"Everything you need to know about gold"
Kelsey Williams GOLD AND UNREALISTIC EXPECTATIONS
Gold has been characterized as insurance, a hedge against inflation/social unrest/instability, or, more simply, just a commodity. But it is treated most of the time, by most people, as an investment.
This is true even by those who are more negative in their attitude towards gold. “Stocks are a better investment.” In most cases, the logic used and the performance results justify the statement. But the premise is wrong.
GOLD AND MANSA MUSA
From Wikipedia…
Musa Keita I (c. 1280 – c. 1337) was the tenth Mansa, which translates as “sultan” (king) or “emperor”, of the wealthy West African Mali Empire.
During his reign Mali may have been the largest producer of gold in the world at a point of exceptional demand. One of the richest people in history, he is known to have been enormously wealthy; reported as being inconceivably rich by contemporaries, “There’s really no way to put an accurate number on his wealth” (Davidson 2015).
GOLD IS STILL ABOUT US DOLLAR PART II
In my original article I made the following statements:
“It means that holders of any non-USD currency who want to exchange it for gold, must first exchange it for US dollars and then exchange the US dollars for gold.
When anyone is selling gold, the proceeds are always paid in US dollars. The dollars can be held as such, or they can be exchanged for other currency.”
Another professional labeled the above statements as “fiction”.
I do not agree. But I do see the possibility for others to infer something other than what was intended. Therefore, I apologize. And I have replaced the statements in question with the following:
GOLD IS STILL ABOUT THE US DOLLAR
The US dollar is the world’s reserve currency. And that isn’t likely to change in any radical way, anytime soon. Unless there is some kind of calamitous implosion of the dollar. I am talking about outright rejection and repudiation. And that could happen. The problem is that there isn’t another currency that could likely take its place. By the time that possibility becomes a reality, any possible candidates would likely be in worse shape. This includes the Euro and Chinese Yuan.
All currencies are substitutes for real money, i.e. gold. And because all governments inflate and destroy their own currencies, the possibility of gold reasserting itself as the international medium of exchange increases considerably under the aforementioned conditions.
But, a lot of bad stuff has to happen before we get to that point. And governments around the world have too much at stake to capitulate when it comes to ceasing to issue ‘funny money’.
So, for the time being, lets focus on things as they are. Which leads us back to the title of this article.
Gold is priced in US dollars and trades in gold are settled in US dollars because of the hegemony of the dollar and its role as the world’s reserve currency. But what does that mean to others around the world? For example, those who live and work in Germany (euro), Japan (yen), China (Yuan)?
When someone in Switzerland, for example, exchanges Swiss Francs for gold, they are quoted a price in Swiss Francs. That seems pretty straight-forward. But how is the price for gold in Swiss Francs calculated when the international market for gold is priced in US dollars?
The amount that someone pays in Swiss Francs (or any other non-USD currency) is determined by calculating the exchange rate between the US dollar and the specific non-USD currency involved. Based on that calculation, it is then known how many Swiss Francs are needed to equal the transaction amount in US dollars.
What is particularly important here isn’t necessarily obvious. But it is a critical factor when assessing a transaction of this nature. And here is why.
On December 31, 2013, gold traded at $1210 per ounce. And on that day one euro could be exchanged for 1.3776 USD. Hence, 842 euros ($1210 USD divided by 1.3776 = 842) could be exchanged for $1210 USD which could then subsequently be exchanged for one ounce of gold.
Nine months later, on September 30, 2014, gold again traded at $1210 per ounce. But the exchange rate for one euro was 1.2629 USD. Even though the gold price in US dollars was unchanged, the cost for an ounce of gold in euros had increased nine percent to 958 ($1210 divided by 1.2629 = 958). To be technically correct, the cost of US dollars had increased for holders of euros.
On May 31, 2016, twenty months later, gold was again trading at $1210 per ounce. The euro had weakened further relative to the US dollar and the exchange rate for one euro was 1.1131 USD. Using the same math as before, the cost for $1210 US dollars had again increased, this time by an additional thirteen percent to 1087 euros.
Over the entire two and one-half year period (twenty-nine months in all) the cost to acquire gold for holders of euros had increased by twenty-four percent. And yet, gold itself, priced in US dollars was the same.
There are several things we can learn from this.
For one thing, there is always a demand for US dollars since they are needed for use in international trade (oil transactions are priced in US dollars, too).
For another, the potential for changes in exchange rates of any other currencies relative to the US dollar must be considered for these transactions.
The possible combinations are numerous and always different. An increase in the value of the euro relative to the US dollar in the examples above would have given us results opposite to those which actually occurred. And, of course, every currency other than the US dollar would show different results based on their changes in value relative to the US dollar.
Currency exchange rates are continuously changing and so is the US dollar price of gold. It is possible to have an increasing US dollar price for gold and, simultaneously, a stronger US dollar relative to another currency. This results in a ‘double whammy’ to the holder of a non-USD currency – unless you already own the gold.
In our examples earlier, the US dollar price of gold could actually have declined for the periods indicated and still resulted in a higher cost for holders of euros.
The US dollar price of gold does not tell us “what gold is doing”. It tells us what the US dollar is doing. Or rather, what people think is happening to the US dollar.
But what people think is happening changes all the time. Also, the information we are ‘fed’ by the Fed is suspect and inaccurate. Hence, changes in the US dollar relative to gold are ongoing and can be quite volatile. Over time, however, the gold price in US dollars is a reasonably accurate reflection of the value of the US dollar.
The US dollar price of gold does not tell us anything about other countries and their currencies. To know that we must look at exchange rates of those currencies relative to the US dollar.
Let’s be clear about something. The ‘value’ of gold does not change. It is original money and its value is constant and stable. And has been for several millenniums.
The value of the US dollar, however, changes all the time. This is precisely because the supply of dollars is manipulated by the Federal Reserve via the ongoing expansion and contraction of the supply of money and credit. Mostly expansion.
For an historical, real-life example of value and purchasing power as they relate to gold and the US dollar, see my article A Loaf Of Bread, A Gallon Of Gas, An Ounce 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!
SOURCE OF THE FED’S POWER
We have become pawns in the game of Chess being played by the Federal Reserve Bank. Who is their opponent? Anybody else who makes a move.
We have become pawns in the game of Chess being played by the Federal Reserve Bank. Who is their opponent? Anybody else who makes a move.
Week in, week out, everyone’s eyes and ears seem fixed on what the Federal Reserve Board will say or do. Mostly, it is about what they say. That’s because they can’t really do much of anything.
Except inflate the supply of money and credit. Which they have been doing for over one hundred years. And they are good at it, too. The historic erosion in value of the US dollar should merit more acclaim – or outrage. Unfortunately, the Fed is good at shifting the focus of concern to their opponent(s).
In their various statements, members of the Federal Reserve Bank often refer to their policies, decisions, and efforts in ways that make them sound sincere about their attempt to “manage the economy”. And, admittedly, they are sincere in that attempt. The trouble is, it is an impossible task.
The US Federal Reserve has led us down a primrose path by virtue of their self-proclaimed intention to manage and modify the stages of the economic cycle (prosperity, inflation, recession, depression).
Federal Reserve Bank policies are a repudiation of fundamental economic principles. The consequences of those policies and actions are evident in the historical results and the final resolution will be ugly.
On the face of it, that should be enough to discourage anyone from taking upon themselves such a hopeless task. But the problem is much worse than that. The inflation created by the Federal Reserve is intentional. And their efforts have brought about a ninety-eight percent decline in the value of our money.
The cumulative effects of their ‘success’ have made their job even more difficult. Now their efforts are almost solely focused on containing the effects of their own inflation. The stages of the economic cycle mentioned above are skewed in ways which alter their duration and hugely increase their volatility.
So why does the Fed do the things they do? For that matter, why does the Federal Reserve Bank even exist?
From my article, The Federal Reserve And Interest Rates – Definitely Not What You Think:
In addition, the Federal Reserve Bank is also charged with ensuring the financial operation of the US Government. Or, in other words, maintaining their (the US Government’s) ability to borrow money by issuing more and more debt in the form of Treasury securities. In my opinion, this is the sole and overriding purpose behind the existence of the Federal Reserve. And it drives every decision they make. It is not about the economic effects of their policies on US citizens (individually or collectively). It is ALL ABOUT KEEPING THE US GOVERNMENT SOLVENT. The US Government is not solvent, of course, but maintaining and reinforcing the confidence in their financial viability is absolutely essential. And nothing else takes precedence.
Alan Greenspan was noted for his verbiage. Other Federal Reserve Board chairs and members make frequent comments about various things related to the economy and financial matters. And the official reports and statements given for public consumption are usually crammed with facts and figures deemed to be part of a credible basis for the decisions and actions taken.
But, whereas there is a great deal of information related, you won’t hear anything referring to the above reason for the existence of the US Federal Reserve Bank.
The responsibility of “keeping the US Government solvent” may sound ‘laudable’ to some. I certainly would prefer that the US Government be able to return to solvency and maintain it. But something seems amiss.
It isn’t so much about keeping the government solvent as it is facilitating the government’s ability to borrow more and more money. This is done by issuing more and more Treasury bills, notes, and bonds. When the US Government needs money, the Federal Reserve creates deposits of Treasury securities in the accounts of certain ‘primary’ banks/dealers. Those institutions are then responsible for placing the securities with numerous other dealers and so on, down the line.
The largest amounts are sold to foreign governments and (very) large investors. Some are held by dealers as part of their investment inventory and some by banks who hold them as part of their reserves. The proceeds of those placements, of course, flow back to the US Treasury.
Acting for and in behalf of the US Government in the placement of US Treasury securities is the primary role of the Federal Reserve Bank. And it is the source of their power.
Buying from and selling to certain primary dealers in Treasury securities is an ongoing function of the Fed. It is done for the purpose of expanding and contracting the supply of money and credit already in the system. Which is an active way for the Fed to execute their mandate to “manage the economic cycles” and ‘hopefully’ ensure that economic conditions and operation of the financial system allow for continued issuance of more and more debt by the US Government (i.e., more U.S. Treasury Bonds).
This has supposedly worked reasonably well for several decades. But since the supply of money and credit is always expanding, the value (purchasing power) of the US dollar continues to suffer. Which is precisely why “a dollar today doesn’t buy what it used to” or “doesn’t go as far”.
And therein lies the rub. Confidence in the dollar is critical to the US Government. If that confidence is not sustained, then all bets are off.
The US Government must be able to sell enough Treasury securities. Otherwise, they will not have enough money to operate. If they don’t have the money to operate, they lose control – and power. And they will do whatever they can to avoid that outcome.
Any policy or ‘action’ by the Fed is always taken with this objective in mind: Maintain the viability of the market for US Treasury Securities. This enables the ongoing operation and function of the US Government.
As long as people continue to “look to the Fed” for direction, then they are demonstrating a degree of confidence that keeps things from unraveling. And it helps the Fed maintain a semblance of status quo. Which in turn benefits the US Government.
The Fed’s power lies in their manipulation and ongoing expansion of the supply of money and credit.
Unfortunately, expecting, wishing, and hoping that an isolated few individuals can control, avert, or stop the economic consequences that have been brought to bear on their own citizens and the rest of the world is a pipe dream.
Sooner or later, the dam will burst.
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!
INFLATION – WHAT IT IS
Inflation is the debasement of money by the government. Period.
It is not an increase in the general level of prices for goods and services.
The above statements are critical to an understanding and correct interpretation of events which are happening today – or expected to happen – that are casually attributable to inflation. So, let’s go one step further.
There is only one cause of inflation: government. The term government also includes central banks, especially the US Federal Reserve Bank.
Inflation is not caused by “greedy” businesses, excessive wage demands, or accelerated consumer spending. Even government’s own propensity to spend, as reckless as it is, does not cause inflation. And that does not contradict my earlier statement that government is the only cause of inflation. They are. But not because of their spending habits.
Economic growth does not lead to higher inflation. There are statements made often that imply a link between growth in our economy and inflation. And that we have to “manage the growth” so the economy doesn’t “grow too quickly” and “trigger higher inflation”. These statements are false and misleading.
Also, inflation will not “accelerate over the next couple of years due to higher energy prices and stronger wage growth that leads firms to raise prices”…Gus Faucher/PNC Bank/WSJ (It is possible that inflation will accelerate over the next couple of years, but it can’t/won’t be for the reasons stated.)
So how does the government cause inflation? It’s time for a bit of history…
Early ruling monarchs would ‘clip’ small pieces of the coins they accumulated through taxes and other levies against their subjects.
The clipped pieces were melted down and fabricated into new coins. All of the coins were then returned to circulation. And all were assumed to be equal in value. As the process evolved, and more and more clipped coins showed up in circulation, people became more outwardly suspicious and concerned. Thus, the ruling powers began altering/reducing the precious metal content of the coins. This lowered the cost to fabricate and issue new coins. No need to clip the coins anymore.
From the above example it is not hard to see how anything (grains and other commodities for example) used as money could be altered in some way to satisfy the whims of government. But a process such as this was cumbersome and inconvenient. Of course it was. What a shame. There had to be a better way. And there was.
Enter: Paper Money
With the advent of the printing press (moveable type) and continued improvements to the mechanics of replicating words and numbers in an easily recognizable fashion, paper money was now in vogue – big time.
However, people viewed the new ‘money’ with healthy skepticism and coins with precious (or semi-precious) metal content continued to circulate alongside the new paper money. Hence, it was necessary, at least initially, for government to maintain a link of some kind between money of known value vs. money of no value (in order to encourage its use).
Over time, eventually, that link was severed; partially at first, then completely. And it was done by fiat (a decree or order of government).
Not only does our money today have no intrinsic value, it is inflated (and therefore debased) continuously and ongoing through subtle and more sophisticated ways such as fractional-reserve banking and expansion of credit. The printing press is still at the core and is humming 24/7 but the digital age has ushered in new and ingenious ways to fool the people.
Government causes inflation by expanding the supply of money and credit. And that expansion of the money supply cheapens the value of all the money. Which is precisely why, over time, the US dollar continues to lose value. It takes more dollars today to purchase what could have been purchased ten years ago, twenty years ago, etc. And it has been going on for over one hundred years. It dates back to the origin of The Federal Reserve Bank in 1913.
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.
More history… The Arab Oil Embargo in 1973 and the demands for more money for oil which led to the formation of the Organization Of Petroleum Exporting Countries (OPEC) followed close behind then President Nixon’s severance of all ties of the US dollar to Gold. The underlying fact of the matter was that the dollars which they were receiving for their oil were worth less (not quite ‘worthless’) and had been losing value for several decades. And the price had been fixed for decades.
To understand this better, imagine that you were a company selling widgets for $1 each and according to your contract you cannot receive any more than that. Fast forward twenty or thirty years. You are still selling lots of widgets and still receiving $1 for each one you sell. But your costs over the years have continued to climb. And it also costs you more for everything you buy to maintain your standard of living. And it’s not just you. Everyone is paying more for everything. Yet, on an ongoing, year-to-year basis, things seem reasonably normal. But prices now are rising more frequently and the rate of increase is higher than before. What is going on?
The effects of inflation are showing up. Those effects can be very subtle at first, or not noticed at all. But at some point in time the cumulative effects of inflation become more obvious and everyone starts acting differently. Businesses try to plan for it and individuals invest with inflation in mind.
If your dollars were freely convertible into equivalent amounts of gold based on the prices in effect at the time of your original contract to produce widgets – or sell barrels of oil – then you could just exchange your dollars for gold. Which is exactly what happened. Foreign governments in the late sixties began to demand the gold to which they were legally entitled. And countries which produced and sold oil wanted a higher price for their oil. Wouldn’t you?
As people become more aware of the effects of inflation they start looking for reasons. And for guilty parties. Government is quick to act of course. They start by implementing wage and price controls. This is like setting the stove burner on ‘high’ and putting a lid on the pot with no release for the pressure. And they talk a lot.
They have talked enough over the past thirty years to frighten us into thinking that our own spending and saving habits are the problem. Sometimes the blame is directed at foreign countries and their currencies (China/Yuan for example).
Our sense of ‘unfairness’ over China’s attempts to weaken the Yuan seem to be misplaced. We criticize them for doing the same things the US government and Federal Reserve have been doing for over one hundred years.
The inflation (expansion of the supply of money and credit) produced by the Federal Reserve is deliberate and intentional. And ongoing. The effects of that inflation are volatile and unpredictable.
Even with the hugely, inflationary response of the Federal Reserve in 2008 and afterwards we did not see the “obvious substantial increase in the general level of prices for goods and services” that some expected and predicted. But we did see a resurgence of higher prices for financial assets like stocks and real estate.
During the seventies, prices for basic necessities were rising on a weekly, even daily, basis. But things eventually settled down and we had an extended period of stability and relative US dollar strength for a couple of decades.
And yet, the effects of inflation are very clear. How much are you paying for things today compared to fifteen years ago? Ten years ago?
As time marches on, the effects of government inflation will become more extreme and more unpredictable. And the loss of purchasing power of the US dollar will reflect that.
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!
Any analysis of gold must have a correct premise. And terms used in that analysis must be clearly understood. For example…
“Are you pro-gold?” Just exactly what does that mean? Is it a political or moral issue? In other words, does someone’s position on gold indicate ideology or lifestyle choice? Can a political liberal be pro-gold? And if someone answers the original question in the affirmative, does that mean they are anti-something else?
Over the past several months there have been numerous articles referencing a relationship between gold and interest rates. Most of them are well-meaning attempts to convey information about recent changes in the markets as interest rates head higher.
In several instances, however, the author(s) have tried to explain a ‘perceived’ correlation between rising interest rates and the value of the US dollar – in a very positive manner. And they have imputed a similar correlation – albeit negative – in other statements with respect to Gold. In both cases they are incorrect.
GOLD PRICE $700 OR $7000?
Does either of the above preclude the other? In other words, if we expect gold to reach $7000.00 per ounce, and we are correct, does that mean that we can’t reasonably expect gold to go as low as $700.00 per ounce? Conversely, if we are predicting or expecting gold to continue its current decline, and even breach $1000.00 per ounce on the downside, can $7000.00 per ounce, or anything even remotely close to that number, be a reasonable possibility?
Warren Buffett is right – and wrong – about gold. And many others are, too.
Among their various characterizations of gold are the following: it is an unproductive asset; it doesn’t ‘do’ anything; it just sits there; it’s too volatile; stocks are a much better investment.
And, of course, they are right. Up to a point.