After decades of concerted effort by governments and central banks, the focus away from gold as money has led to its characterization as an investment, a hedge, insurance, etc. Some still refer to it as a barbarous relic. Are any of these descriptions valid?
The Meaning Behind Gold’s Triple Top
In a previous article I wrote:
“Looking at this chart, it should be apparent that gold at $2000 is fully-priced. Unless you are convinced that the US dollar is going to crash soon, then expectations for much higher gold prices at this point are unwarranted.” ($10,000 Gold Or A Triple Top?)
The article was published in August 2020 and the chart is reprinted below…
Is Silver Really Cheap; And Does It Matter?
IS SILVER REALLY CHEAP?
Proponents of silver and their expectations for a much higher price have talked for years about the reasons “silver is undervalued” (their words, not mine).
Whether it is a deficit in new production of silver or the gold-to-silver ratio, there is always something to talk about; so let’s talk.
Below is a chart (source) of silver prices for the past century…
Silver Prices – 100 Year Historical Chart
The chart is plotted using average closing prices for spot silver so the peak shown in 1980 is $36 oz., which is an average of closing prices for the month of February 1980. The peak intraday price was $49 oz. in January 1980.
In either case, with spot silver currently under $28 oz., silver is definitely cheaper than it was in early 1980.
That does not, however, make silver a bargain at its current price. The actual average price for the entire year 1980 was $20.98 oz. With the average closing price for 2021 at more than $26 oz., then silver is more costly by an average of $5 oz., or twenty-four percent.
The two parallel lines identify a price zone for silver between $20 – $40 oz. The total time that silver prices were actually within that range or higher amounts to less than five years.
Since the chart includes a total of 106 years, that means silver has traded at prices below $20 oz. for more than ninety-five percent of the past century.
Conversely, we might say that silver at $27 oz. is not cheap. In fact, after adding the exorbitant premiums that accompany the purchase of physical silver (Silver Eagles, junk silver coins, etc.), silver is quite expensive; more than almost any other time shown on the chart.
However, a realistic assessment of silver prices is not complete unless we consider inflation-adjusted prices. Here is the same chart as above, but with silver prices adjusted for inflation…
Silver Prices – 100 Year Historical Chart (inflation-adjusted)
In the chart above, the same parallel lines of $20 and $40 are shown. On an inflation-adjusted basis, most of the price history for silver is still under $20 oz.
An imaginary line at $30 oz. compares more closely to the $20 oz. in the first chart and reinforces how significant the recent $30 oz. stopping point is in silver’s price history.
Even on an inflation-adjusted basis, silver is still more expensive than almost any other time in the past one hundred years. After adding premiums for actual physical silver in various forms, the acquisition price approaches $35-40 oz.
Some will argue that expectant price increases for silver will make any of this type of analysis unnecessary, or moot. However, the reasoning behind those expectations are more grounded in fantasy than actual fundamental fact.
SILVER SUPPLY-DEMAND GAP
One of the so-called fundamentals that seem to attract unwarranted attention is the supply-demand gap in production (mining) of silver relative to consumption.
“The gap in consumption over production that existed in the late sixties and early seventies was one of several things that contributed to much higher silver prices. But when all is said and done, and after decades of ‘fundamental’ arguments about such an imbalance, silver has failed to show any further signs of a need for revaluation in price because of consumption/production gaps, past or current.” (see No Silver Lining Here)
GOLD-TO-SILVER RATIO
Another favorite argument trumpeted in silver’s behalf is the reliance on a return to gold-to-silver ratio of 16:1. The ratio currently stands at 67 and was as high as 120 last year. Below is a chart of the ratio…
Gold to Silver Ratio – 100 Year Historical Chart
Silver investors who are depending on a declining gold-to-silver ratio are betting that silver will outperform gold going forward. But, if anything, the chart (see link above) shows just the opposite. For more than fifty years, the ratio has held stubbornly above a rising trend line taking it to much higher levels.
In the Mint Act of 1792, the U.S. government arbitrarily chose a 16:1 ratio of gold prices to silver prices. The actual prices were set at $20.67 per ounce for gold and $1.29 per ounce for silver.
“There is no fundamental reason which justifies any particular ratio between gold and silver.” (see Gold-Silver Ratio: Debunking The Myth and Gold-Silver Ratio And Correlation)
SILVER – WHAT NOT TO EXPECT
- Don’t expect silver to outperform gold. Gold is real money and its higher price reflects the actual loss in purchasing power of the US dollar. As long as the dollar continues to lose purchasing power, the price of gold will continue to move higher relative to silver.
- Don’t expect silver’s price to rise if stocks collapse. A collapse in stock prices more likely would usher in hard times economically; maybe recession or depression. Silver is primarily an industrial commodity, so it is very price sensitive to economic slowdowns. When stocks fell at the onset of Covid-inspired closures and shutdowns last year, the price of silver fell by a larger percentage, before moving higher along with most everything else.
- Don’t expect silver to rise above $30 oz. and stay there. That would be a refutation of everything we know about silver historically.
- Don’t expect a special circumstance or event to void any of the above.
SILVER – WHAT SHOULD YOU DO?
What you do depends on your reasons for owning silver.
- If you own silver and are expecting large-scale fantasy price increases, reread this article and the other ones referenced.
- If you got in early on the latest upswing and have some nice profits, take them.
- If you own some silver coins against the possibility of a collapse in the US dollar, keep them and go about your business.
- If you have larger amounts of wealth you want to protect, consider gold. It is a much better choice.
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!
A Fair Price For Gold – $1000 Or $2000?
What is a fair price for gold? How can we know if gold, or any other money, is worth what we can buy with it?
So, what can we buy with it? And how do we know that the value of our gold/money is realistically priced?
We know that gold is currently priced at more than $1800 per ounce; so the value of gold today is what we can buy with one thousand eight hundred dollars.
But is $1800 dollars per ounce realistic? Does it represent fair value? Are there reasons why we might expect that price to rise or decline to any substantial degree that would influence our choice to hold money in gold vs. US dollars?
Overheated Economies And Market Predictions
OVERHEATED ECONOMIES AND MARKET PREDICTIONS
Janet Yellen said the following last week…
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat”
Later that same day, she said this…
“It’s not something I’m predicting or recommending. If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.”
Also last week, we heard from the Federal Reserve which released the following statements on Thursday, May 6, 2021…
- Rising asset prices are posing increasing threats to the financial system, the Federal Reserve warned in a report Thursday.
- “Asset prices may be vulnerable to significant declines should risk appetite fall,” the central bank said.
Before we can understand how to interpret these statements and any possible conflictions, there are four key topics which need to be explained: inflation, the Federal Reserve, interest rates, and the economy.
Gold Price During Hyperinflation
Let’s start by defining hyperinflation…
“Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.” (source)
In addition, hyperinflation is described as “an extreme case of monetary devaluation that is so rapid and out of control that the normal concepts of value and prices are meaningless.”
The latter description is much more characteristic of the potential threat that most people envision when they invoke the term hyperinflation.
Under the conditions characterized by price increases “so rapid and out of control that the normal concepts of value and prices are meaningless”, what would happen to the price of gold?
Higher Gold Price Not Correlated To Money Supply Growth
To say that “a higher gold price is not correlated to money supply growth” is fundamentally correct. However, the expectation for a much higher gold price resulting from huge money creation by the Federal Reserve is shared universally by investors, analysts, and others.
In fact, it is considered almost scriptural canon that a huge increase in the money supply will lead inevitably to a huge increase in the gold price. Historical examples of France in the late 18th century, Germany (Weimar Republic) in the 1920s, and Zimbabwe or Venezuela more recently, are often cited as proof of the relationship between money supply growth and its effect on gold prices.
That is not the case, though.
Gold Prices – Don’t Get Too Excited
GOOD NEWS… The rebound in gold prices from their recent low has awakened new fervor among those looking for the elusive moonshot. The ‘obvious’ signs of much higher inflation have emboldened those who are inclined to predict ever higher gold prices.
Contrastingly, the chart of GLD prices pictured below doesn’t look all that great…
No Fear Of Inflation; Threat Of Deflation
FED HAS NO FEAR OF INFLATION
The Fed wants to have their cake and eat it too, but the cake is stale. Jerome Powell’s remarks in testimony before the Senate recently provoked considerable attention.
Responses, interpretation, and analysis by observers were many and varied. Unfortunately, no one learned anything different from what they thought they knew before Powell’s testimony.
The Fed is well aware of the problem. It is systemic in nature and goes far beyond corporate due diligence, bank liquidity, and the safety of your broker.
Most everyone else (with the exception of Janet Yellen, Ben Bernanke, and Alan Greenspan) thinks they understand the problem, but their limited understanding doesn’t allow for the subtleties of Fed Chair behavior.
Gold’s Singular Role
When it comes to analyzing gold and gold prices there seems to be no limit to the explanations of cause and effect. The number of things presumed to be fundamental, or which are correlated to gold, has grown exponentially as gold receives more attention in the media and from the public.
The state of confusion that exists regarding gold and gold prices is exacerbated by the contradictions and conflicting arguments of almost all concerned parties. This includes investors, traders, analysts, and brokers.
Rather than a desire to understand gold and its singular role, most investors and others are interested in gold only when its price is going up. They buy it and then look for reasons to justify their expectations of even higher prices.
They do look for explanations as to why the price goes down, of course; especially when that happens after they have taken a position on the long side. By then, it is usually too late.
GOLD’S SINGULAR ROLE
There is one overriding fundamental with respect to gold: “GOLD IS REAL MONEY”.
Money has three specific characteristics: 1) medium of exchange; 2) measure of value; 3) store of value. In order for something to be money, it must have all three of these attributes. Otherwise, it is not money.
The US dollar is not money because it does not embody all three of the necessary characteristics. It is an accepted medium of exchange and a measure of value, but it is not a store of value.
Gold is also original money. It was money before the US dollar and all paper currencies, which are merely substitutes for real money; in other words, substitutes for gold.
Lots of things have been used as money during five thousand years of recorded history. Only gold has stood the test of time.
WHAT GOLD IS NOT
The simplest, and most accurate way to say what gold is not, is to state emphatically: “GOLD IS NOTHING ELSE OTHER THAN MONEY’.
Gold is not an investment; nor is it a hedge. Gold is not insurance. Gold is not a safe haven. Gold is not silver’s handsome twin brother. Gold is not a barbarous relic. Gold is not an outdated earlier version of the cryptocurrency craze. Gold as money is not an idea whose time has come and gone.
Gold is nothing other than money. Its use in jewelry is always secondary to its role as money. Gold is money that can be used for adornment, but it is still money, nonetheless. Always.
THE VALUE OF GOLD
The value of gold is in its role and use as money. It is divisible into fractional units for transaction purposes and is a proven store of value.
Gold’s value is constant and unchanging. One ounce of gold today will purchase amounts of goods and services roughly equivalent to what it could have bought fifty, one hundred, or one thousand years ago.
The reason the value of gold does not change is because gold, itself, is unchangeable.
WHY DOES THE PRICE OF GOLD CHANGE?
It is logical and reasonable to ask “If gold is unchangeable, and its value is constant, then why does its price change?
The changing price of gold is attributable to one thing only: changes in the value of the US dollar.
Over the past century, the US dollar has lost between ninety-eight and ninety-nine percent of its purchasing power. Correspondingly, the price of gold has increased by a multiple of fifty ($1050 per ounce) to one hundred ($2060 per ounce) times its original fixed and convertible price of $20.67 per ounce.
The chart (source) below shows a one hundred-year history of rising gold prices…
Over that same one hundred years, what you can buy with an ounce of gold remains stable, or better. (see my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)
SUMMARY
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. The higher price of gold over time is a reflection of the ongoing loss in purchasing power of the US dollar.
Gold’s value is not determined by world events, political turmoil, or industrial demand. Gold is not correlated to interest rates or anything else. Gold is not a hedge or a safe haven; nor is it an investment.
Gold is real money and nothing else.
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!