"Everything you need to know about gold"
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.
A Lesson About Gold
Apparently, there is no limit. This seems especially true right now with all of the “obvious” signs and indicators staring you in the face. It is almost blasphemous to speak cautiously. Better to let your imagination run wild and join in the revelry.
I can’t do that. I don’t choose to be dumped into the same cauldron of boiling fantasy with other analysts and advisors, who tout and promote based on the latest headlines. There has to be more to it. I think there is.
“Modern Monetary Theory (MMT) is a heterodox macroeconomic framework that says monetarily sovereign countries like the U.S., U.K., Japan and Canada are not operationally constrained by revenues when it comes to federal government spending. In other words, such governments do not need taxes or borrowing for spending since they can print as much as they need and are the monopoly issuers of the currency.” Investopedia
Of course governments are not ‘constrained’ by revenues. They have always been able to “print as much as they need”.
Modern Monetary Theory is not ‘modern’. Far from it.
STOCKS, OIL, GOLD…
In late 1999, the hyper-bullish technology stock sector was nearing the end of its nearly decade-long run to unsupportable and overly optimistic highs. At the center of the hype and fascination were new companies, headed by twenty-something geniuses. They were referred to as startups.
The multiples of earnings that normally applied in order to assess value of these companies was thrown aside. That is because most of them did not have any earnings.
Nevertheless, they were attractive enough to garner huge crowds of support. Just the hint of a revolutionary idea could boost an unknown small private company into the spotlight of the new issue market with over subscription being commonplace.
Technology stocks collapsed in 2000, and were eventually joined by the broader stock market which began a two-year descent that saw the S&P 500 lose fifty percent of its value.
Nearly smack in the middle of this two-year decline in stock prices came the 9/11 tragedy. Shortly after that the market bottomed, but before it could get untracked and head back up in earnest, there was a mutual fund “scandal”.
Then in 2006, real estate prices peaked – and cratered. Most of the damage was in residential real estate where it seemed to be the most extensive. It was definitely the most obvious.
Foreclosures were rampant and an entire cross-section of the population was in transit, moving from their recently acquired new homes and into rentals, if they could find one.
Economic fallout spread to major investment banks and the stock market. Financial institutions with household names like Lehman Brothers, Merrill Lynch, Washington Mutual, and AIG were skewered.
The stock market finally recognized how bad things were. Beginning in August 2007, and continuing for the next eighteen months, stock prices declined with a vengeance. The overall market, as reflected by the S&P 500, lost nearly two-thirds of its value.
In February 2009, a bottom was reached. The past ten years has seen the market surge to new all-time highs, seemingly much higher than could have possibly been anticipated just a few years ago.
The S&P 500 has increased in value four-fold from its low of 735 ten years ago to its most recent high of 2945.
It seems hard to believe, and it strengthens the argument for long-term investing in stocks and staying the course. But maybe things are not quite what they seem. Lets take a look.
Below is a chart (macrotrends.net) of the S&P 500 for the past twenty years. The data are inflation-adjusted using the headline CPI and plotted on a logarithmic scale… 
From this chart we can see that, in real terms, stocks did not get back to their highs of 2000 until fifteen years later, in February 2015. Even without the adjustment for inflation, stocks did not reach and exceed their 2000 peak until thirteen years later, in March 2013.
Also, we see that six of the past ten years were spent in recovering lost ground. The new highs and additional growth has come only in the past four years.
Fifteen years seems like an inordinately long time to wait for the market to assert itself and return to any expected pattern of normal growth. And you would have had to endure pure hell to see it happen.
And while the six and one-quarter percent average annual real rate of return over the past ten years is not inconsistent with the stock market’s long-term average annual return of about seven percent on an inflation-adjusted basis, it is too convenient to describe it as a return to normal.
A clearer picture of the stock market’s performance is found in looking farther back on the time line. The stock market’s (S&P 500) total return for the nineteen years beginning in January 2000 and ending in December 2018 is about fourteen percent, on an inflation-adjusted basis.
This equates to an average annual real rate of return on stocks of slightly more than seven-tenths of one percent for the first two decades of this century. That is not even close to the seven percent average annual return on an inflation-adjusted basis that stock market proponents are fond of citing.
In other words, the stock market returns for the this century are ninety percent less than their long-term average.
Below is a chart (macro trends.net) of crude oil for the past twenty years. As with stocks above, the price of crude oil is also adjusted for inflation and plotted on a logarithmic scale…
For eight years between 2000 and 2008, the price of crude oil quadrupled in real terms. After that, and in concert with stocks above, it lost two-thirds of its value, bottoming in January 2009, one month earlier than stocks.
Unfortunately for crude oil, that was not the bottom. After recovering a major portion of its losses it began another extensive decline in price in mid-2014. Then, after bottoming in early 2016, the price of crude oil doubled and then fell back to its recent low of close to $45.00 per barrel in December 2018.
After nineteen years of exclamatory volatility, crude oil at the end of last year was exactly where it was in February 2000 on an inflation-adjusted basis – $45.00 per barrel.
Now let’s look at gold. The chart below, as with stocks and oil above, shows prices for gold over the past twenty years and is inflation-adjusted, too, and plotted on a logarithmic scale… 
It seems somewhat ironic, but gold appears to be much less volatile than either stocks or oil. For the first eleven years of this century, the price of gold was steadily increasing, as contrasted with the extreme action and counteraction in the prices of stocks and crude oil.
Also, in stark contrast to stocks and oil, the price of gold actually increased substantially over the past two decades. Even after a drop in price of almost one-third since its high in August 2011, the price of gold ended 2018 more than three times higher than where it started the century in January 2000.
The three-fold increase (two hundred percent total return) equates to an average annual increase of six percent, which is nine times greater than stocks for the same period. And it is infinitely greater than crude oil which ended the same nineteen year period unchanged.
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!
We know that inflation is the debasement of money by government. The effects of inflation show up in the form of rising prices over time. The rising prices are a reflection of the loss of purchasing power of the currency involved. For our purposes, that means the U.S. dollar.
The chart below depicts increases in the Consumer Price Index, year-to-year, dating back to 1914…
You wouldn’t know that by listening to current commentary on the economy.
There is a bigger threat, though. But first, there is some clarification about inflation that is necessary.
Most people infer rising prices when they hear the term inflation. That is not correct. The rising prices are the ‘effects’ of inflation. The inflation, itself, has already been created.
It is not created, or caused, by companies raising prices. And it is not created by ‘escalating wage demand’.
When someone says “inflation is back”, they are referring to rising prices. Yet they are wrong on two counts.
First, as we have previously said, the rising prices, generally, are the effects of inflation.
Second, the inflation isn’t back; because it never went away.
From my book INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT:
“Inflation is the debasement of money by the government.
There is only one cause of inflation: government. The term government also includes central banks; especially the U.S. Federal Reserve Bank.”
The Federal Reserve caused the Depression of the 1930s and worsened its effects. Their actions also led directly to the catastrophic events we experienced in 2007-08 and have made us more vulnerable than ever before to calamitous events which will set us back decades in our economic and financial progress.
The new Chairman of the Federal Reserve, Jerome Powell, is personable, likable, candid, and direct. But he cannot and will not preside over any changes that will have lasting positive impact.
The Federal Reserve does not act preemptively. They are restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making.
And their actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.
Yet they are not independent. In fact, they have a very cozy relationship with the United States Treasury. That relationship is the reason they are allowed to continue to fail in their attempt to manage the economic cycle.
There are two specific terms which describe our own actions and relationship with the Federal Reserve – obsession and dependency.
We are bombarded daily with commentary and analysis regarding the Fed and their actions. Almost daily we are treated to rehashing of the same topics – interest rates, inflation – over and over. And we seemingly can’t read or hear enough, i.e. obsession.
But are we reading or hearing anything which will help us gain a better understanding about the Federal Reserve? And what, if anything, can we realistically expect them to do?
We are also hooked on the liberally provided drug of cheap credit. Our entire economy functions on credit. We are dependent on it. And without huge amounts of cheap credit, our financial and economic activity would come to a screeching halt.
A credit implosion and a corresponding collapse of stock, bond and real estate markets would lead directly to deflation. The incredible slowdown in economic activity leads to severe effects which we refer to as a depression.
Deflation is the exact opposite of inflation. It is the Fed’s biggest fear. And it is a bigger threat at this time than progressively more severe effects of inflation.
The U.S. Treasury is dependent on the Federal Reserve to issue an ongoing supply of Treasury Bonds in order to fund its (the U.S. government’s) operations. During a deflation, the U.S. dollar undergoes an increase in its purchasing power, but there are fewer dollars in circulation.
The environment during deflation and depression makes it difficult for continued issuance of U.S. Treasury debt, especially in such large amounts as currently. Hence, the resulting lack of available funds for the government can lead to a loss of control.
The U.S. government is just as dependent on debt as our society at large.
The following excerpt is from my new book ALL HAIL THE FED!:
“When something finally does happen, the effects will be horribly worse. And avoidance of short-term pain will not be an option. The overwhelming cataclysm will leave us no choice.
As severe as the effects will be because of previous avoidance and suppression, they will also last longer because of government action. The cry for leaders to “do something” will be loud and strong. And those in authority will oblige.
But don’t look to the Federal Reserve for a resolution. They are the cause of the problem.”
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 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, 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.
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!
INFLATION – WHAT IT IS, WHAT IT ISN’T
Inflation is an insidious threat to our financial and economic security. It has been foisted upon us to the point that we are in danger of losing much more than the value of our money. The capital markets are facing risks of immensely greater proportion than those of 2007-08. Economic activity is primarily financed by credit and we are hooked on the drug of money and higher prices – for everything. We are told often that inflation is spontaneous and that we must learn to mange its effects. That is not true.
Inflation is intentional and practiced by governments and central banks the world over. And its effects are unpredictable and destructive. In addition, the effects of inflation are cumulative; hence, they tend to be more volatile, ongoing. And buried underneath all of the surface weaknesses is the specter of fractional-reserve banking. It is the legalized version of Ponzi scheme. A special section on the topic is included.
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).