"Everything you need to know about gold"
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).
INFLATION – WHAT IT IS
Inflation is the debasement of money by the government. Period.
It is not an increase in the general level of prices for goods and services.
The above statements are critical to an understanding and correct interpretation of events which are happening today – or expected to happen – that are casually attributable to inflation. So, let’s go one step further.
There is only one cause of inflation: government. The term government also includes central banks, especially the US Federal Reserve Bank.
Inflation is not caused by “greedy” businesses, excessive wage demands, or accelerated consumer spending. Even government’s own propensity to spend, as reckless as it is, does not cause inflation. And that does not contradict my earlier statement that government is the only cause of inflation. They are. But not because of their spending habits.
Economic growth does not lead to higher inflation. There are statements made often that imply a link between growth in our economy and inflation. And that we have to “manage the growth” so the economy doesn’t “grow too quickly” and “trigger higher inflation”. These statements are false and misleading.
Also, inflation will not “accelerate over the next couple of years due to higher energy prices and stronger wage growth that leads firms to raise prices”…Gus Faucher/PNC Bank/WSJ (It is possible that inflation will accelerate over the next couple of years, but it can’t/won’t be for the reasons stated.)
So how does the government cause inflation? It’s time for a bit of history…
Early ruling monarchs would ‘clip’ small pieces of the coins they accumulated through taxes and other levies against their subjects.
The clipped pieces were melted down and fabricated into new coins. All of the coins were then returned to circulation. And all were assumed to be equal in value. As the process evolved, and more and more clipped coins showed up in circulation, people became more outwardly suspicious and concerned. Thus, the ruling powers began altering/reducing the precious metal content of the coins. This lowered the cost to fabricate and issue new coins. No need to clip the coins anymore.
From the above example it is not hard to see how anything (grains and other commodities for example) used as money could be altered in some way to satisfy the whims of government. But a process such as this was cumbersome and inconvenient. Of course it was. What a shame. There had to be a better way. And there was.
Enter: Paper Money
With the advent of the printing press (moveable type) and continued improvements to the mechanics of replicating words and numbers in an easily recognizable fashion, paper money was now in vogue – big time.
However, people viewed the new ‘money’ with healthy skepticism and coins with precious (or semi-precious) metal content continued to circulate alongside the new paper money. Hence, it was necessary, at least initially, for government to maintain a link of some kind between money of known value vs. money of no value (in order to encourage its use).
Over time, eventually, that link was severed; partially at first, then completely. And it was done by fiat (a decree or order of government).
Not only does our money today have no intrinsic value, it is inflated (and therefore debased) continuously and ongoing through subtle and more sophisticated ways such as fractional-reserve banking and expansion of credit. The printing press is still at the core and is humming 24/7 but the digital age has ushered in new and ingenious ways to fool the people.
Government causes inflation by expanding the supply of money and credit. And that expansion of the money supply cheapens the value of all the money. Which is precisely why, over time, the US dollar continues to lose value. It takes more dollars today to purchase what could have been purchased ten years ago, twenty years ago, etc. And it has been going on for over one hundred years. It dates back to the origin of The Federal Reserve Bank in 1913.
What most people refer to as ‘inflation’ or its causes are neither. They are the effects of inflation. The increase in the general level of prices for goods and services is the result of the inflation that was already created.
More history… The Arab Oil Embargo in 1973 and the demands for more money for oil which led to the formation of the Organization Of Petroleum Exporting Countries (OPEC) followed close behind then President Nixon’s severance of all ties of the US dollar to Gold. The underlying fact of the matter was that the dollars which they were receiving for their oil were worth less (not quite ‘worthless’) and had been losing value for several decades. And the price had been fixed for decades.
To understand this better, imagine that you were a company selling widgets for $1 each and according to your contract you cannot receive any more than that. Fast forward twenty or thirty years. You are still selling lots of widgets and still receiving $1 for each one you sell. But your costs over the years have continued to climb. And it also costs you more for everything you buy to maintain your standard of living. And it’s not just you. Everyone is paying more for everything. Yet, on an ongoing, year-to-year basis, things seem reasonably normal. But prices now are rising more frequently and the rate of increase is higher than before. What is going on?
The effects of inflation are showing up. Those effects can be very subtle at first, or not noticed at all. But at some point in time the cumulative effects of inflation become more obvious and everyone starts acting differently. Businesses try to plan for it and individuals invest with inflation in mind.
If your dollars were freely convertible into equivalent amounts of gold based on the prices in effect at the time of your original contract to produce widgets – or sell barrels of oil – then you could just exchange your dollars for gold. Which is exactly what happened. Foreign governments in the late sixties began to demand the gold to which they were legally entitled. And countries which produced and sold oil wanted a higher price for their oil. Wouldn’t you?
As people become more aware of the effects of inflation they start looking for reasons. And for guilty parties. Government is quick to act of course. They start by implementing wage and price controls. This is like setting the stove burner on ‘high’ and putting a lid on the pot with no release for the pressure. And they talk a lot.
They have talked enough over the past thirty years to frighten us into thinking that our own spending and saving habits are the problem. Sometimes the blame is directed at foreign countries and their currencies (China/Yuan for example).
Our sense of ‘unfairness’ over China’s attempts to weaken the Yuan seem to be misplaced. We criticize them for doing the same things the US government and Federal Reserve have been doing for over one hundred years.
The inflation (expansion of the supply of money and credit) produced by the Federal Reserve is deliberate and intentional. And ongoing. The effects of that inflation are volatile and unpredictable.
Even with the hugely, inflationary response of the Federal Reserve in 2008 and afterwards we did not see the “obvious substantial increase in the general level of prices for goods and services” that some expected and predicted. But we did see a resurgence of higher prices for financial assets like stocks and real estate.
During the seventies, prices for basic necessities were rising on a weekly, even daily, basis. But things eventually settled down and we had an extended period of stability and relative US dollar strength for a couple of decades.
And yet, the effects of inflation are very clear. How much are you paying for things today compared to fifteen years ago? Ten years ago?
As time marches on, the effects of government inflation will become more extreme and more unpredictable. And the loss of purchasing power of the US dollar will reflect that.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
The average cost for a loaf of bread in 1930 was ten cents ($.10). The average cost for a gallon of gasoline was also ten cents.
With gold priced in U.S. dollars at $20.00 to the ounce, you could at that time purchase two hundred loaves of bread or two hundred gallons of gasoline (or some combination thereof).
Twenty dollars of paper currency OR one ounce of gold valued at $20.00, usually in the form of a U.S. Double Eagle ($20.00 gold coin, legal tender), were equal in “purchasing power”.
Over the next four decades the cost for a loaf of bread/gallon of gasoline continued to increase such that in 1970 the respective costs were twenty-five cents/thirty-six cents. An ounce of gold (at $40.00) would purchase one hundred sixty loaves of bread/one hundred eleven gallons of gasoline. That is considerably less than the two hundred units of either item which could have been purchased in 1930. But the numbers are even worse when we look at what twenty dollars of U.S. paper currency would buy in 1970: eighty loaves of bread/fifty-five gallons of gasoline. Both gold and the U.S. dollar lost purchasing power over the forty-year period 1930-70 but the U.S. dollar was the “biggest loser”.
Time for a bit of history to help us understand what had happened historically over the course of that forty-year period. In 1933, President Franklin Roosevelt issued an executive order prohibiting private ownership of gold by U.S. citizens and revaluing gold at $35.00 to the ounce. Also, U.S. paper currency would no longer be convertible into gold for U.S. citizens. Foreign holders (primarily foreign governments) could continue to redeem their holdings of U.S. dollars for gold at the “new, official” rate of $35.00 to the ounce. But what does that really mean?
If you are a foreign holder of U.S. dollars, you had just been told that your stash of “money” (in the form of U.S. currency) was now worth forty-one percent less than previously. It was a tacit admission by the U.S. government that they had been “inflating” the money supply aggressively as evidenced by the cumulative effects of that inflation showing up in the cost of goods and services (i.e. average cost of loaf of bread/gallon of gasoline).
The Depression (1930s) and World War II (1940s) “conveniently” received much of the blame. But things progressed reasonably well (economically speaking) throughout the fifties and sixties. By the late 1960’s and early 1970’s foreign governments were demanding returns of their gold on deposit here in the U.S. Some of that gold was the result of new redemptions of the accumulation of U.S. dollars which they held and which were promised as redeemable in gold.
In 1968, the United States Government again revalued gold “officially” at $40.00 to the ounce and at the same time acknowledged a “free market” price for gold which could operate on its own, independently. However, the U.S. would not recognize the free market price in any official dealings/transactions.
By 1971 things were getting a bit dicey. Foreign governments wanted their gold, but the U.S. did not want to release it. Or, they didn’t have it. Probably some combination of both. So, in August 1971, President Nixon suspended any further convertibility of U.S. dollars into gold by non-U.S. citizens. All hell broke loose. Literally.
Prices of goods and services in the United States began rising rapidly (historically speaking) and the U.S. dollar price of gold peaked in 1980 at $850.00 to the ounce. The average price for gold in 1980 was $615.00 to the ounce.
By 1980 the average cost of a loaf of bread was $.50 (double what it was in 1970) and the average cost of a gallon of gasoline had settled out at $1.19 (several years after the Arab Oil Embargo of early 1970’s). The above stated average U.S. dollar price of gold ($615.00 to the ounce) would purchase twelve hundred thirty loaves of bread or five hundred sixteen gallons of gasoline. And the good old U.S. dollar? Twenty dollars in U.S. paper currency would buy forty loaves of bread/seventeen gallons of gasoline.
Ten years later, in 1990, a loaf of bread had increased to $.70 and a gallon of gasoline to $1.34. With gold at $338 USD/oz you could purchase four hundred eighty-two loaves of bread/two hundred fifty-two gallons of gasoline. Twenty U.S. dollars would buy twenty-eight loaves of bread/fifteen gallons of gasoline.
So where are we today? The average cost of a loaf of bread and a gallon of gasoline are approximately the same – about $2.50. With gold at $1300.00 to the ounce you can purchase five hundred twenty loaves of bread or five hundred twenty gallons of gasoline which is nearly one hundred sixty percent MORE than the amount you could have purchased with one ounce of gold in 1930.
And twenty dollars in U.S. currency will purchase eight loaves of bread or eight gallons of gasoline which is ninety-six percent LESS than the amount you could have purchased with twenty dollars in U.S. currency in 1930.
What else do you need to know? Get some 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!