Gold

Throwing Gold BRICS At Broken Windows

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THROWING GOLD BRICS

The latest salvo fired at the U.S. dollar by BRICS countries includes press reports about “creating an international precious metals exchange to ensure fair pricing and trade growth”. Russia’s finance minister, Anton Siluanov, announced that Russia is currently in talks with other BRICS members about such an exchange.

Previously, for several years, we have heard about a potential BRICS sponsored currency or monetary unit, that would minimize the dominant role of the U.S. dollar with regards to international trade, and supplant or replace the dollar as a reserve currency. The attraction of an alternative to the U.S. dollar is hopefully enhanced and stimulated by incorporating gold ‘backing’ into any proposed formula.

WHAT IS BEHIND THE BRICS MOVEMENT?

To be quite frank, the motivation and driving forces behind BRICS are political and retaliatory in nature.  As the accepted voice of the BRICS countries, Russia speaks loudly and clearly about their displeasure and disenchantment with trade sanctions, the dominant role of the U.S. dollar, and the United States in general. In addition, Russia is unhappy over its own failure to achieve global supremacy.

Throw in a freedom-hating China, which would like to see the Yuan replace the dollar and maybe control the gold market, plus a few other countries with their own axe to grind, and you wind up with BRICS (Brazil, Russia, India, China, South Africa, and the rest).

As a group, the countries that make up BRICS account for more than one-third (37%) of the global economy. BRICS has the potential to wield some clout, but tenuous and suspect relationships between and among the various member countries will tend to water down any “official” agreements and actions. (A similar negative, counterbalance exists within OPEC: a certain individual nation(s) acts contrary to the group’s expressed policies and desires, limiting the potential impact of embargoes and production quotas.)

The BRICS movement is not about gold. It is a politically-motivated, anti-U.S. and anti-dollar movement. Russia and China are more concerned about supremacy and control than in fostering a more reliable and stable currency. Using gold to further their efforts and accomplish their intentions is convenient. Otherwise, they would not go to the trouble of creating the charade known as BRICS and suggesting a gold-backed alternative to the U.S. dollar.

GOLD, BRICS, & THE GREAT RESET

The talk about a gold-backed international currency has gold bulls fantasizing about supernormal and unrealistic prices for gold. This has exacerbated negative sentiment and analysis about the U.S. dollar from those who might otherwise be less enthusiastic about “the coming collapse of  the dollar” and the ushering in of the Great Reset.

The Great Reset is today’s best example of decades-old predictions about a ‘new’ currency to replace the ‘old’ dollar. It isn’t that there aren’t forces out there who are conspiring to bring about financial and economic upheaval en route to their goal of one-world government and global domination; there definitely are. The Great Reset is likely part of that secret cabal’s attempts to bring those evil designs to fruition.

However, in the gold sector, having tasted recently of higher prices for their beloved yellow metal, investors and others are beating the drum loudly and vigorously about negative events that they think will send gold prices to the moon and make them rich.

Unfortunately, for them, their expectations for gold are not fundamentally sound.

REAL GOLD FUNDAMENTALS

The proclivity of reference to the demise of the U.S. dollar seems belated. The U.S. dollar has already lost more than 99% of its purchasing power since its destiny was entrusted to the Federal Reserve more than a century ago. At this stage of the game, though, there is no shortage of concerned individuals telling me how to protect myself against the coming collapse in the dollar. Don’t look now, but the collapse has already happened.

Yes, the U.S. dollar could lose an additional 99% of its current purchasing power. But, how long will it take? Another century? It took gold more than one hundred years to increase in price by one-hundred fold. Is it supposed to do that again solely in anticipation of a further similar loss in the U.S. dollar?

Okay, let’s assume that there is a complete collapse in the U.S. dollar within the next year or two. And, let’s further assume that gold reflects that collapse in the U.S. dollar by surging in price to $100,000 oz. What do you do?

Should you sell your gold and take your profits? A 50-fold increase in just a couple of years is fantastic, but…

If the U.S. dollar becomes totally worthless, and the gold price is measured in hundreds of thousands rather than hundreds and thousands, the dollar price of gold is meaningless. If nobody accepts dollars in trade because they are worthless, then you haven’t gained anything at all. What you have done is protect and preserve your purchasing power. 

After the events described above, you still have an ounce of gold. Gold’s value is in its use as money. An ounce of gold at $100,000 is no more valuable than an ounce of gold at $2000, or an ounce of gold at $20.67. It is all about purchasing power.

GOLD BACKING VS CONVERTIBILITY 

It is easy to say that a new currency will be backed by the gold holdings of the nations involved. It is also possible to verify that the gold is held by those same respective countries. However, without convertibility, there are no practical restraints on issuers of any new currency. Even with convertibility, the element of trust is of paramount importance. The U.S. dollar’s own history tells us that.

The U.S. dollar was once convertible into gold at a fixed ratio of $20.67 oz. Twenty U.S. paper dollars were exchangeable for one ounce of gold and vice-versa. As long as convertibility was available, the U.S. dollar could be considered “as good as gold”.

Active convertibility is a restraint on the government’s expansion of the money supply. If too many dollars are created, the government won’t be able to make the required exchanges on demand without losing more gold in exchange for paper dollars which continue to lose purchasing power. As the money and credit expansion continues, the dollars continue to lose purchasing power. This results in a preference to hold gold rather than dollars.

The redemption of dollars for gold increased and led to suspension/cancellation of gold ownership for U.S. citizens by President Roosevelt in 1934. When President Nixon closed the gold window for redemptions by foreign governments in 1971, the U.S. dollar was left without any vestige of  gold backing or convertibility.

Without convertibility, any new currency, even one with the pretense of being backed by gold, is just another empty promise and another substitute for real money, i.e., gold. 

CONCLUSION

Do you trust the governments of Russia and China, or any quasi-government authority to institute and maintain any proposed new currency (gold-backing or not) that would be a better alternative to the U.S. dollar? As bad as the dollar is, you aren’t going to get a better alternative from any of the BRICS countries.  This is manifestly so, because…

Inflation is the debasement of money by government. All governments inflate and destroy their own currencies.

In the case of the BRICS countries, the proposed new currency is a substitute for a substitute (U.S. dollar) for gold/real money. (Also see Gold Convertibility – NOT Gold Backing)

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

Siren Song Of Gold Mining Shares

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GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES

No amount of wishful thinking and baseless proclamations will change that. Owning gold stocks (miners) instead of the actual physical metal (in other words, processed and refined with appropriate hallmarks and in tradable form) is a losing bet. Investors should ignore the siren song of gold mining shares.

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Silver’s 50-Year Bear Market

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Recent articles trumpeting silver’s outperformance relative to gold and some ridiculous price projections are a bit too much. Missing from most of the extremely positive commentary is a dose of reality. Below are three charts (source) which should provide some needed perspective. The charts show average monthly closing prices (inflation-adjusted) for the periods August 2020 – July 2024; April 2011 – July 2024; and January 1980 – July 2024. Here is the first chart…

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Descending Price Peaks In Latest Gold Charts

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The latest gold charts are pictured below and show a series of descending price peaks dating back to 1980. There are four charts. The first two charts are for the period following the August 2011 peak. The third and fourth charts are for the period after the gold price peaked in 1980. Prices on all charts are monthly average closing prices.

For example, the average closing price for gold in the month of January 1980 was $677 oz. This price ($677) is shown on Chart #3 below. During that same month, the intraday high for gold was $843 oz. The spike in price above $800 was very short-lived and not a reliable indicator of where gold traded during the month of January 1980. Average closing prices are more representative and more realistic for comparative purposes and analyses.

There are two charts for each time period. The first chart plots nominal prices; the second chart shows inflation-adjusted prices. Here is the first chart…

#1 Gold Prices August 2011-June 2024

The average closing price for gold in August 2011 was $1825 oz. After declining for more than four years, the gold price bottomed at $1060 oz. and began rising. The 2011 high was eclipsed and a new high price for gold was set at $1971 oz. in July 2020. After a sharp decline in 2022, the price of gold rose to another new high of $2327 oz., which is also the current closing price on June 28, 2024. The gold price has more than doubled (119%) since its December 2015 low.  That is quite impressive, but, there are some caveats.

Gold’s recent price performance, in total, looks very good if you are short-term oriented. The shouts of joy might be a bit overdone, though, if you have been holding gold since its peak in 2011. In that case, the total price increase for the entire thirteen-year period is only 27%. That is an annualized gain of 1.86%, which is more indicative of a slow-moving wagon, rather than a rocket ship in blastoff mode.

The numbers in both cases are made worse when the effects of inflation are factored in…

#2 Gold Prices (inflation-adjusted) August 2011-June 2024

In Chart #2, the effects of inflation have turned the 2011 high and subsequent new highs in 2020 and 2024 into a series of descending peaks. Each successive peak almost matches, but doesn’t quite reach the previous high point. The total gain of 119% referenced in Chart #1 is almost halved, down to 66%. The meager nominal price increase of 27% is now a net loss (-8%). The $1825 oz. nominal price peak in 2011 correlates to a real (inflation-adjusted) price of $2529 oz. in today’s cheaper dollar(s),

Now, let’s look at gold’s price performance over a longer time period. Here is Chart #3…

#3 Gold Prices January 1980-June 2024

When the gold price peaked in January 1980, it correlated to the effects of inflation that had depleted U.S. dollar purchasing power by 97% over the previous half-century. At $677 oz., the gold price was thirty-three times higher than it was when gold and the dollar were interchangeable, i.e., convertible, at a fixed ratio of $20.67 per ounce. The next major peak for the gold price was in 2011 at $1825 oz., followed by 2020 and 2024. Now, lets look at inflation-adjusted prices dating back to 1980…

#4 Gold Prices (inflation-adjusted) January 1980-June 2024 

In Chart #4, the ever-ascending nominal price increases shown previously in Chart #3 are more severely subdued when the effects of inflation are factored in. In addition, both volatility and time become more apparent.  While the nominal price of gold continues to rise reflecting actual loss of purchasing power in the U.S. dollar, the gold price in real (inflation-adjusted) terms has yet to exceed any of its previous price peaks; and likely never will. That is because gold’s value is in its use as money and is basically constant.

Each price peak in gold beginning in 1980 and including the peaks in 2011, 2020, and 2024 is a reflection of the intervening loss of purchasing power in the U.S. dollar since the previous peak.

CONCLUSION 

After allowing for the effects of inflation, an ounce of gold at $2400 today is no more valuable than it was at $2000 in 2020, or $1825 in 2011, or $677 in 1980. For that matter, the purchasing power of one ounce of gold is the about the same today as it was a century ago when it was priced at $20.67. In other words, if you bought gold at any of those prices and held it until now, you do not have real profits. The higher gold price is not a profit. It represents the dollar’s loss of purchasing power. (There are possible short-term trading opportunities for traders. See Understanding Profit Potential In Gold)

Gold is real money and a long-term store of value. Holding gold provides a measure of protection against depreciating currencies. Over time, the increasing price of gold matches the loss of purchasing power in the U.S. dollar that has already occurred. (also see Gold Has Done It’s Job – Isn’t That Enough?)

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 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!

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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What Happens To Gold Price If The Fed Doesn’t Cut Rates?

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GOLD PRICE IF THE FED DOESN’T CUT

With the increasing gold price of late comes the assumption that the expected cut in interest rates will open a torrent of cheap money that will bring the U.S. dollar down with a thud.  But, what would happen to the gold price if the Fed doesn’t cut interest rates?

What seemed like a universally expected event may not be as likely as some have assumed. In fact, the Fed has a history that includes examples of pivots and re-pivots; or, ignoring the presumed pivot and staying the course.
You can read more about the possibility that the Fed might not cut interest rates in my article Investors Are Too Anxious For Rate Cuts.

In this article we will address the implications for gold if the Fed doesn’t cut interest rates. It matters not what the reasoning is behind such a possibility. What matters is that much of what has happened to prices for gold, stocks, bonds, etc., is based on the presumption that several interest rate cuts are forthcoming, possibly before the end of the year. Hence, there is a potential shock for investors who have relied on that presumption, as well as the particular logic mentioned in our opening paragraph above, should the Fed not follow through.

IMPLICATIONS AND POSSIBILITIES

Ignoring for now the finer (and more critical) point of inflation-adjusted returns, both gold and stocks are at all-time highs. What might happen to gold if a “potential shock” becomes a reality? It depends.

To the extent that a more significant portion of money used to fund the purchase of gold recently was done so based on the presumed cuts in interest rates and a clear change in direction, then we could see a significant decline in the gold price; at least temporarily. This might also happen if interest rate cuts are delayed. Market participants in both stocks and gold would likely see any inaction or hesitancy by the Fed regarding interest rate cuts as negative for their investment outcomes and expectations.

Another possibility is that any effects on the gold price could be muted. That has more to do with other factors, not interest rates. For example, if the prevailing thoughts dominant in the minds of those placing a larger portion of the money flowing into gold is not based on concern about interest rates, rather on anything else, then it is entirely possible that the gold price might show little reaction to non-cuts in interest rates.

OTHER FACTORS, SUMMARY

Some buyers in the gold market are not thinking so much about interest rates. Their concerns have more to do with the continual loss of purchasing power in the U.S. dollar. The erosion of U.S. dollar purchasing power is the result of ongoing inflation, which is the intentional debasement of money by governments and central banks. The continuous expansion of the supply of money and credit for more than a century has resulted in a dollar which has lost ninety-nine percent of its purchasing power.

Over time the gold price is historically correlated to that decline in the purchasing power of the dollar. Gold is real money and a long-term store of value.

Whether buyers of gold are individuals (retail investors), speculators, hedge funds, governments, or central banks; and whatever the reasoning behind their purchases, which reasoning is quite often temporary; in the end, it is still all about the U.S. dollar. (also see U.S. Dollar Best Of The Worst; Gold Best Of The Best)

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!

U.S. Dollar Best Of The Worst; Gold Best Of The Best

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Among the major fiat currencies in the world today, the U.S. dollar is “the best of the worst.” What that means is that there are no better alternatives.

BRICS – QUESTIONABLE MOTIVES

That is especially true when one considers all of the nonsense and suppositions stemming from statements made by member nation representatives of BRICS. Both Russia and China are foremost in their efforts to talk the dollar into disrespect and disrepute. Their motives, however, have nothing to do with providing a better alternative.

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Justification For Gold

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Justification for gold to move substantially higher in price continues to press the boundaries of imagination. In this article we will try to filter the noise in the headlines and also simplify what has been marketed as something much more complex.

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