Kelsey Williams

Gold – A Better Explanation

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GOLD – A BETTER EXPLANATION

The emotional adamancy which dominates most analysis of gold contributes to confusion and misunderstanding. For example, “Backdrop For Gold Today Is As Bullish As It Has Been In A Long Time”; or “Precious Metal Sector Is On Major Buy Signal”. These and other similar claims are often supported by reams of technical analysis – the best that money can buy.

And this is on top of general misstatements of fact. It would appear that there is virtually no justification for lower gold prices except when caused by manipulation associated with conspiratorial forces.

Otherwise world tension, terrorism, natural calamities, social unrest, economic weakness, interest rates, inflation, trade deficits, Indian jewelry demand, etc, etc. all put a ‘floor’ under the price of gold. At least this is what we are told.

And the timing: “It’s now (or never).” “Gold has finally broken through its overhead resistance.” “$2,000/oz by the end of 2017.”

Does understanding gold require a degree in cyclical theory or financial mathematics? Or is it related to climate change?

A simpler and better explanation for gold exists. It only requires a bit of historical observation.

1) First, and foremost, is the simple fact that gold is real money.

Its value (purchasing power) is constant and stable. And its role as money came about through trial and error. Gold has stood the test of time.

2) Second, paper currencies are substitutes for real money.

Gold is also original money. It was stored in warehouses and the owners were issued receipts which reflected ownership and title to the gold on deposit. The receipts were bearer instruments that were negotiable for trade and exchange.

3) Third, inflation is caused by government.

One thing that should be clear from history is that governments destroy money. That might sound harsh, but it is true.  And when we say “destroy” we mean just that. Inflation is practiced intentionally by governments and central banks. Its effects are severe and unpredictable. The Federal Reserve Bank of The United States has managed to destroy the U.S. dollar by bits and pieces over the past century. The result is a dollar that is worth 98 percent less than in 1913 when the Fed began its grand experiment.

The relationship between gold and the US dollar is similar to that between bonds and interest rates.  Bonds and interest rates move inversely.  So do gold and the U.S. dollar.

If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining.  And, conversely, if interest rates are declining, the value of your bonds is rising.  One does not ’cause’ the other.  Either result is the actual inverse of the other.

A stable, or strengthening U.S. dollar means lower gold prices. A declining U.S. dollar means higher gold prices.

In other words, higher gold prices are a direct reflection of a weakening U.S. dollar. 

And please don’t confuse the U.S. dollar with the U.S. dollar index. The U.S. dollar index(es) do not tell us anything about the price of gold.  A dollar index reflects changes in the U.S. dollar’s exchange rate versus other currencies.

Actual changes in the value of the U.S. dollar show up in the ever-increasing general level of prices for all goods and services – over time. (See A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)

The threat of world war is ominously present today. Countries and municipalities are going bankrupt. And acts of terrorism are an almost daily occurrence. This is in addition to an economy that can’t seem to improve enough or sustain an acceptable rate of growth.

So let’s buy gold, right? Maybe, maybe not. You see, gold doesn’t care about those things. It doesn’t care whether or not somebody fires a rocket armed with a nuclear warhead or the state of Illinois declares bankruptcy. And it doesn’t react to comments by Janet Yellen or Donald Trump. Indian jewelry demand is not on its radar. Nor are housing starts.

Gold responds to one thing. Changes in the U.S. dollar. Nothing else.

A continually weaker dollar over time means higher gold prices.

Periods of dollar strength are reflected in a declining gold price.

Lets talk for a moment about North Korea and the threat of war.  Its a very scary situation. But even if things get worse, it won’t have an impact on gold prices. Here’s why:

In late 1990, there was a good deal of speculation regarding the potential effects on gold of the impending Gulf War. There were some spurts upward in price and the anxiety increased as the target date for ‘action’ grew near. Almost simultaneously with the onset of bombing by US forces, gold backed off sharply, giving up its formerly accumulated price gains and actually moving lower.

Most observers describe this turnabout as somewhat of a surprise. They attribute it to the quick and decisive action of our forces and the results achieved. That is a convenient explanation but not necessarily an accurate one.

What mattered most for gold was the war’s impact on the value of the US dollar. Even a prolonged involvement would not necessarily have undermined the relative strength of the US dollar.

All of which leads us back to a simpler and better explanation:

Insofar as gold is concerned, it is all about the U.S. dollar.

 

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 And The Need To Explain Price Action

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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!

The Fed’s 2% Inflation Target Is Pointless

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FED’S 2% INFLATION TARGET

Within the Federal Reserve sometime in 1996, a discussion took place among FOMC (Federal Open Market Committee) members regarding the subject of inflation targeting. Federal Reserve District Governor (San Francisco) Janet Yellen believed that a little inflation “greases the wheels” of the labor market. Her preferred “target” was 2%. She asked Chairman (at the time) Alan Greenspan his preference.

The Chairman replied.  “I would say the number is zero, if inflation is properly measured.”

On the surface, it might seem that Chairman Greenspan is indicating that no inflation is preferable to “a little” inflation.  But that is contradictory to the actual mechanics of ongoing monetary action by the Fed since its inception in 1913.

The Federal Reserve creates inflation through ongoing expansion of the  supply of money and credit. Our fractional-reserve banking system is intrinsically inflationary – at the very least. And what did he mean by the parenthetical comment, “if inflation is properly measured”.

More likely, he was adopting the role of devil’s advocate and trying to promote further, active discussion among FOMC members. The results seem to indicate this.

In meetings the next day, Greenspan summarized the discussion: “We have now all agreed on 2 percent.” The Federal Reserve now had an internally stated, unofficial inflation target. Their own “guiding light”. But they didn’t want to talk about it publicly.  At least Greenspan didn’t.

He termed their discussion “highly confidential (in) nature” and said: “I will tell you that if the 2 percent inflation figure gets out of this room, its going to create more problems for us than I think any of you might anticipate.”

Ben Bernanke didn’t share Greenspan’s reservations.  He wanted everyone to know that the Fed’s inflation target was 2%.  But why?

One possibility is the need for justification.

Actions by the Federal Reserve are historically unclear as to logic and purpose. That allows for a modicum of privacy and the false descriptive of an independent Fed. It also suggests an aura of ‘special dispensation’ surrounding the Fed.

By late 2010, however, those notions were unravelling quickly as people wallowed in the after effects of the financial crises of 2007-08. Mr. Bernanke and his fellow practitioners of monetary medicine were seen as ineffective, at best, and appeared as if they did not know what they were doing.

Action was, in effect, demanded. And they were not afraid to pull the trigger. But they needed a clear, publicly observable target. How does anyone know you hit the target if they don’t know what you are aiming at?

Having a clearly acknowledged target changes the focus. Judgment is restricted to the new area of focus.  Did you hit the target or didn’t you?

This presumes that the target is justified, of course.  And if an inflation target is justified, why 2%?  Why not a lower number? Or any other number? In truth, it probably doesn’t make any difference.

From the Fed’s perspective, it gives them a license to openly discharge their firearms in the public square. If they miss, they can just reload and fire again.

Should they happen to hit the target, they can either maintain their current posture, or tweak it accordingly so as not to overshoot in the future.

But they will never “hit” their target.  Especially this one.  Why not?

Because it is a moving target, comprised of moving parts. And it is the result of the Fed’s own previous actions.

There is only one cause of inflation: government.  The term government also includes central banks, especially the US Federal Reserve Bank.

What most people refer to as ‘inflation’ or its causes are neither. They are the effects of inflation.   The “increase in the general level of prices for goods and services” is the result of the inflation that was already created.  …Kelsey Williams

Bernanke pushed until he got his way. A formal, precise inflation target rate of 2% was adopted at the FOMC meeting on January 24, 2012.

Five years later…

HEADLINE: The Fed’s Janet Yellen could use some target practice…

Quote: Ever since the Federal Reserve adopted an explicit inflation target of 2% in 2012, the central bank has had limited success in hitting it. Only once, in fact, in the months between April 2012 and today, did the year-over-year increase in the personal consumption expenditures (PCE) price index breach 2%. …MarketWatch/Caroline Baum 12July2017

That shouldn’t be a surprise given that it’s a moving target.  But there is more to it than that.

Right now, the inability to hit the target serves as the Fed’s perfect excuse for not acting more decisively.  This is especially true with respect to raising interest rates. In addition, Ms. Yellen is afraid to do anything. Here’s why.

The bigger risk to the economy and financial stability is another credit collapse.  And they can’t claim ignorance as they did the last time. They know its coming. They just don’t know when.

The levels of debt, the convoluted intricacies of the derivatives market, the interwoven relationships within the shadow banking system are all at hugely more precarious tipping points than ten years ago.

And it is the Fed’s own inability to hit the 2% inflation target that is warning them.

Think of all the hundreds of billions of dollars that went into saving the system from collapse before. And then force feeding the money drug into the patient for another nine years.

The problem is that all of the beneficiaries (i.e patients) of the Fed’s assistance are now hard-core addicts. If the Fed tries to raise rates they could very easily trigger another collapse much worse than before.

The Fed continues to look for the effects of all of those hundreds of billions of dollars to show up in the ‘rate’ of inflation. Supposedly that would be a sign to them of improved economic activity and growth. That isn’t happening.

The reason is because most of the ‘help’ effects showed up in ever higher prices for financial assets (stocks and bonds) and real estate.

And all of those toxic assets (CDOs of every letter and color, and various other esoteric derivatives) have swollen in price to levels far beyond any reasonable value. In addition, far too many of them are resting quietly on the Fed’s balance sheet.

The Fed has actually blown another bubble much bigger than the previous one. Nothing fundamental has changed. The only difference is that the situation is worse than before. Now, out of fear, they are trying to steer a course between action and inaction.

The action, of course, is raising interest rates and offloading their own balance sheet. But their actions could trigger events similar to 2007-08. In which case the Fed’s image would forever be tainted. (I think this is more of a concern for Janet Yellen than her fellow board members.)

The inaction – doing nothing – is pretty much where things are currently. If the Fed maintains ZIRP (zero interest rate policy), the patient could overdose and slip into a coma.

The Fed’s 2% inflation target is an attempt to predict the effects of inflation. That’s impossible. It is also unwise as it reinforces the acceptance of a “little inflation” as normal, necessary. It isn’t.

A “little inflation” is why the U.S. dollar is worth ninety-eight percent less than in 1913 when the Federal Reserve originated.

(Read more about the Federal Reserve here

 

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!

What’s Next For Gold? Its All About The U.S. Dollar

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What’s next for gold? Seems like a fairly simple question. Unfortunately, it  is nearly impossible today to get a simple answer.  That’s the problem. 

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Predicting The Price Of Gold Is A Fool’s Game

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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!

The Fed’s Dilemma – Doing The Right Thing Won’t Help Janet Yellen Or Us

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THE FED’S DILEMMA

The Federal Reserve doesn’t know what to do.  That’s too bad.  For all of us.

The bigger problem is that it probably doesn’t make much difference what they do – or don’t do. 

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Only One Fundamental For Gold

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ONLY ONE FUNDAMENTAL FOR GOLD

There have been several articles recently proclaiming and detailing the fundamentals for gold. A few of them have some excellent points. Most of them don’t. And there have been some polite discussions of applicability, meaning, and intent with regards to specific claims.

Some of the discussions involve protracted technical analysis and are quite lengthy.  And some analysts have a special formula or barometer of their own, which they use to justify their claims or indicate correlation between gold and a wide variety of unrelated items.

There are commonly accepted – sometimes erroneous – statements of fact and also convoluted explanations which are unclear and long-winded.

A bit of brevity might help. The definition of fundamental is as follows:

“a basic principle, rule, law, or the like, that serves as the groundwork of a system; essential part…”

There is only one basic fundamental that needs to be known about gold:  Gold is real money.

GOLD IS NOT AN INVESTMENT

To further clarify, this means that gold is not an investment. Nor, is it a hedge against inflation or deteriorating world conditions. It is also not insurance; or a commodity with special attraction; or a barbarous relic.

Do people view gold as an investment? Absolutely. Which is why they are continually surprised and confused at their investment results. They buy gold (invest in it) because they expect the price to go up; which is logical.

The problem is that the premise is wrong.  When someone invests in gold, they are expecting the price to go up as a result of certain factors which they believe are “drivers of gold”.  In other words, they believe that gold responds to certain factors. These factors include interest rates, social unrest, political instability, government policies/actions, a weak economy, jewelry demand, and various ratios comparing gold to any number of other things.

But, again, that assumes that gold is an investment which is affected by the various things listed. It is not.

Have you ever “invested” in money?  More specifically, when was the last time you called your financial advisor and placed an order for U.S. dollars?

Gold is quoted in U.S. dollars and the dollar is the world’s reserve currency.  The ‘price’ of gold in U.S. dollars is an inverse reflection of the value of the U.S. dollar.  The changes in price are continuous and ongoing.   Confidence (or lack of it) and expectations (realistic or not) plays a part.

There are more extreme changes for shorter periods of time which don’t correlate exactly to changes in purchasing power of the U.S. dollar.  But the most extreme changes occur after longer periods of time when the cumulative effects of inflation are recognized more fully by holders of the depreciating paper currency (i.e. U.S. dollar).  And, since paper currencies and credit can be manipulated by government, expectations and reactions become more volatile.

Without a clear understanding of the above paragraph, we will continue to see unexpected results which defy our logic if we ‘invest’ in gold as a “hedge against the chaos and resulting breakdown of society”; unless that chaos results in a significant decline and/or breakdown of the U.S. dollar itself.

VALUE OF GOLD

If gold is real money, and not an investment, then what determines its value? Its value is in its purchasing power. Gold, or any other money, is worth what we can buy with it. And gold’s designation as ‘real’ money is precisely because it is a store of value.

Gold is original money. It was money long before the U.S. dollar.  And it will still be money after the U.S. dollar meets its inevitable end.

By definition, if someone does not believe that gold is real money, then they are saying that something else is. And that is why it is difficult for most people to understand and analyze gold.

Most people tend to equate money with wealth and abundance.  This leads to placing value on things in terms of how many dollars an item is worth.  Viewed this way gold seems to hold no value unless it is continually rising in price according to our own expectations and investment logic.

When gold is viewed and treated as an investment, it complicates things.

Applying investment logic to gold leads to erroneous conclusions. Gold does not react or correlate with anything else – not interest rates, not jewelry demand, not world events.

CHANGES IN GOLD’S PRICE

Changes in gold’s price are the direct result of changes in the value of the US dollar. Nothing else matters.

Insisting that interest rates (either nominal or ‘real’) affect the price of gold is incorrect.  As far as gold is concerned, it does not matter what is happening to interest rates. It might matter to the U.S. dollar.

Whether interest rates – real or nominal – are rising or declining does not impact the price of gold. Changes in the value of the U.S. dollar do.

This is true of all the other factors which people assume have an impact on the price of gold, too.  It is the U.S. dollar – and only the U.S. dollar – that causes changes in the price of gold.

Historically, there is no period of time of any consequence in the last one hundred years, wherein the price of gold in U.S. dollars rose when the value of U.S dollar was not declining. The inverse is also true. Periods of decline in gold’s price were reflected inversely in the rising value of the U.S. dollar.

All of this is in the context of an intentional, century-long decimation of the U.S. dollar’s value by the Federal Reserve and the U.S. Government.

Inflation is caused by government.  The effects of that inflation show up gradually, generally, in the form of rising prices for goods and services.  Since the U.S. dollar is a substitute for real money (i.e. gold) it is particularly vulnerable to the effects of the government’s inflation.

The US dollar has lost more than ninety-eight percent of its value over the past one hundred years. The price of gold (real money) reflects that decline in value at $1220.00 per ounce. Otherwise, gold would still be at $20.00 per ounce (or close to it) and would be equal in value to $20.00 in U.S. currency as was the case in 1913 when the Fed “was born”.

The U.S. dollar is terminally ill.  It cannot be saved; only sustained. The Federal Reserve knows this. This is why the ‘can’ of responsibility is always kicked down the road.

(also see: History Of Gold As Money)

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 Fed And Drug Addiction – A Prediction

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THE FED AND DRUG ADDICTION

The Federal Reserve Bank was established in 1913. Its stated purpose was to control the economic cycles; more specifically to avoid panics and crashes by smoothing out the variances in the stages (prosperity, inflation, recession, depression) of the economic cycle.

The plan centered around control (expansion and contraction) of the money supply and exertion of any influence it could muster regarding direction (up, down, or stable) of interest rates.

Before going further, lets talk for just a bit about drug addiction. Without being overly technical, lets briefly and generally look at the course of addiction; other than for purely experimental reasons, or peer pressure, or social association. Most addictive habits are the result of attempts to escape, or hide, or avoid problems and concerns.

What is most important, however, is the process itself and the effects of usage; both concurrent and cumulative.

An initial ‘fix’ will likely provide temporary relief and/or even induce a state of calm or euphoria. All good so far.

After a reasonably short period of time, the effects (for the most part) seem to dissipate and the individual returns to previous reality.  And, of course, after a brief interlude, is just as aware of the issues that were of concern previously.

Soon thereafter, the next attempt at escape is pursued.  But something is different.  This time the effects experienced are not as ‘positive’ as before and don’t last quite as long.  In addition, the aftereffects resulting from the ‘come down’ are more pronounced.

The seemingly logical next step for most users is to up the dosage; which is done. And the effects are more positive and might even last as long as the first time. But the aftereffects are worse.

The Federal Reserve has proclaimed their intention to manage the economic cycles. And, yes, they do believe they can. At least they say they can. And they have said that for decades. But, unfortunately, for them and  for us, they have not been able to do so and cannot do so. Not that they will admit that.

The Fed’s efforts at controlling the money supply are attempted in expectation of minimizing the effects of recession, maintaining financial and economic stability, promoting prosperity, and avoiding calamities like the Depression of the thirties.  Certainly those are commendable objectives. But are they even possible?

Likely not. And their track record thus far indicates more harm than good has come from their efforts.

The Fed has the tools to expand and contract the money supply. But on a continuous basis, and ongoing for over one hundred years, the focus is on expansion. And the net result of their cumulative expansionary efforts is a ninety-eight percent decline in the value of the U.S. dollar.

That is the price we have paid for hoping and believing that a small group of individuals can “manage the economic cycles” and avoid temporary and  short-term pain associated with the changes in the cycle.

As addiction to drugs becomes more intense, and the dosage and frequency increase, so do the cumulative negative effects. An individual who is habitually addicted starts to notice a breakdown in organs and systems within the body. And each succeeding fix or dosage supplies less and less of the intended effects; and doesn’t last as long.

As the reality of the addiction sets in, and all along the way, half-hearted attempts are made at kicking the habit. Get off the drugs and get better.  But in most cases, the shorter, temporary illusion of something better or something not as bad prevails. And so the destructive behavior continues.  But the withdrawal symptoms are worsening. Hence, any abstention is brief.

By now, death may very well be apparent. Continued usage will kill the patient. But the effects of withdrawal, by necessity, might pose just as great a risk. In other words, it just might be too late to do anything of lasting, positive, consequence. Damned if you do, and damned if you don’t.

What we refer to as ‘inflation’ are really the effects of inflation that has already been created by the Fed.  The continued, ever-increasing expansion of money and credit destroys the value of existing money. Over time, as the existing money loses its value/purchasing power, the effects show up generally in the form of rising prices.

This is why it costs more today to buy life’s necessities (and luxuries) than it did ten years ago; or twenty years ago, etc. On a year-to-year basis it is usually not too noticeable. But sometimes the symptoms are exacerbated such as in the seventies.

The long-term results of reliance on the Fed’s infusions of money and credit have brought us to a similar juncture as that mentioned above in the drug addiction scenario.

As we become more dependent on the inflation to keep things going, the effects of each successive expansionary effort have less impact. And we become more vulnerable in two ways.

The first is an overdose. Too much money, too quickly, leads to complete destruction and repudiation – death – of the currency. The runaway or hyper-inflation in Germany in the 1920s is a defining example.

The second is a credit collapse. Not enough money at the right time and the patient slips into withdrawal. And the effects of withdrawal – monetarily speaking – could be so bad as to usher in true deflation and a full-scale depression.

Just as a drug addict must endure pain and discomfort in order to cleanse himself, so must it be with our monetary system. It is not the individual, per se, or the system that are at fault. The dilemma results from the  cumulative effects of repeated bad choices over long periods of time.

In 2008-09 our economy bordered on the verge of collapse. Think of the drug addict who has slipped into withdrawal and the accompanying symptoms have become almost unbearable.

Doing the right thing would have required enduring the pain while setting things straight. In order to effectively cure the patient, this means implementing sound monetary policy; admitting the failure of policies and actions that had been pursued for the past century; and resisting the temptation to avoid the necessary pain by relapsing into previous bad habits.

Unfortunately, the Federal Reserve chose to ramp up the dosage and increase the frequency.

The patient (U.S. dollar) has stabilized and is currently in recovery – temporarily. But full recovery is only possible if a purging and cleansing occurs. That won’t happen voluntarily; by the Fed, the U.S. Government, or by U.S. citizens.

The path chosen is one of managing the illness. The addict who wishes to avoid withdrawal and its often excruciating symptoms does something similar. Temporary comfort and illusion provided by regular doses of the drug – in this case, money – masks the pain and avoids the reality of the existing condition. And it leads eventually to death and destruction.

You cannot get better by killing yourself slowly, a little bit at a time.

What’s worse, however, is the increased likelihood that the entire system will collapse under its own weight, no matter how hard someone tries to avoid the inevitable consequences.

That is where the Federal Reserve (and U.S. Government) are today. It is exactly as we said earlier in referring to the addict who has passed the point of behavior modification and common sense having the desired effect.  Too much damage has been done. Damned if you do, damned if you don’t.

Something similar to 2008-09 is going to occur again. Only it will be much worse. And regardless of the traditional, reactionary talk and efforts to save us, the system will likely not withstand the “symptoms of withdrawal”.

Learn to enjoy things now; as they are currently. It probably won’t get much better than this.

(more about The Federal Reserve: A Game Of Chess And The Source Of The Federal Reserve’s Power)

 

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-Silver Ratio: Debunking The Myth

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A 16-to-1 gold to silver ratio has been the Holy Grail of some silver investors since the mid-sixties.

Unfortunately, fifty years later, it is a quest that continues unabated without success.

In fact, there is evidence that contradicts and widens the chasm that separates wishful thinking from reality. 

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Gold Vs. Gold Stocks – Just The Facts, Ma’am

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GOLD VS. GOLD STOCKS

“…but what I do know is the people running the company are practically married to their shareholders and investors, like you.”

That’s good to know.  After two decades of sharing their bed(s) with investors “like you” since the honeymoon period and birth of gold’s bull market in 1999/2000, the management of this particular gold mining company is still committed.  And, presumably, other companies’ managements are similarly committed. Are you? 

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