Gold And Silver – Fundamentals Be Damned

ABOUT GOLD AND SILVER…

When speaking of gold and silver, analysts and investors are always happy to share their viewpoints on the fundamentals for the two metals. Lately, the list of fundamentals seems to be growing.

When someone mentions housing starts and gold in the same sentence, it is indicative that analysis has become suspect, and the resultant observations are likely to be of little or no value.

Inferring correlative activity between gold and a host of other non-related items such as interest rates, social unrest, political turmoil, wars, existing home sales, retail sales, economic activity, etc., is confusing and unsupportable.

So-called fundamentals for gold are lumped into one big cauldron of boiling phrases and sayings. Investors can pick and choose which fundamental(s) suits them.

The definition of the term fundamental (noun) is  “a central or primary rule or principle on which something is based.”  

As regards gold and silver, each of them has one basic fundamental:

1) Gold is real money.
2) Silver is an industrial commodity.

Each of them has a secondary use that is similar to the primary fundamental of the other metal. Gold is real money, first and foremost, but it also has industrial applications. Silver is primarily an industrial commodity that has a secondary use as money.

The basic value of either gold or silver stems from its primary fundamental. This means that gold is valued for its role as real money and silver’s primary value stems from its use in industry. And the primary fundamental for each metal will always be the same, even though there can be changes in the relative relationship of primary and secondary uses.

For example, lets say that gold’s primary role as money accounts for 90% of its assumed value. The other 10% can be industrial uses, such as jewelry. If there is an increase in industrial demand for gold, as a result of increasing demand for its use in ornamentation and jewelry, the relative percentage in gold’s total demand increases. In other words, a possible new allocation might be 85% for monetary use and 15% for industrial use.

What is important to note, however, is that the total demand for gold does not change. The increase in industrial demand for gold supplants the investment demand. Also, whatever changes occur in the relative percentages will never alter the balance of the two in a material way or in a way that inverts the primary and secondary uses.

Primary demand for gold will always be for its use as money; and that value will always exceed any secondary applications in industry by a wide margin.

With silver, the example is similar, except that the industrial and monetary uses are reversed. Whatever changes or increases take place in silver’s use as money will supplant industrial demand by a like percentage. As with gold, the increase in its secondary use and valuation will never override its primary use. Silver will always be valued primarily for its use in industry – not for its use as money.

Even if most investors and analysts understood these things (they don’t), then they likely would ignore them – because they are boring.

Investors are fickle and price conscious. Most of them are not interested in value. They want to know when the price of something is going up, by how much, and why. The ‘why’ is mostly an after thought. Usually, ‘why’ enters the conversation after the price goes down when it was expected to go up.

That is when investors and their advisors start talking a lot about fundamentals. Since the fundamentals they talk about don’t apply to gold and silver, whatever logic they use is faulty because it is based on incorrect assumptions. This leads to unrealistic expectations.

Negative news in the headlines seems to be a reason to buy gold. A recent headline even proclaimed “bad news is good news for gold”. Apparently, some investors are thinking and acting with that statement in mind. Unfortunately, simultaneous events do not prove correlation.

So how do we explain gold’s price changes according to its fundamental above?
Gold is not just real money. It is original money. Gold was money before the US dollar. Its value is constant and unchanging. It is the ultimate store of value.

Gold is the measure of value for everything else. Everything else is assessed a value based on its price in gold – in grams, kilos, ounces, and fractional units of such.

This seems backwards to most of us because we are used to valuing things in terms of their price in dollars, or any other currency. But if we learn to understand it, we can better understand the following:

The rising price of gold in dollars does not mean that gold’s value is increasing; rather, it signifies a correlative loss in the purchasing power of the US dollar.

In other words, NOTHING ELSE OTHER THAN THE US DOLLAR IS A DETERMINING FACTOR IN THE PRICE OF GOLD.

What we have said about gold, however, does not apply to silver. Silver is primarily an industrial commodity; and its price in dollars is mostly a reflection of its use in industry rather than its use as money.

Slowdowns in economic activity lead to declines in industrial demand. This is reflected by lower prices for industrial commodities, like silver. In fact, during every recession in the last fifty years – seven of them – the price of silver declined. (see: Prospecting For Silver During Recessions)

(note: silver’s price swoon in March-April 2020 at the onset of the current recession brings the number to eight)

As far as silver’s role as money is concerned, silver has not come close to replicating gold’s increasing price over time.

GOLD PRICE ANALYSIS

The US dollar has lost somewhere between 98-99% of its purchasing power over the past one hundred years.

When the gold price hit $2060 oz. last August, it was a one hundred-fold increase over the past century and represented a ninety-nine percent loss in US dollar purchasing power.

In inflation-adjusted terms, $2060 oz. in August 2020 is nearly identical to $1895 oz. in August 2011. Both peaks equate similarly to a ninety-nine percent loss in US dollar purchasing power.

The increase in the US dollar price of gold from one peak to the next (Aug 2011-Aug 2020) represents the actual purchasing power that was lost in those intervening nine years. 

Approximately midway between the two price peaks, the gold price bottomed at $1040 oz. in January 2016. This was a fifty-fold increase and reflected a ninety-eight percent loss in US dollar purchasing power.

TARNISHED SILVER

Whereas, gold’s price currently is eighty-five times higher than its original fixed price of $20.67 and indicates a nearly ninety-nine percent loss in US dollar purchasing power, silver’s price has risen only seventeen fold ($22.40 oz. divided by $1.29) over the same one hundred years.

In fact, in inflation-adjusted terms, silver is cheaper today than it was one hundred years ago (see: Silver Is Cheap And Getting Cheaper). That is hardly a testament to silver’s value as an inflation hedge or its role as money.

Many of the analyses about gold and silver are factually incorrect. They are lacking in fundamental support and have no historical precedent.

The logic used is faulty because it is based on incorrect assumptions. All of this leads to unrealistic expectations.

The expectations for a moonshot price trajectory, for either gold or silver, are wishful thinking. And to the extent they occur, they will be accompanied by conditions that negate the expected positive benefits (see: Gold’s Not An Investment – You Won’t Get Rich and Silver Fails Miserably To Meet Expectations)

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!