Kelsey Williams

More Retailers Announce Price Cuts; Economy Weakens Further

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MORE RETAILERS ANNOUNCE PRICE CUTS

Walgreens (WBA) has joined the growing list of retailers that have announced sweeping price cuts for their products. The list also includes Walmart, Target, Amazon, etc. All of them cite the need to increase customers traffic. Presumably the increase in traffic will also increase sales and translate to higher profits. Let’s hope so. The attitude of current shoppers is almost defensive in nature. Impulse shopping has been replaced by planned shopping for specific items and includes conscious price comparisons with competing vendors and online searches.

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Gold Has Done Its Job – Isn’t That Enough?

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GOLD HAS DONE ITS JOB

For most of us who understand what gold is (and, what it isn’t), gold continues to perform as reasonably expected. Rather, its price continues to reflect the ongoing loss of purchasing power in the U.S. dollar. Gold, itself, isn’t doing anything at all. (see Not About Gold; All About The Dollar)

Short term nominal profits notwithstanding, gold’s value is the same as it is always. Gold is real money and its value is in its use as money. Gold is a medium of exchange, a measure of value, and a long-term store of value.

There has been no decoupling or modification of any link between the gold price in dollars and the value of the U.S. dollar. Part of the confusion about the link between the U.S. dollar and the gold price results from the tendency of analysts and others to cite current strength in the U.S. dollar index.U.S. DOLLAR INDEX 

“The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies. The Index goes up when the U.S. dollar gains “strength” (value) when compared to other currencies.”  (Wikipedia) 

The “basket of foreign currencies” includes the Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona, Swiss franc. Nowhere is there any reference to gold. The only thing the U.S. Dollar Index tells us is how the U.S. dollar compares to a select group of other currencies. The U.S. dollar index tells us nothing about gold.

It is also a fact that the U.S. Dollar Index doesn’t provide any measurement of the dollar’s value on an absolute basis, but only on a relative basis. Any or all of the various currencies can be gaining or losing value (purchasing power) at any particular time. All that is indicated by changes in the index is how well the dollar is faring on foreign exchange markets against the group/basket of other currencies which comprise the index.

A CENTURY OF INFLATION  

Before the inception of the Federal Reserve in 1913, and for a couple of decades afterwards, gold and the U.S. dollar both circulated as money mediums on a convertible, fixed-exchange rate basis. Both gold and paper dollars were used interchangeably at a fixed rate of $20.67 to one ounce of gold.

Whereas, inflation previously was the domain of governments, the practice of money creation and inflation was eventually granted to central banks. Acting in its authorized capacity, the Federal Reserve embraced its role in assertive fashion and has become the leading exporter of inflation on a worldwide basis.

After more than a century of continuous, intentional inflation (expansion of the supply of money and credit), the U.S. dollar has lost more than ninety-nine percent of it purchasing power. That actual loss of purchasing power in the U.S. dollar is reflected in a gold price which is more than one hundred times higher than its $20.67 oz price when gold and the dollar were interchangeable and convertible. 

The loss of purchasing power in the U.S. dollar shows up in higher prices for the goods and services we buy. Those higher prices are NOT inflation. The higher prices are the effects of inflation; inflation which was previously created by the Federal Reserve. (see Gold, Inflation, And The Federal Reserve)

KEY TO THE GOLD PRICE 

The effects of inflation are the key to the gold price. Specifically, the ongoing higher price for gold reflects the actual loss of purchasing power in the U.S. dollar that has already occurred as a result of the inflation created by the Federal Reserve.

For example, in January 1980 the average closing price for gold was $677 oz., which is representative of a ninety-seven percent loss of U.S. dollar purchasing power. The average closing price for gold in August 2011 was $1825 oz. By then, the additional effects of inflation after 1980 had brought the dollar’s cumulative loss of purchasing power to almost ninety-nine percent. Nine years later, in August 2020, a nearly-full ninety-nine percent loss of purchasing power resulted in a gold price of $1970 (monthly average closing price). As of the end of April, 2024, additional effects of inflation resulted in a gold price of $2285 oz.

Here is what all of this looks like on a chart (source)…

Gold Prices – 100 Year Historical Chart

The chart above shows an ever higher gold price as the ongoing effects of inflation progressively manifest themselves in a U.S. dollar that continues to lose purchasing power. The chart below shows the same action with the gold prices adjusted for the effects of inflation…

Gold Prices (inflation-adjusted) – 100 Year Historical Chart

As can be seen on the second chart, the higher gold price over time, no matter how extreme it seems in the short term, nor how high it goes, is simply a reflection of the long-term effects of prior inflation. The higher gold prices come after the effects of inflation have shown themselves in the form of the U.S. dollar’s actual loss of purchasing power, i.e., higher prices for goods and services.

Also, on the second chart, what shows up as new, ever higher, nominal prices for gold, are not new highs at all after allowing for the effects of inflation.

A very important point of note is that a higher gold price reflecting the dollar’s loss of purchasing power comes only in hindsight – after the fact. Also important is the fact that the effects of inflation are delayed and unpredictable. Until the effects of inflation show up and are absorbed into the economy, there is no reason to expect a new, higher gold price.

LATEST PRICE ACTION FOR GOLD – CONCLUSION

What most investors refer to as a new high in the gold price is a reaction to the effects of inflation that have occurred since August 2020 when gold was priced at $1970 oz. A new nominal high, yes; but, after allowing for the effects of inflation, the gold price has not exceeded its previous peaks in 2020, 2011, and 1980 (see the second chart above for verification).

There is no historical precedent for any expectations that gold will ever exceed its inflation-adjusted price level. This means that the gold price is probably at or near its peak nominal price for now. Only after further clear losses of purchasing power in the U.S. dollar can a higher nominal price for gold be expected. (also see Viewing Gold In Its Proper Context and Understanding Profit Potential In 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!

Thoughts About Target, Retail Sales, And The Economy

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THOUGHTS ABOUT TARGET

MINNEAPOLIS, May 20, 2024 /PRNewswire/ — Target Corporation (NYSE: TGT) announced today it will lower everyday regular prices on approximately 5,000 frequently shopped items…

When I saw Target’s announcement (above) concerning merchandise price cuts, I had several questions.  First, I wondered whether this was something peculiar to Target, or something indicative of bigger problems for the retail industry. But, that was not what concerned me the most. A more important question is whether Target’s woes are symptomatic of a fundamentally weak economy.

My own impressions of Target from a consumer’s perspective is that it is a fairly popular brick and mortar store with a variety of products which are moderately priced. I am not impressed with the grocery department and I don’t shop there for groceries. Otherwise, I find myself stopping by for a specific item or two from time-to-time. Given that I think most others who shop there find more to their liking and do so more often, I also wondered “Why is Target experiencing this problem?”

Apparently, Target’s prices are not as “consumer friendly” as I had assumed. In fact, my wife, who works in Campus Recreation Department for Utah Tech University, related a story concerning the purchase of some needed supplies. The supplies are normally ordered online via another source. The words used were “expensive” and “over-priced.”

Target’s own announcement and articles about it are universal in their indication that the purpose of the price(s) reduction is to attract customer traffic and increase sales. Recognition is given to inflation and the toll that higher prices have extracted on consumers.

Is it Target’s niche market that is suffering more from the effects of inflation? Or, is this something that is happening to others in the retail industry or throughout the economy? For example, can we expect a similar announcement from Walmart in the future?

Some additional questions: 1) Will this round of price cuts for Target be enough to draw sufficient traffic into the stores? 2) Will additional traffic translate into higher sales volume AND net profits for Target?

Normally, the higher consumer prices associated with inflation help compensate the retailer for their own higher costs to bring goods to the marketplace. It seems logical then, that if those higher prices are necessary to cover costs, and that customer traffic is declining; then, how can price reductions, even if they accomplish the primary purpose (to attract customer traffic), make up for the absorption of higher costs by the retailer? A smaller profit margin will require a lot more sales revenue to maintain profitability.

This begs the question, “Is one round of price cuts enough?” Further price reductions can only be undertaken if the profit margin is large enough to accommodate them. Otherwise, the purpose changes to just an attempt to accelerate cash flow, albeit temporarily.

If Target’s problems are not unique, then the entire retail industry might be in trouble. Depending on how widespread and how deep the issues are, then the indications for the economy as a whole are ominous.

Below is a chart of retail sales…

Real (inflation-adjusted) Retail Sales Historical Chart

As can be seen in the chart above, real (inflation-adjusted) retail sales peaked three years ago, in April 2021. The decline since then has been somewhat volatile, but a bigger concern would be the possibility of a slowing economy which leads to further significant declines. What we experienced in 2020 could be a precursor to something similar. This time, though, it could be worse and last longer.

CONCLUSION 

Investors should exercise caution regarding the stocks of Target and other retailers. As far as Target is concerned, their problems seem to be broader than just that which might be inferred by their own pricing structure complications. In other words, the problems are bigger than just competitive pricing. Consumers can enjoy the lower prices at Target for now, but there may be similar announcements and actions from other retailers soon. Target’s announcement and others that may follow are more likely indicative of broadly slowing economic activity that could worsen further before relief can be expected.

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!

The Amazing Collapse Of Silver Coin Premiums

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SILVER COIN PREMIUM COLLAPSE

As starry-eyed investors bask in the glory of a silver price which penetrated $30 oz. on Friday, it seems like a good time to review what has happened to the premiums attached to silver coins. I have written several articles about silver coin premiums over the past four years. I will refer to them periodically throughout this article. Most of my analysis and comments pertain to U.S. Silver Eagles and U.S. junk silver coins.

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Spending Is Not Inflationary; Inflation Is Not Transitory

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IS GOVERNMENT SPENDING INFLATIONARY?

When the terms ‘spending’ and ‘inflation’, are used in the same sentence, it is usually in reference to government spending habits. For example, Congress recently approved massive, additional amounts of financial aid for Ukraine and Israel. Thus, we might say that “government spending is inflationary”.

President Biden’s ongoing attempts to cancel student loans have been labeled as reckless and inflationary. The support payments and financial aid programs associated with Covid economic shutdown were termed “highly inflationary”.

Lack of fiscal restraint on the part of government can be harmful, damaging, and demoralizing. In some cases, it is downright deplorable. Lack of fiscal restraint can lead to bankruptcy and loss of confidence.

The spending, however (even deficit spending), is not inflationary; nor, are accelerating wage demands and higher prices for consumer goods and services, higher housing costs, etc. Excessive government spending and the higher cost of living are not inflationary; they are the effects of inflation.

INFLATION, GOVERNMENT, AND CENTRAL BANKS

Inflation is a creation of government. All governments intentionally create inflation to foster and support their own spending habits. Governments create inflation by expanding the supply of money and credit. The ongoing inflation of the money supply leads to a loss of purchasing power in all the money in circulation. The loss of purchasing power shows up in the form of higher prices for goods and services. The higher prices are incorrectly referred to as inflation, but they are NOT inflation. The higher prices for goods and services that result from the loss of purchasing power are the effects of inflation.

Today, the role of government in the creation of inflation has been replaced by central banks. The United States Federal Reserve has been creating inflation since its inception in 1913. It efforts have resulted in a dollar that is worth one penny compared to the dollar of a century ago.

Nearly all of the things we commonly refer to today as inflation are not inflation at all. They are the effects of inflation that has already been created by the Federal Reserve via expansion of the supply of money and credit. Without this inflation the government would not be able to spend the multiple trillions of dollars it does to support its egregious spending habit.

INFLATION IS NOT TRANSITORY

Treasury Secretary Janet Yellen and Fed Chair Jerome Powell have received blowback from their comments a few years ago regarding inflation being transitory. When inflation is defined correctly as “the expansion of the supply of money and credit by governments and central banks”, then it is clear that inflation is not transitory. That is because inflation is an intentional, continuous, and ongoing practice of all governments and central banks. In other words, inflation never stops; so it cannot be transitory.

When Ms. Yellen and Mr. Powell made their comments, the term “inflation” was used to describe the surge of higher prices that happened post-Covid economic shutdown. A significant portion of those higher prices resulted from supply chain disruptions which have nothing to do with inflation. The portion of higher prices for goods and services attributable to supply chain disruptions would have occurred with or without the effects of inflation. Since supply chain disruptions are temporary, their effects (shortages, higher prices,  etc.) are also temporary; or, in this case, transitory.

It is my opinion that both Powell and Yellen were thinking about supply chain issues when the comments were made. If that is the case, then their comments were not entirely incorrect. There are two problems with that interpretation, though.

The first problem concerns the ratio of how much of the increase in prices is allocated to the effects of inflation and how much is the result of supply chain problems. I think it is reasonable that the subsequent decline in the rate of increasingly higher prices is due to lesser stress from supply chain bottlenecks and the delayed startup in economic activity.

The second problem has to do with accuracy/timing. How much of an impact on prices for goods and services can be expected from any known increase in the money supply? Even given the temporary nature of supply chain disruptions, how long will resolution take and how long before more positive effects of increasing economic activity materialize?

CONCLUSION 

Governments and central banks create inflation intentionally and continuously. The effects of that inflation result in a loss of purchasing power of all the money in circulation. The loss of purchasing power shows up in the form of higher prices for goods and services.

The effects of inflation are unpredictable in timing (usually delayed) and magnitude. The Federal Reserve is engaged in a battle to contain the negative effects of the inflation which they created. Egregious government spending is enabled by the inflation (increase in the supply of money and credit) that is created by the Federal Reserve. The spending, itself, for all of its negativity, is not inflationary. The inflation is not transitory because it never stops.

(also see Investors Re: Rate Cuts – “So You’re Telling Me There’s A Chance”)

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!

Investors Re: Rate Cuts – “So You’re Telling Me There’s A Chance”

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INVESTORS AND RATE CUTS

When it comes to cuts in interest rates, investors stubbornly cling to the notion that “no” means “yes”. In the movie, Dumb And Dumber, Lloyd Christmas (Jim Carrey) asks the lovely lady he is pursuing what the odds are that the two of them might get together; and, makes a point of telling her to “give it to me straight”. She replies “not good”. She further clarifies that the actual odds are “more like one in a million”. Not to be deterred, Carrey, in character, replies “So you’re telling me there’s a chance”. Here is the clip https://www.youtube.com/shorts/cbrTKw50X6U

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Gold, Oil, Wheat, & Stocks Since 2020

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GOLD, OIL, WHEAT, STOCKS 

Financially speaking, the markets have been all over the map in the past four years since the onset of Covid and the self-inflicted wounds from forced economic shutdown. I went back to August 2020, five months after the festivities began,  and pulled up some charts which show the price action since then for gold (money), wheat (food), crude oil (energy), and stocks (S&P 500). I will make some comments after each chart and provide observations at the end of the article. We’ll start with gold…

Gold Prices (August 2020-April 2024)

Peak prices for gold reached in August 2020 at or near $2000 oz. were not exceeded until late last year, more than three years later. Currently, gold is up about eighteen percent from its average closing price ($1971) in August 2020. At one point, in October 2022, the gold price was down by a similar amount and percentage.

Oil Prices (August 2020-April 2024)

Since August 2020, the price for a barrel of crude oil has risen sharply from $51 to a current price of $83; an increase of sixty-two percent. Almost two years ago, though, the price was at $114. There has been a decline of twenty-seven percent since then.

Wheat Prices (August 2020-April 2024)

The price of wheat soared from $5 per bushel to $12 (up 140%) in barely a year and one-half; then collapsed by almost sixty percent. Currently, at about $6 per bushel, wheat is up twenty percent since August 2020.

S&P 500 Index (August 2020-April 2024)

The S&P 500 stock index has risen by forty-four percent, increasing from 3500 to 5048.  At one point in 2022, stocks had dropped one-third in price almost wiping out previous gains after August 2020. The relentless move higher afterward is quite impressive, regardless of fundamentals or logic to the contrary.

THOUGHTS AND OBSERVATIONS 

By late 2020, most markets had risen quite assertively from their Covid-induced lows. There was no let-up in sight, though. Oil, wheat, and stocks continued their runs upward without hesitation. Gold refused to join the party and the others soon topped out and followed suit with all of them dropping for most of 2022 as higher interest rates took their toll on the markets.

Beginning in late 2022, rumors, hints, and speculation about the possibility of a Fed pivot sent stocks and gold higher. Wheat and oil prices continued lower for the time being.

At this point, wheat is the biggest loser, down fifty percent from its peak in February 2022, net of its recent rebound from the $5 level. That seems somewhat surprising. The effects of inflation have shown up in higher prices for goods and services, especially food and groceries. It seems reasonable that a healthy portion of the earlier wheat price increase was attributable to the effects of inflation. Supply chain disruptions likely accounted for much of the balance. So, why the sharp reversal and decline in the wheat price afterward? I don’t see evidence that food prices are coming down. Are wheat speculators deflationists?

The descent in oil prices was arrested last October when Palestinian militants attacked southern Israel from the Gaza Strip. Iran has shown its cards, too. As long as tensions remain high in the Mid-East, oil prices will be more vulnerable to upside shocks. But the downside could be just as shocking, depending on the circumstances. We saw an example of that with the economic shutdown during Covid. Without further escalation of fighting which could disrupt oil supplies and deliveries, might oil prices be much lower right now, along with wheat prices?

The rising cost of money (higher interest rates) has had observably negative effects on the financial markets. Higher prices for stocks seem more anticipatory of the beneficial effects of lower interest rates if/when they happen. It doesn’t  seem reasonable that stock prices could keep making all-time highs while bond prices flirt with twenty-year lows and have been decimated by higher interest rates. The booze isn’t as cheap as before, but it is still available for now, apparently.  That could change quickly. If it does, stock prices could drop faster and farther than bonds, or, anything else.

Gold has been the least volatile of the group. The increase in the gold price of eighteen percent doesn’t seem to warrant the enthusiasm that it is being accorded. Rather than cause for celebration, it is a merely a reflection of the most recent effects of inflation – the loss of purchasing power in the U.S. dollar that has occurred over the past four years. At $2338 oz. today, gold is still cheaper than its August 2020 inflation-adjusted price of $2375 ($1971). Gold’s price action is supportive evidence of its role as a long-term store of value.

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!

Gold Stocks vs Gold – Choose Gold

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GOLD STOCKS VS. GOLD

The long-term underperformance of gold stocks compared to gold itself is clear and indisputable. A matter of remaining contention is whether or not beleaguered investors in the not-so-shiny metal stocks will ever recover from more than twenty years of disappointing and largely negative results. It isn’t just the poor relative performance, though; holding gold mining stocks has been a losing proposition in its own right.

Below is a chart which shows the relationship of the HUI (NYSE Gold Stock Index) relative to the price of gold…

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I Bought A Stock (AU) At 20; Now It’s 23 – Am I Rich?

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I BOUGHT A STOCK (AU) AT 20…

…Now, it’s 23. I must be rich. That sounds ridiculous and it is. But, that is how some gold bulls sound when talking about “new highs” for the yellow metal. At least one analyst mentioned the “four year wait” for gold’s breakout, so let’s go back to 2020. More precisely, August of 2020. If anyone had bought a stock which was predicted to “break 20 and go straight to 30” would it have generated the same excitement that predictions for gold to go from $2000 to $3000 did? Not likely; but that did not stop the torrent of predictions and hyped expectations for the rocket launch that some expected. Calls for $5000, $10,000, and higher stoked the fever and emotions of anxious investors.  Alas, we all had to wait for almost four years. Now, those same anxious investors are hoping the rocket launch hasn’t aborted – again.

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Chair Powell’s Speech Re: Fed Independence

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In Fed Chair Powell’s speech this past Wednesday, he spoke about Fed monetary policy and also talked about the role of the Federal Reserve. In addition, he referred directly to the matter of the Fed’s independence and the necessity of maintaining that independence. In effect, he warned Congress about efforts to involve the Fed politically or to attempt modification of the independent monetary policy role of the Fed.

Below are selected excerpts from the speech which are followed in turn by my comments…

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