold Broken Out Or Not? Technicals And Fundamentals

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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…

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Gold Standard And The Federal Reserve

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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presents his arguments as to the reason and logic that a gold standard will not work and that it is an idea which is out of date and inferior to the current system, i.e., “modern central banking”.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.”
 
 

 

 

 
 
 

Gold, MMT, Fiat Money Inflation In France

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“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. 

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Stocks, Oil, Gold: Inflation-Adjusted Returns

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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!

 

Silver’s Next Big Move

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SILVER’S NEXT BIG MOVE…

Eight years ago this month, silver started its “next big move”.  And that move continues today. It is awesome to behold. See the chart (ten-year history of silver prices) below…

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Is The Federal Reserve ‘Too Big To Fail’?

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The term “too big to fail” refers to certain businesses whose viability is considered critical to the survival and effective operation of our economic system. These very large businesses are designated as too big to fail because their failure or bankruptcy would have disastrous consequences on the overall economy.

The potential effects are considered to be severe enough, and the costs so unbelievably large, that these businesses are afforded special attention and consideration in the form of bailouts and protection from creditors.

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Fed Inflation Is Losing Its Intended Effect

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FED INFLATION HAS LESS IMPACT

The chart below shows the ratio of the gold price to the monetary base for the past one hundred years.

The monetary base used in the chart is calculated by the St. Louis Federal Reserve and the following definition is from their website:

“The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks. These data are adjusted for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories.” (source)

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Gold – US Dollar vs US Dollar Index

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When it comes to analysis of gold, the U.S. Dollar Index finds nearly universal acceptance. Or rather, when most analysts refer to comparison/correlation of the U.S. dollar to gold, they usually illustrate their point with a chart of the U.S. dollar index.

While they won’t say it straight out, most of them see the U.S. Dollar Index as a proxy for the U.S. dollar. But, is it?

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Peak Gold Not Bullish For Prices

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PEAK GOLD NOT BULLISH…

For over a year now, the South African mining industry has experienced a measurably significant decline in the amount of gold produced.  Statistics reported by South Africa last week show that the amount of gold produced by South African mines has declined for fifteen consecutive months. In December, gold output dropped thirty-one percent from the year before.

All mines, including gold, have a useful life which is determined by the ‘extraction period’ – the period of time during which recovery of the desired mineral deposit is procured. The output over time tends to grow at first, reach a peak, and then decline. 

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Gold Technical Perspective – Why So Bullish?

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Does technical analysis need to be so convoluted?  Here are a couple of definitions from different sources:

1) Convoluted: (especially of an argument, story, or sentence) extremely complex and difficult to follow. (source)

2) Convoluted sentences, explanations, arguments, etc. are unreasonably long and difficult to understand.

We are not talking about the accuracy or relevancy; or even the general length of an article centered around charts and graphs. But the convolution of most technical analysis does provoke some head scratching.
Another concern might be the nearly universal use of extrapolation. 

1) Extrapolation: the action of estimating or concluding something by assuming that existing trends will continue or a current method will remain applicable.

2) Extrapolate: to infer or estimate by extending or projecting known information. 
Judicious use of extrapolation is warranted. However, the inference of trend continuation can lead to predictions and expectations of little foundation or merit.
In this article we will look at three charts (one-year, five-year, and ten-year) of GLD, the SPDR Gold Shares ETF. (source for all charts)
In order to emphasize simplicity and consistency, I have drawn only two lines on each chart – a rising uptrend line of support; and a descending overhead line of resistance. All three charts are updated as of Friday, February 15th, 2019.
Immediately below is the first chart, a one-year history of daily GLD prices…
From this chart we can see that GLD has worked its way higher since its recent low last August. And it appears that it soon may intersect/test overhead resistance at 126. If it does break through and move higher, most observers would probably think that doing so would signal much higher prices.
That seems reasonable, but how high? And what about the downside risk? If it doesn’t break through soon, it could fall back to its rising uptrend line of support. Currently, that is a drop of about eight percent to 114.
Is there enough upside potential to offset the downside risk by an acceptable margin?
While there is nothing overtly negative in the chart pattern, there is also nothing obviously positive, either; at least to a degree that would warrant excessive bullish optimism.
So, lets look at the next chart, a five-year weekly history of prices for GLD…
On this chart we see that there is a descending line of overhead resistance dating back to at
least February 2014.  And the rising uptrend line of support dates back to December 2015.
The longer time periods in both cases are indications of strength. This means that the overhead line of resistance we talked about before will probably not be broken too easily. And maybe not right away. It has turned back at least three previous attempts in the past three years.
But it also means that the uptrend in place for the past five years cannot be taken lightly, and could provide strong support on any pullback.
So where does that leave us? Is there sufficient technical justification to support wildly bullish claims for new highs in gold prices this year? Next year?
Our final chart just below is a ten-year history of monthly prices for GLD…
From this chart we get an entirely different perspective about gold prices. The rising line of support which has been in place for three years is seen within the context of declining line of overhead resistance which goes back almost six years.
In addition, it is apparent that the two lines will soon intersect; and that the price of GLD will eventually cross at least one of those lines. But which one?
If it is the line of overhead resistance, then that would seem to indicate that recent strength in the price of GLD is the foundation for considerably higher prices.
But the risk on the downside is still significant. Possibly much more than most recognize.
It took twenty-eight years for gold to finally surpass its 1980 price peak of $850.00 per ounce. We are now in the eighth year of declining prices for gold. Can you wait twenty more years to see $1900.00 gold again?
Why so bullish?  (also see Gold Under $1000 Is A Very Real Possibility)

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!