GOLD PRICE, INFLATION, DOLLAR COLLAPSE
Expectations for gold to move higher in price are often tied to worsening inflation and a possible collapse in the U.S. dollar.
That sounds logical and there is historical precedent to support such expectations; but, some clarification is necessary first.
DEFINITION OF INFLATION
Inflation is the debasement of money by governments and central banks. The inflation is intentional and all governments inflate and destroy their own currencies.
The inflation occurs with the expansion of the supply of money and credit. This cheapens the value of all the money in circulation.
As a result, all of the money in circulation loses purchasing power. The loss of purchasing power shows up in the higher prices that consumers pay for goods and services.
The higher prices are not inflation. They are the effects of inflation. Those effects are cumulative and unpredictable. Over time they become more volatile as well.
In addition, the effects (loss of purchasing power, higher prices, etc.) of inflation are not proportionate to the amount of inflation which is created. In other words, a one hundred percent increase in the money supply does not mean that a doubling of consumer prices will result.
INFLATION AND THE GOLD PRICE
Gold is real money. It is also original money. Gold was money before the U.S. dollar and all paper currencies.
The U.S. dollar is a substitute for real money, i.e., gold. A rising gold price over time is a reflection of the loss of purchasing power in the U.S. dollar that has already occurred.
When gold peaked in 1980, its price correlated to a ninety-seven percent loss of purchasing power in the dollar up to that point. The move was spectacular in nature, but it was mostly catch up to the decline in the dollar that had been accruing for the previous four decades.
Successively higher peaks in the price of gold in 2011 and 2020 reflected and confirmed a ninety-nine percent decline in U.S. dollar purchasing power.
When gold peaked at $2058 oz. in August 2020, its price was one hundred times higher than its original fixed price of $20.67 oz. when the U.S. dollar was freely convertible into gold at that rate.
Consumer prices also increased by a similar amount over that time frame. The U.S. dollar of ninety years ago is worth one penny today – a ninety-nine percent loss of purchasing power.
GOLD’S SINGULAR ROLE
Gold’s singular role is its use as money. Gold is real money because it carries the qualifying characteristics of money, including that of a store of value.
The value of gold is directly attributable to its use as money. Gold’s value is constant and unchanging.
One ounce of gold is no more valuable today than it was fifty or one hundred years ago; or a thousand years ago.
Gold is the original measure of value. Before paper currencies, goods and services were priced in gold (ounces, grams, grains, etc.).
It was not a question as to how much your gold was worth. The question was did you have enough gold, i.e., money, to purchase a desired item.
US DOLLAR COLLAPSE
A collapse in the U.S. dollar means further, significant erosion of its purchasing power, possible loss of its reserve status, and potential repudiation. In other words, the possibility of the dollar becoming worthless is often inferred when the word ‘collapse’ is used.
Time might be more important than the total destruction involved. For example, if the prices of consumer goods and services doubled over the next six months, the meaning and intent of the term collapse would be satisfied.
But, if the U.S. dollar were to become worthless, the price of gold in U.S. dollars would be meaningless.
Pick a number, any number. Let’s say $100,000.00 oz. If no one is willing to accept dollars in trade, would you be willing to sell your gold at that price?
If the U.S. dollar were to become worthless, it won’t matter what the price of gold is in U.S. dollars. Again, what will be important under those conditions is how much gold you own.
Gold would retain its purchasing power. If there is a USD price it will only tell you how much more purchasing power the dollar has lost.
Gold at $100,000 oz. won’t be any more valuable than it is at $2000 oz. And gold at $2000 oz. today isn’t any more valuable than it was at $20.67 oz.
It does not make any difference what currency gold is priced in, either. Gold’s price in dollars, euros, yen or yuan does not tell us anything about gold, but only what happens to the currency itself.
For example, if gold were priced in Chinese yuan today and the yuan were to lose fifty percent of its current purchasing power, the gold price in yuan would reflect that loss by eventually move higher by one hundred percent.
The fifty percent loss of purchasing power in the yuan would increase the cost of goods and services priced in yuan by one hundred percent as well.
It is important to note, however, that an increase in the gold price comes after the effects of inflation are readily apparent and absorbed into the system.
BRICS
Some countries (BRICS) have been vocal in their condemnation of the U.S. dollar. They have banded together with a seemingly common objective to “overthrow the U.S. dollar”.
It is important to understand that all of the rhetoric and publicity involving BRICS nations and their efforts to undermine and replace the U.S. dollar are political in nature.
To whatever extent there is merit to their arguments in favor of an alternative to the U.S, dollar as a reserve currency, can you trust the likes of Russia and China, etc. to sponsor and provide that alternative?
Trust is an issue when considering calls and promises for a “gold-backed” currency to replace the dollar. The key point of importance is not the gold backing; it is convertibility.
The success of any fiat currency or real money substitute (in other words, anything other than gold itself as the medium of exchange) depends on its convertibility into gold – on demand.
At this point in time, trial balloons and potential suggestions for a gold-backed currency alternative to the U.S. dollar do not include convertibility.
CONCLUSION
Gold is real money and a long-term store of value. All attempts to replace it are substitutes for real money and doomed to failure.
Credibility for the U.S. dollar was based on its convertibility into gold at a fixed, agreed-upon rate of exchange.
Absent that convertibility, the ongoing effects (loss of purchasing power in USD) of inflation manifest themselves in a higher gold price.
Without gold convertibility, any attempts to replace the U.S. dollar are doomed to failure.
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!
I confess to being illiterate in this field. I keep hearing people say buy metals, when the dollar collapses, gold & silver will shoot to the moon. What is gold valued against at that point, & what are you going to be able to do with it? You aren’t going to buy a loaf of bread for an ounce of gold.
Sorry for the late response. Gold is original money. At one time, before the dollar and other paper currencies, goods and services were priced in fractional units/weights of gold. (see my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold).