Gold

Does Demand For Gold Send Its Price Higher?

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DOES DEMAND FOR GOLD SEND ITS PRICE HIGHER?

Gold is original money. As such, it is the measure of value for everything else.

Gold was money before the US dollar and other paper currencies. All paper currencies are substitutes for gold, i.e., real money.

So, how much is money worth? Money is worth what you can buy with it. In my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold, I compared the cost to purchase bread and gasoline over the past one hundred years using US dollars vs. gold.

The article illustrates the single reason that separates gold from all other forms of money: gold is a store of value; nothing else is. 

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Gold – Bullish Or Bearish?

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GOLD – BULLISH OR BEARISH?

What does it mean to say that one is “bullish” on gold? Or “bearish”? Or, more simply, what is a bull or a bear?

“A bull is an investor who thinks the market, a specific security or an industry is poised to rise. Investors who adopt a bull approach purchase securities under the assumption that they can sell them later at a higher price. Bulls are optimistic investors who are attempting to profit from the upward movement of stocks, with certain strategies suited to that theory. …James Chen, Investopedia

According to the definition, then, being bullish on gold is an indication that an investor can optimistically purchase gold and expect to sell it later at a higher price for a profit. 

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Potential Highs and Lows For Gold In 2020

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DOWNSIDE POSSIBILITIES FOR GOLD PRICE

There is a correlation of gold’s increasing price relative to the declining value of the US dollar. The chart (source for all charts) below shows this inverse relationship clearly…

Over time, as the US dollar continues to lose value, the price of gold continues to increase.  Seemingly, it would be worthwhile to just buy gold and wait for the inevitable decline of the dollar.

It is not that simple. Here is the same chart with a long-term uptrend line added…

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Gold-Silver Ratio And Correlation

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GOLD-SILVER RATIO

From Investopedia:

“Correlation is a statistic that measures the degree to which two variables move in relation to each other. Correlation measures association, but doesn’t show if x causes y or vice versa, or if the association is caused by a third–perhaps unseen–factor.”

In order for correlation to exist, there must be fundamentals that directly connect the two items being compared.

For example, there is a possible correlation between localized, bad weather and crop failures. But how do you predict the timing and extent, or the effects, to a degree that can be profitable?

And there certainly is a correlation between the price of labor and materials vs. the finished cost of building a new home. But there is no correlation between the price of labor and materials vs. the number of new housing starts.

We can find patterns and rhythm that might appear to be correlation (or inverse correlation) by plotting the price differential of any two items but it still does not imply correlation.

So, are gold and silver correlated?

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Re: Gold Prices – Effects Of Inflation Are Unpredictable

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GOLD PRICES AND INFLATION

The latest actions by the Federal Reserve have led many to assume that much higher inflation is a foregone conclusion.  This leads to a further expectation that much higher gold prices are imminent.

That sounds logical, but it is not that simple.

There is a relationship between higher gold prices and inflation, but the two are not directly related. The confusion results from a misunderstanding about inflation and its effects.

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Gold Price Is Not About Gold

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The gold price is not about gold. In fact, it tells us nothing about gold.

So why are people so obsessed with the price of gold? In most cases, it is because people likely view gold as an investment opportunity. “How much can I make and how quickly?”

However, the question which continues to plague gold investors and others is “Why didn’t gold respond the way we expected?”

The answer is found in the term unrealistic expectations. 

When gold is characterized as an investment, the incorrect assumption leads to unexpected results regardless of the logic. If the basic premise is incorrect, even the best, most technically perfect logic will not lead to results that are consistent.

Here are some examples of inconsistencies when viewed through the lens of faulty logic based on incorrect assumptions…

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Expectations For Higher Gold Prices – Fly In The Ointment

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Expecting higher gold prices? Read on…

From Wikipedia:

“In English, the phrase fly in the ointment is an idiomatic expression for a drawback, especially one that was not at first apparent, e.g.

     We had a cookstove, beans, and plates; the fly in the ointment was the lack of a can opener.” 

For four centuries, ‘a fly in the ointment’ has meant a small defect that spoils something valuable or is a source of annoyance. The modern version thus suggests that something unpleasant may come or has come to light in a proposition or condition that is almost too pleasing; that there is something wrong hidden, unexpected somewhere.”

In general, with gold prices currently at $1500-1600 per ounce, the expectation among participants in the gold trade today is for much higher gold prices going forward. And most of them, I think, seem to believe it will happen sooner, rather than later; and quickly, too.

Their enthusiasm rests on two assumptions: 1) That the new unlimited amounts of cheap credit made available by the Federal Reserve is hugely inflationary. 2) That the effects of the inflationary avalanche will destroy the US dollar, thus resulting in higher gold prices.

On the surface, both statements are logical and rooted in correct fundaments. But there is a fly in the ointment.

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Cash Is King Right Now, Not Gold

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CASH IS KING FOR NOW

Amidst the fallout of stock markets crashing worldwide, gold (silver, too) and oil imploding, and the scare of coronavirus, the dollar itself stands tall. That is not what some were expecting. Nevertheless, unrealistic expectations abound today, so let’s see what we can learn from this.

When investors sell en masse, they generally turn to cash as a resting place for their money. Cash for most people today still means US dollars. This implies an increase in demand for US dollars.  Gold investors and their advisors seem to have been expecting just the opposite.

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Gold And Stocks Headed Lower

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GOLD AND STOCKS HEADED LOWER – NO CORRELATION

Gold and stocks are moving south together; but they are not correlated. Nor, are they inversely correlated, as some gold enthusiasts claim.

Reference to gold as a safe haven has some investors buying gold to hedge against a stock market crash. It is almost as if gold has become a pseudo defensive stock.

It seems investors actually expect gold’s price to go up when the stock market goes down; and vice-versa.

If that were the case, how do you explain the extended periods when both moved together; or the price action of gold relative to stocks in the past four days? Gold currently is lower in price than it was before stocks tumbled nearly 4000 points.

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$1500 Gold Price Is Fair And Accurate

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Is $1500 a reasonable price for gold? Some of the more ardent gold “bulls” might say no. A price of $2000 per ounce should sound better to them. That particular number is likely more popular because gold’s price didn’t quite get there eight years ago, stopping just shy of $1900 per ounce.

Similar behavior occurred after 1980, when gold’s price assent was stopped at $850. At that time, $1000 became the price projection of choice.

In both cases, the expectations for gold were likely born out of desire, rather than fundamentals.

So, how can we know what is a fair and accurate price for gold today – right now?

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