"Everything you need to know about gold"
GOLD FACTS AND FUNDAMENTALS…
After the gold price reached a high of $850 oz. in 1980, its price began a long decline that lasted over twenty years. But the decline was not just characterized by its lower price, which eventually bottomed around $250 oz.
More noteworthy was the lack of interest in the yellow metal, which continued for almost twenty-five years.
INFLATION OR DEFLATION
The debate continues but not much has been said that clarifies the issue for ordinary investors. What follows in this article should help.
Inflation is the debasement of money by government and central banks. The Federal Reserve and all central banks practice inflation by expanding the supply of money and credit continuously and intentionally.
This debasement of the money results in effects that are harmful and unpredictable. One of these effects of inflation is an unquantifiable loss of purchasing power in the money itself.
“Gold going nowhere” seems to be a reasonable description of recent price action in the metals markets.
Below is a daily chart of GLD for the past year…
An understanding of the relationship between between the gold price and inflation requires historical observation and factual understanding. Below are three specific statements that are rooted in historical fact…
1) GOLD IS REAL MONEY
Lots of things have been used as money during five thousand years of recorded history. Only gold has stood the test of time. It has earned its role as real money because it is the only thing which meets the three specific criteria for money: a measure of value, a medium of exchange, and a store of value.
Gold is and has been easily incorporated into recognizable forms and amounts for use within various standards of weight and measure. Also, gold is scarce, malleable, indestructible and beautiful.
2) PAPER CURRENCIES ARE SUBSTITUTES FOR REAL MONEY
Gold is also original money. It is the original measure of value for everything else.
A medium of exchange needs to be portable, which gold certainly is. Gold is and has been easily incorporated into recognizable forms and amounts for use within various standards of weight and measure.
Gold 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. Some consider these negotiable receipts to be a precursor to our modern checking system.
3) INFLATION IS CAUSED BY GOVERNMENT
One thing that should be clear from history is that governments destroy money. Inflation is the debasement of money by government. It is practiced intentionally by governments and central banks.
The effects of inflation are volatile and unpredictable. The Federal Reserve Bank of The United States has managed to destroy the purchasing power of the U.S. dollar little by little over the past century. The result is a dollar that is worth ninety-nine percent less than in 1913.
MORE ALWAYS EQUALS LESS
When the Fed began its grand experiment, the price of gold was fixed and convertible at the rate of $20.67 per ounce. This fixed rate of exchange was supposed to act as a restraint on government to keep them from creating excess dollars to meet their spending needs.
Here is a historical example of how inflation was practiced with gold before the invention of the printing press and the advent of paper currencies…
“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.” (see Inflation – What It Is, What It Isn’t, And Who’s Responsible For It)
From the above example it is not hard to see how anything used as money could be altered in some way to satisfy the spending habits of government. But a process such as this was cumbersome and inconvenient.
Enter: Paper Money
With the advent of the printing press and continued improvements to the mechanics of replicating words and numbers in easily recognizable fashion, paper money became the “next big thing.”
At first, people viewed the new ‘money’ with skepticism. Coins with 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.
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 debased continually through subtle and more sophisticated ways such as fractional-reserve banking and credit expansion.
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 exactly why the US dollar continues to lose purchasing power.
EFFECTS OF INFLATION
The ongoing expansion of the supply of money and credit by governments and central banks IS inflation.
This intentional debasement of money leads to a gradual loss in purchasing power of the US dollar.
The loss in purchasing power results in higher prices over time for most goods and services.(see “A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold” Revisited)
The loss in purchasing power and subsequent higher prices are the effects of inflation.
GOLD AND THE US DOLLAR
A declining U.S. dollar means a higher gold price. A stable or strengthening U.S. dollar results in a stable or lower gold price.
In other words, over time, a higher gold price is correlated inversely to the US dollar’s loss in purchasing power.
When the gold price peaked last August at $2060 oz., it was one hundred times higher than its original fixed US dollar price of $20.67 oz. a century ago. That indicates almost exactly the ninety-nine percent decline in US dollar purchasing power mentioned earlier and is indicative that gold is a store of value.
If you think the current effects of inflation are understated, that would mean the potential for a higher gold price is implied. Except…
The effects of inflation are unpredictable. And a higher gold price is predicated on seeing the actual price increases first.
The gold price doesn’t go up because people expect inflation to get worse. It only goes up to reflect the loss in US dollar purchasing power that has already occurred.
Furthermore, it can take years for the gold price to reflect any subsequent loss in purchasing power (1980-2011; 2011-2021).
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!
NEW FUNDAMENTALS FOR GOLD
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.
PRICE CONSCIOUS INVESTORS
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.
That brings us back to gold’s only fundamental: gold is real money. Anything else is a substitute.
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 at $4.00 oz. in January 1974. (see: Silver Is Cheap And Getting Cheaper)
CONCLUSION
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!
If you are still waiting on silver to bring you huge profits, your wait just got longer. Below is a chart (source) of SLV prices for the past week…
Silver prices gapped significantly lower at the open on both Thursday and Friday. The combined loss for the two days is almost six percent.
It’s true that two days price action doesn’t tell the whole story, but contrary to what usually happens in fairy tales, this story isn’t likely to end in similar fashion. The phrase “happily ever after” does not apply.
Nor can it be said with any conviction that there is a positive side to silver’s recent price action. No matter how optimistic silver investors are, false hopes are still “false”.
Below is a two-year chart of SLV…
While it is not drawn on the chart, there is an uptrend line of support which dates back to March 2020 and which was decisively broken earlier this summer in June. At that time, silver prices gapped down sharply, too; and again in August.
At this point silver prices are down more than 25 percent from their highs last August and appear to be headed lower. It isn’t unreasonable to expect SLV to land somewhere around $18 and spot silver at $19-19.25 – at least temporarily.
IS SILVER REALLY CHEAP?
In May 2021, I published an article titled “Are Silver Prices Really Cheap; And Does It Matter?” At the time, spot silver prices were approximately $27 oz.
The February Reddit false alarm was in the rear view mirror, and the silver price seemed to be consolidating at about ten percent below its high from last August which was in the vicinity of $30 oz…
“On an inflation-adjusted basis, most of the price history for silver is still under $20 oz. Even on an inflation-adjusted basis, silver is still more expensive than almost any other time in the past one hundred years.”
Silver back below $20 oz. is like returning home after a fun vacation. Familiar territory, but not much to get excited about.
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!
If you are betting on gold, you may be in for some tough sledding. Below is a 5-year chart of the yellow metal updated through Sep 3, 2021…
The final posted price as of September 3rd is $1831 oz.
The Labor Day weekend gave gold investors three days to prime themselves for the anticipated price launch. Then, Tuesday happened.
By the end of the day, Sep 7th, gold was down more than $30 oz. and had reversed all of its gains from Friday September 3rd and more. The spot price closed below $1800 oz. for the first time in over one month.
It was a decidedly harsh jolt to anyone expecting a follow through from last Friday’s action and the potential implications are disturbing. Below is another chart. This one is a ten-day chart for GLD…
The chart above is admittedly very short-term in nature, but it is clear that Tuesday’s break in the gold price was swift and consequential.
Some additional perspective might help. Looking back at the first chart, it appears that the gold price has now broken below a clearly defined uptrend line of support dating back to 2018.
A possible near-term target for a move downward is $1500 oz. and there doesn’t appear to be much support before that.
After that there is considerable previous price action between $1300 and $1500 oz., so gold might find a stopping point somewhere within that range.
It is not unreasonable to expect this before the end of this year.
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!
NOT BIDEN’S INFLATION
You wouldn’t know that by listening to current commentary about inflation. Casual observers, economists, investors and analysts seem to agree that “higher inflation is being generated by abnormally huge amounts of government spending”.
The supposition, however, is incorrect. In fact, no amount of government spending causes inflation.
It is also true that abnormally higher spending by consumers does not cause inflation.
Most people think that the term ‘inflation’ is synonymous with ‘higher prices’.
The rising prices, however, are not inflation. The inflation has already been created.
DEFINITION OF INFLATION
“Inflation is the debasement of money by governments and central banks.“
The inflation is accomplished by expansion of the supply of money and credit. All governments and central banks inflate and destroy their own currencies intentionally.
The inflation leads to a loss in purchasing power of the currency which in turn shows up in the form of increases in prices for most goods and services.
Inflation is not created, or caused, by companies raising prices. It is not triggered by escalating wage demand, hoarding or supply shortages.
Changes in economic demand, hoarding, and bottlenecks in the supply chain for goods and services have nothing to do with inflation.
When someone says “inflation is back”, they are referring to rising prices. They are wrong on two counts.
First, the portion of rising prices resulting from the loss in purchasing power are the effects of inflation.
The current share of rising prices resulting from changes in economic demand, such as supply chain bottlenecks, pent-up demand, etc. have nothing to do with inflation or its effects and are a totally separate factor in price changes for various goods and services.
Second, the inflation isn’t back; because it never went away.
Inflation is an ongoing cancer for all currencies of the world and its effects are unpredictable. Governments and central banks never stop expanding the supply of money and credit.
This means, of course, that all currencies continue to lose purchasing power. The US dollar today is worth one penny compared to its purchasing power of a century ago.
ROLE OF THE FEDERAL RESERVE
The Federal Reserve is a banker’s bank. Its purpose is to create and maintain a financial system that allow banks to lend money in perpetuity.
We are bombarded daily with commentary and analysis regarding the Fed and their actions. We are treated to continual rehashing of the same topics – tapering, interest rates, inflation – over and over.
Fed actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.
Today the Fed is restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making. (see The Federal Reserve – Purpose And Motivation)
THE FED IS THE PROBLEM
One of the self-proclaimed objectives of the Federal Reserve is to manage the stages of the economic cycle so as to 1) avoid recessions and depressions and 2) extend the prosperity phase of the cycle.
How well have they done? Not very well.
In their initial attempt to avoid and defer the natural corrections associated with economic recession, the Fed ushered in the most severe depression in our country’s history beginning with the stock market crash in 1929. Even former Fed chairman, Ben S. Bernanke agrees:
“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”…Remarks by Governor Ben S. Bernanke (At the Conference to Honor Milton Friedman, University of Chicago -Chicago, Illinois November 8, 2002)
But they did do it again.
Six years after his speech, Governor Bernanke presided over another catastrophe in the financial markets. Cheap credit and ‘monopoly’ money had blown bubbles in the debt markets that popped.
Alan Greenspan was Chairman of the Federal Reserve at the time Bernanke made the above statement. When testifying before Congress after the credit implosion of 2007-08 and after he had been replaced by Mr. Bernanke, Greenspan had this to say:
“I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works. I had been going for 40 years with considerable evidence that it was working exceptionally well.”
And lets not forget the Fed induced bubble surrounding stocks in the late nineties which was pricked in early 2000. Greenspan was at the helm then, too.
But is this really any wonder? What can you expect after reading what Danielle DiMartino Booth says…
“The economists were satisfied parsing backward-looking data to predict future events using their mathematical models. Financial data in real time were useless to them until it had been “seasonally adjusted,” codified, and extruded into charts. Fed employees had no interest in financial news.”
IT WILL BE MUCH WORSE NEXT TIME
Similar events today would bring about a price collapse in all markets as well as usher in deflation and a full-scale depression. All of this would be resisted on every front by government and the Federal Reserve.
They would launch an all-out financial war (and maybe another real war, too) by opening the money and credit spigots full force in a futile attempt to reverse the credit implosion and negative price action of all assets.
The depression would also last much longer than needed. And the price declines which are necessary to correct the excesses of the past and cleanse the system would be countered every step of the way by regulations and programs of dubious value.
The efforts of government would actually worsen things and prolong the suffering; and the results would be much worse than anything we could imagine.
It will be quite a ride. (also see Federal Reserve And Market Risk; see here for ThinkMarkets review)
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 rise and fall of gold stocks is a story of hurt and disappointment. That is because most of the time gold stocks are in decline.
Below are four charts which depict the sad story. Following each chart I will make some brief comments…
EVERYTHING PEAKED IN 1980
Both gold and crude oil peaked at all-time highs in 1980. Those highs are still intact when the effects of inflation are accounted for. Below are the charts for both gold and crude oil…