Gold

Gold And The Elusive Chase For Profits

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Between the years 1971 and 2011, the price of gold went from $42.00 per ounce to $1900.00 per ounce – a forty-five fold increase. This is depicted on the chart below…

Looking at the chart, it would appear that gold is in a long-term bull market and that continually higher prices over time can be expected. Proponents of this approach to gold cite fundamentals such as a weakening U.S. dollar, social unrest, wars (combat and trade), political instability, etc.

And the numbers seem to bear this out. For the forty-year period between August 1971 and August 2011, the price of gold was up forty-four hundred percent.

But are we really making any money? The chart below paints a clearer picture…

The inflation-adjusted chart immediately above seems to support a severely modified view of gold from that which we mentioned earlier. Rather than long-term, ever-higher, onward and upward, we see strictly defined periods of extreme volatility. Indeed, it appears almost cyclical.

And our previous total return of 4,400 percent for the forty-year period August 1971 to August 2011, is reduced to 900 percent. Even so, that is the equivalent of a 6% average annual return, net of inflation. Which is huge.

(In case you are interested, the average annual return for the S&P 500 – with dividends reinvested – for the same exact time period, is 5.13 percent. That relatively small differential on an annual basis is magnified considerably when you compare cumulative total returns: Gold at 900% vs. S&P 500 at 639%)

So, does the nine hundred percent total return/6% annual return represent a profit?  Yes, most definitely. Net of the effects of inflation, the price of gold increased ten-fold; all of which represents added value. Here’s why…

In 1971, the cost for one loaf of bread was $.24. The average cost for one gallon of gasoline was $.36. With gold at $42.00 per ounce, you could purchase one hundred seventy-five loaves of bread or one hundred seventeen gallons of gasoline (or some combination of the two).

Forty years later, in 2011, the average cost for one loaf of bread was $2.42; and one gallon of gasoline was priced at $3.52. Hence, again, using only one ounce of gold (this time priced at $1900.00 per ounce) you could purchase seven hundred eighty-five loaves of bread or five hundred thirty-nine gallons of gasoline.

The additional six hundred ten (785-175) loaves of bread or four hundred twenty-two (539-117) gallons of gasoline represent an increase in real value/purchasing power for gold for the years between 1971 and 2011.

All of this sounds good. But there are some other issues. Looking again at the first chart, we can see that the price of gold increased from $850.00 per ounce at its 1980 high point to $1900.00 per ounce at its 2011 high point. This translates to a gain of $1050.00 ($1900.00 – $850.00) per ounce, or one hundred twenty-three percent.

Unfortunately, on an inflation-adjusted basis, you would have a negative, net return of ten percent. In real terms, the price of gold did not even match its 1980 high. And this result is after waiting for thirty-one years.

Owning gold from January 1980 until August 2011, a total of thirty-one years (during which its price rose from an all-time high of $850.00 per ounce to a subsequent, new all-time high of $1900.00 per ounce), resulted in a cumulative, net loss of ten percent in inflation-adjusted, real terms. 

That doesn’t sound good,  but it is even worse considering the decline in gold’s price since 2011. With gold currently priced at $1240.00 per ounce, the cumulative net loss balloons to forty-four percent (certainly not a supporting factor for the argument that gold is a long-term inflation hedge).

Another way of looking at it is that all of the real profits – nine hundred percent cumulative total return – from the forty-year period (1971-2011)  came in the first nine years, 1971-80.

When President Nixon suspended convertibility of the U.S. dollar into gold in 1971, his action ushered in a decade-long period of U.S. dollar weakness and rejection. The effects of inflation created over the previous four decades, initially in an attempt to extricate us from the economic depression of the thirties, then to fund the country’s expenses relative to its involvement in WWII, etc. came roaring to life in the form of higher prices for all goods and services.

The 1970s were a catch-up period for the price of gold relative to the U.S. dollar’s loss in value over the previous four decades. That, and the anxiety and anticipation created by the realization that things were far worse than we had previously known, led to outsized gains.

Gold’s failure to make a new, inflation-adjusted high in 2011 is perfectly reasonable.  This is because gold’s upward price movement reflected the extent of ongoing U.S. dollar devaluation that had occurred since the eighties. Whereas, the price movement upward in the seventies reflected U.S dollar devaluation that had occurred over the prior forty years – a period more than twice as long.

Gold’s price is not an indication of its value. The value of gold is constant and does not change. Its price is a reflection of the value of the U.S. dollar. Nothing more. Nothing less. Nothing else.

And what is happening to the US dollar?  It is in a state of constant  deterioration, punctuated with periods of relative stability.

And the peaks and low points for those periods are seen clearly on both  charts (1933, 1971, 1980, 2001, 2011) and correspond with highs and lows for the price of gold, both in nominal and real terms.

Gold is not an investment. 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.

In light of all this, what can we expect from gold looking ahead? Or, better phrased, what can we expect from the U.S. dollar; and how does that translate to expectations for the price of gold?

One possibility is that the U.S. dollar could continue to stabilize and strengthen along with an improving economy. The price of gold would stabilize and move lower reflecting the dollar’s relative strength. This is similar to what happened between 1980 and 2001, and what we are currently experiencing since 2011. And it could go on this way for years. During periods like this, you should not expect gold’s price to increase.

Another scenario is that the dollar could renew its long-term decline in rapidly accelerating fashion, eventually ending in complete rejection and repudiation. In which case, owning gold is imperative for wealth preservation and financial survival. But any profits would be elusive. At a time like that, the U.S. dollar price of gold becomes meaningless. What does matter, and what is critical, is how much gold you own.

Lastly, attempts by the Federal Reserve to unwind its horrendously bloated balance sheet and encourage a return to a relatively normal level of interest rates could backfire. We could see a another credit collapse. This one would be much worse than anything we have experienced to date, and the unwinding of prices for all assets (stocks, bonds, real estate, commodities) denominated in dollars would trigger a full-scale depression and lead to a suppression of most economic activity. Don’t look for gold to save you. The U.S. dollar would increase in value; thus, gold’s price in dollars would decline significantly. The US dollar would actually buy more, not less. But the supply of US dollars would be significantly less.  This is true deflation, and it is the exact opposite of inflation.

There are, of course, variations and combinations of the above scenarios that may play out. Any actions or responses by government and the Federal Reserve will affect the magnitude and duration of various crises.

Whatever the course of events, or how they unfold, there is no fundamental reason for gold to make new inflation-adjusted highs.

The case for gold is not about price. It is about value. And its value will become readily apparent when governments and individuals are scrambling amid the ruins of our financial system looking for something, anything, to replace worthless paper currencies. which are nothing more than substitutes for real 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!

Gold vs. Stocks: Ratios Do Not Prove Correlation

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GOLD VS. STOCKS 

There is considerable extensive research and lots of articles written about gold vs. stocks. Sometimes, that is done in order to support or justify the argument that stocks are a better, long-term investment than gold. And the results seem to indicate that.

Except that gold is not an investment.

Gold is real money and a ‘store of value’. Its fundamentals have nothing to do with the fundamentals for stocks or any other investments. When gold is analyzed as an investment, it gets compared to other investments. And then the analysts start looking for correlations.

Some say that an ‘investment’ in gold is correlated inversely to stocks. But there have been periods of time when both stocks and gold went up or down simultaneously.

And, classifying gold as an alternative investment, or a safehaven asset, confuses people and creates unrealistic expectations. At least when comparing apples to oranges, we know that both of them are fruits. 

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Gold And Interest Rates – No Correlation

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GOLD AND INTEREST RATES 2001-11

Over and over again, the following statement or something similar continues to find its way into commentary about gold:

“…prospects of higher US interest rates have the ability to limit upside gains. It must be kept in mind that Gold is a zero-yielding asset that tends to lose its allure in a high-interest rate environment”  

A variation of that statement:

“Because gold doesn’t bear interest, it struggles to compete when interest rates rise.” 

The statements imply a correlation between gold and interest rates. And the implied correlation suggests that higher interest rates result in lower gold prices.

If that is the case, then there should be some historical precedent to corroborate the correlation. There is. And we only need to go back a few years or more to find it. But it does not corroborate the correlation; it refutes it.

During the ten-year period 2001-2011, gold’s price increased from $275.00 per ounce to a high of nearly $1900.00 per ounce. And interest rates continued their long-term decline throughout that entire period.

In this example the original correlation is inferred to be supported by the opposite scenario  – lower interest rates and higher gold prices. So far, so good.

GOLD AND INTEREST RATES 1970-80

However, let’s go back a bit further along the time line. Between 1970 and 1980, the price of gold increased from $35.00 per ounce to $850.00 per ounce. But rather than declining, interest rates were on a tear.

Rather than “struggling to compete” gold was galloping ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments.

The higher rates were a reflection of lower prices for bonds and particularly U.S. Treasury securities. The 10-year U.S. Treasury bond yield exceeded 15%. Which makes you sort of wonder when you read something like this:

“Higher rates boost the value of the dollar by making U.S. assets more attractive to investors seeking yield.” 

Two ten-year periods of outsized gains in the price of gold. And interest rates were doing something exactly opposite during each period. There simply is no correlation between gold and interest rates.

Additionally, there is no correlation between gold and 1) social unrest, or 2) global terrorism; or 3) world wars. Gold is not a safe haven hedge and it is not an investment. It is real money.

WHY DOES GOLD PRICE CHANGE?

But is there something that correlates with gold? Anything at all? Why does its price change? And so dramatically, it seems?

With respect to gold and its price changes, there is only one thing that correlates. The U.S. dollar.

The U.S dollar is a substitute for gold. Gold is original money. The price of gold is an inverse reflection of the changing value of the U.S. dollar. The ongoing, never-ending deterioration of the dollar’s value means ever rising gold prices over time.

Gold is the standard; not the U.S. dollar. Gold has earned its designation as real money over five thousand years of history. It is original money. And it is real money because it is a store of value.

And there is historical evidence to support the correlation of gold’s price to the value of the U.S. dollar. Every change of significance in time and price for gold correlates with an inverse change in the value of the U.S. dollar. Higher prices for gold correlate with a lower value for the U.S. dollar. Lower gold prices correlate with stability and strength for the U.S. dollar.

The correlation between gold and the U.S. dollar is implicit. One does not ’cause’ the other. Either one is the inverse of the other.

Some have said that the argument about correlation of interest rates and gold depends on making a distinction between real interest rates and nominal interest rates. No correlation there, either.

That is because any patterns that appear to confirm correlation between real or nominal interest rates and gold need to include the U.S. dollar. The U.S. dollar is the determining correlative factor re: gold.

Without taking into account the relative strength or weakness of the U.S. dollar relative to gold’s price, any other correlations are either meaningless, misleading, or contradictory.

There are six major turning points (1920, 1934, 1971, 1980, 2001, 2011) on the chart (source) below. All of them coincided with – and reflect – inversely correlated turning points in the value of the U.S. dollar…

Gold Prices: 100-Year History
                                                                                               

The U.S. dollar is the world’s reserve currency and gold trades are settled in U.S. dollars. Since gold is priced in U.S. dollars and since the U.S. dollar is in a state of perpetual decline, the U.S. dollar price of gold will continue to rise over time.

There are ongoing subjective, changing valuations of the U.S. dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in U.S. dollars.  (read more 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!

Kelsey Williams Interview With David Scranton

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Kelsey Williams was interviewed by David Scranton on The Income Generation show March 1, 2018 about his book: Inflation – What It Is, What It Isn’t, And Who’s Responsible For It.

Here are the links to the interview:

FULL SHOW [1] https://vimeo.com/advisorsacademy/review/258621529/28ad77b32f

KELSEY WILLIAMS[2] https://vimeo.com/advisorsacademy/review/258625019/3179c3db98

https://vimeo.com/advisorsacademy/review/258621529/28ad77b32f

https://vimeo.com/advisorsacademy/review/258621529/28ad77b32f

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, U.S. Dollar, And Inflation

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GOLD, US DOLLAR, AND INFLATION

Gold bulls have a short memory. Last year at this time, gold was similarly priced and they were quite bullish then, too. But their expectations didn’t ‘pan out’ as expected.  In fact, gold prices turned and went in the opposite direction, hitting lows in late summer well below $1200.00 per ounce.

The downturn was unexpected. But it was unexpected because most analysts and investors were looking in the wrong place for the wrong clues.

Gold’s price changes over time in response to changes in the value of the U.S. dollar. But some additional explanation is necessary.

Some say that a weaker U.S. dollar ’causes’ a higher gold price. That is like saying that lower interest rates cause higher bond prices.  That’s not the way it works.

Gold and the US dollar move inversely.  So do bonds and interest rates.

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.

When you were a kid you probably rode on a see-saw or teeter-totter at some time.  When you are on the ground, someone on the other end of the see-saw is up in the air.  And, vice-versa, when you are up in the air, the other person is on the ground.  Again, one does not ’cause’ the other. Either position is the inverse of the other.

Most of those who comment on gold consider the dollar to be one of several factors contributing to a higher gold price. But, in truth, gold’s price reflects only one specific thing: changes in value of the U.S. dollar.

There are six major turning points (1920, 1934, 1971, 1980, 2001, 2011) on the chart below. All of them coincided with – and reflect – inversely correlated turning points in the value of the U.S. dollar.

Gold Prices: 100-Year History   (inflation-adjusted)                                                                                               source

Since gold is priced in US dollars and since the US dollar is in a state of perpetual decline, the US dollar price of gold will continue to rise over time. There are ongoing subjective, changing valuations of the US dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in US dollars.

There is also more talk about inflation recently.  So here is an axiom to remember: inflation is the debasement of money by the government.

When you  hear someone referring to things such as ‘cost-push’ or ‘demand-pull’ inflation, accelerated wage growth pressure, or an ‘over-heated economy’, listen politely. But know that there is only one cause of inflation – government. And government in this case includes central banks, especially the United States Federal Reserve Bank.

Government creates inflation by expanding the supply of money and credit. They do this intentionally and continually under the pretense of managing the economic cycles.

Since inflation, as practiced by government, is ongoing, the risks are cumulative. As that cumulative risk builds, events triggered by the effects of inflation become more volatile; and they are unpredictable.

When the Federal Reserve responded to the financial crisis of 2007-08 by increasing hugely their monetary expansion efforts, many thought that it would lead to runaway inflation and collapse of the U.S. dollar. It didn’t. But it did drive the prices of assets like stocks, bonds, and real estate, much higher.

Originally, of course, the price of gold surged in response to the Fed’s efforts. Since gold’s price is an inverse reflection of the U.S. dollar, it should come as no surprise that the dollar continued its long decline in value; and significantly so.

But the drop in the value of the dollar and gold’s higher prices from that point forward were mostly in anticipation of damaging effects from the Fed’s inflation in the form of significantly higher prices for all goods and services. In essence, a repeat of the seventies, only much worse, was expected. And the looming threat of U.S. dollar repudiation fanned the flames.

But there was no significant increase in the “general level of prices for goods and services”. And U.S. dollar weakness (possibly overdone) eventually reversed and the price of gold began to decline (2011 – see chart above).

Between 2011 and 2016, the U.S. dollar continued to strengthen and gold’s price continued to decline. At that point the two reversed direction again and that brings us to where we are currently.

Some are convinced that recent dollar weakness will continue unabated and that the price of gold will soar soon. Some are still banking on severely damaging effects from the Fed’s past money creation efforts. And still others are short-term traders who are looking at their charts and want to be “on the right side of the trade”.

Most of them will likely be disappointed – again. There are two reasons:

1)The fundamentals and logic involved are inconsistent and flawed.

2)The effects of inflation are volatile and unpredictable.

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 are the direct result of changes in the value of the US dollar. Nothing else matters.

Since paper currencies and credit can be manipulated by government, expectations and reactions become more volatile and increasingly unpredictable.

That should be relatively clear; especially after what we have experienced in the past ten years. But some are still predicting  a gold ‘moonshot’. And they want it now.

Something like that may occur. In fact, it is quite possible. But when? It will only happen if it is accompanied by a complete collapse and repudiation of the U.S. dollar.

The chart above is current. Does it look like we are in the midst of something similar to 1970-80 or 2001-11? Or something worse?

Yes, forewarned is forearmed. But most of those who are the most vociferous in their calls for huge increases in the price of gold are those who were doing so all during gold’s price decline from August 2011 through January 2016.  What’s changed?

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 Up With Gold?

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WHAT’S UP WITH GOLD?

What are we waiting for? The other shoe to drop; the next big move?

Gold’s reign as the “next big thing” ended seven years ago. Too many people don’t want to admit that, but its true. Those who are ‘bullish’ on gold cannot let go.

Their behavior is typical of those who have missed the boat. And they don’t want to admit it, or believe it. And their problem is compounded by the fact that they originally viewed gold as a quality investment.

Now they continue to point out all of the fundamental reasons gold should go much higher. We are told it is undervalued, unappreciated, unloved. And, of course, the price is manipulated, too.

Those things may provide a bit of consolation, but they don’t mask the pain of losing big bucks. And the interminable wait drags on.

We could say it was simply a matter of (poor) timing. However, most people who have a basic understanding of investment fundamentals would argue otherwise.

And they would be right. In the long-term, time works in our favor – not against us. An investment with good fundamentals – over time – becomes more valuable, not less valuable. And that relentless march upwards helps protect us against our own timing errors.

We don’t have to be perfect market-timers to be successful investors.

And it isn’t that gold’s price can’t go a lot higher, either. It can. And it probably will. And it has done so in the past.

After peaking at $850.00 per ounce in January 1980, the price of gold dropped as low as $250.00 per ounce twenty years later and then soared to $1900.oo per ounce in August 2011.  But will you (or can you) wait thirty-one years to be vindicated?

There is a better explanation.

At the heart of disappointment regarding gold’s price action is the specter of unrealistic expectations:

“believing that rational individuals would sooner or later realize the trend and take it into account in forming their (opinions)”

But there is more to it. Much more. And it involves fundamentals. And an understanding of price versus value.

To wit, gold has only one basic fundamental: it is real money.

To further clarify, this means that gold is not an investment.

Do people view gold as an investment? Absolutely. Which is why they are continually surprised and confused at their investment results. They buy gold because they expect the price to go up; and logically so.

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 may 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.

And 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.

The price versus value issue is rooted in gold’s fundamental role as real money.

Gold is real money because it meets the qualifications of money. It is a medium of exchange, a measure of value, and a store of value.

The U.S. dollar is a substitute for real money. It is a medium of exchange and a measure of value. But it is not real money because it is not a store of value.

The U.S. dollar, in its role as ‘official’ money, has lost more than ninety-eight percent of its value over the past century.

The price of gold, on the other hand, has increased more than sixty times from $20.67 per ounce to in excess of $1300.00 per ounce.

Gold’s price increase does not mean that it increased in value by sixty-fold. Its price increase is a direct reflection of the ninety-eight percent decline of the U.S. dollar.

Gold is worth somewhere between $1000.00 per ounce and $2000.00 per ounce. This price range correlates to a decline in the U.S. dollar’s value of somewhere between ninety-eight and ninety-nine percent.

At $1300.00 per ounce, gold’s price reflects a decline of 98.3 percent in the value of the U.S. dollar since the inception of the U.S. Federal Reserve Bank in 1913.

Let’s recap.

Gold is real money. It is a store of value. The U.S. dollar (and all paper currencies) are substitutes for real money/original money; i.e., gold.

Gold’s characterization – incorrectly – as an investment (which it is not) leads to unrealistic expectations and unexpected results.

Gold’s value is in its role as real money. Its changing price (ever higher over time) is a direct reflection of changes in the value (ever lower over time) of the U.S. dollar.

As far as gold is concerned, nothing else matters.

(also see How Much Is Gold Really Worth?)

 

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 – Technical Obfuscation, Fundamentals, Predictions

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It is pretty much expected today that any investment analysis with justifiable conclusions will be steeped in technical study that includes lots of charts.

This seems especially true of gold.

Which is all well and good, I suppose; except for the obfuscation:

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Gold Prices – Inflation vs. Deflation

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GOLD PRICES

Inflation is the debasement of money by government. The expansion of the supply of money and its subsequent loss in value results in an increase in the general level of prices for goods and services.

Deflation is characterized by a contraction in the supply of money and a decrease in the general price level of goods and services. (What we are currently experiencing is called ‘disinflation’ which is a lower rate of inflation.)

The purpose of this essay is to clarify and explain accurately what to expect regarding gold prices if deflation occurs.

According to Wikipedia: “Inflation reduces the real value of money over time, but deflation increases it. This allows one to buy more goods and services than before with the same amount of money.”

The United States Government, via the Federal Reserve Bank, has been  practicing inflation regularly for over one hundred years. They are good at it. Their efforts have resulted in a ninety-eight percent “reduction in the purchasing power per unit of money.”

The reduction in purchasing power of the U.S. dollar is reflected in the higher price of gold.

In 1913, with gold at $20.65 per ounce, twenty U.S. dollars in paper money was equal to twenty dollars in gold. Today gold is at $1270.00 per ounce, more than sixty times higher than in 1913.

The higher price for gold does not mean that gold has experienced an increase in purchasing power. Rather, its higher price reflects the decline in purchasing power of the U.S dollar.

Deflation is different. It is the exact opposite of inflation.  And the results are different as well.

As we said earlier, deflation is characterized by a contraction in the supply of money. Hence, each remaining unit is more valuable; i.e. its purchasing power increases.

Government causes inflation and pursues it for its own selfish reasons.  A government does not voluntarily stop inflating its currency. And it certainly isn’t going to reduce the supply of money. So what causes deflation?

Government causes deflation, too. Deflation happens when a monetary system can no longer sustain the price levels which have been elevated artificially and excessively.

Governments love the inflation they create. But with even more fervor, they hate deflation. And not because of any perceived negative effects on its citizens. It is because the government loses control over the system which supports its own ability to function.

Regardless of the Fed’s attempts to avoid it, deflation is a very real possibility. An implosion of the debt pyramid and a destruction of credit would cause a settling of price levels for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than currently.  It would translate to a very strong US dollar.  And a much lower gold price.

Those who hold US dollars would find that their purchasing power had increased.  The US dollar would actually buy more, not less. But the supply of US dollars would be significantly less.  This is true deflation, and it is the exact opposite of inflation.

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

Inflation leads to a U.S. dollar which loses value over time; hence, this is reflected in a higher gold price.

Deflation results in an increase in value/purchasing power for the U.S. dollar; hence, this is reflected in a lower gold price.

Those who expect gold to increase in price during deflation are wrong for several reasons.

Gold is not an investment. And it does not respond to the various headline items that journalists and analysts continue to repeat erroneously. It is not correlated with interest rates and it does not respond to housing statistics. It is not influenced by world events, terrorism, or the stock market.

Gold is real money. The U.S. dollar is a substitute for real money, i.e. gold.

If deflation occurs, there is no other possibility except for lower gold prices.

(to read more about gold and its relationship to the U.S. dollar, see 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!

Gold Under $1000 Is A Very Real Possibility

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GOLD UNDER $1000

‎After gold peaked in January 1980 at $850.00 per ounce, it dropped in price by two-thirds (66%) over the next five years. The low in February 1985 was $284.00 per ounce.

At that point it began a strong move upwards over a three-year span peaking at just under $500.00 ($499.75) per ounce in December 1987. That translates to an increase of seventy-six percent.

The advance was solid and well-defined. Those who had been waiting for the price of gold to go back up were confirmed fundamentally and technically. Or so they thought.

With the “clear, technical confirmations” of a “new, bull market in gold” came a deluge of predictions regarding $1,000.00 gold and higher. At the time that would have marked a nearly four-fold increase from its previous  low of $284.00. (That equates similarly to today’s predictions of $4000.00 gold assuming that $1040.00 was the low in December 2015.)

It was not to be. In January 1988, gold began a long an arduous decline which lasted fifteen years. Trading in gold was confined to a range between $300-400.00 per ounce for the next ten years. Then, seemingly as a result of sheer exhaustion, gold broke down through $300.00 per ounce and traded as low as $252.00 per ounce in September 1999. From its temporary peak at $500.00 per ounce to its ultimate low of $252.00 per ounce, gold’s price had dropped fifty percent.

Even after reaching its ultimate low of $252.00 per ounce, gold continued to trade mostly at under $300.00 per ounce for nearly three more years (April 2002).

Let’s see how this compares to more recent history regarding gold.

From its peak in September 2011 at $1895.00 per ounce, gold declined to $1040.00 per ounce over a period of four and one-half year.

Subsequent to that, gold’s price increased by almost thirty percent to $1363.00 per ounce in a period of seven months. Almost fifteen months later, gold has not traded any higher.

Question No. 1: Are we in the midst of a three-year period similar to that which occurred between 1985-88 (with respect to the price of gold)?

Question No. 2: If so, what might we possibly expect going forward?

It is certainly a realistic possibility that the answer to question no. 1 is yes. This is possible even if gold’s price goes higher first.

It seemed a well-known fact that after dropping in price by two-thirds, gold had seen its ultimate low at $284.00 per ounce.  With three successive years of incredibly profitable gains, who would proclaim otherwise? And the technical signals confirmed it.

The situation today is not entirely dissimilar. Whether $1360.00 per ounce is a long-term intermediate/reaction top or not, the prospect for gold to resume a longer-term price decline would not be out of context with its earlier history.

Gold’s initial decline from its peak price in January 1980 lasted for five years and totaled sixty-six percent. Its initial decline from the recent peak in September 2011 lasted for four and one-half years and totaled forty-five percent. Reasonably similar.

Gold’s price increase from its low in February 1985 lasted for three years and totaled seventy-six percent. Its price increase from the recent low in December 2015 has lasted for twenty-two months. At its peak of $1360.00 last summer and again recently this represents an increase of thirty percent. Considerably smaller percentage gains, but not entirely dissimilar when considering the broader picture.

And if gold were to move higher soon it would not negate the possibility of going much lower again and disappointing lots of people.

The additional technical confirmations and increased comfort level that came as gold increased in price from $284.00 to $500.00 between 1985-88 did nothing to stop the subsequent fifteen-year decline to new lows.

If gold were to decline back towards $1000.00 per ounce, how low might it go? What might we expect?

One possibility is that it could trade between $1100.00 and $1300.00 for several years. And then break down below $1000.00. And depending on how quickly it establishes its eventual low point, it might trade for several years under $1000.00. Gold might settle out somewhere just above its previous all-time high in 1980 at $850.00 per ounce. Say $875-$975.00 per ounce.

There are also technical studies that point to a gold price as low as $700.00 per ounce before a resumption of the “eternal” bull market.

Ironically, none of the above is about gold.  It is about the U.S. dollar.

Whatever you think or expect regarding gold, you need to make sure your expectations for the dollar are inversely similar. (see here)

During the entire fifteen year period of gold’s price decline between 1988-2002, the U.S. dollar was gaining in value. When the U.S. dollar peaked in January 2002, gold was priced at $282.00 per ounce (gold had posted its low price of $252.00 a year or two before this but was still trading under $300.00).

At that point, gold and the dollar reversed directions simultaneously. Over the next eleven years, the U.S. dollar gave up nearly thirty percent of its peak value. Gold, meanwhile, gained five hundred and seventy percent in price. That increase seems a bit outsized on the surface, but it is not dissimilar to the outsized declines gold suffered during the previous twenty years while the dollar was gaining in value.

Between September 2011 and January 2016 the U.S. dollar gained significantly and gold’s price declined in similar fashion. The low so far for gold was the $1040.00 per ounce in December 2015.  The peak for the dollar occurred just a few short weeks later in January 2016.

After January 2016, both reversed directions again. The dollar headed lower and gold reversed and went higher. Similar turning points occurred in the summer of 2016 and December 2016.

Which brings us to the present. If gold moves higher from here it will be because of continuing weakness in the U.S. dollar. Conversely, if the U.S. dollar moves higher, it will be reflected in a lower gold price.

(for a scenario about possible gold prices see Gold Price – US$700 Or US$7000?)

 

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 – 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!