$1500 Gold Price Is Fair And Accurate

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Is $1500 a reasonable price for gold? Some of the more ardent gold “bulls” might say no. A price of $2000 per ounce should sound better to them. That particular number is likely more popular because gold’s price didn’t quite get there eight years ago, stopping just shy of $1900 per ounce.

Similar behavior occurred after 1980, when gold’s price assent was stopped at $850. At that time, $1000 became the price projection of choice.

In both cases, the expectations for gold were likely born out of desire, rather than fundamentals.

So, how can we know what is a fair and accurate price for gold today – right now?

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Fed-Watching Is Overhyped And Overdone

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FED-WATCHING IS OVERHYPED

If you are one of those who is looking for clues from the Federal Reserve as to the direction of the markets, forget it. You are too late.

Too many people think that the latest Fed minutes will give them some indication of what to expect from the markets. Those same people think that the Fed actually has a strategy and that they are “managing the economy” with the intention of pursuing what is best financially and economically for the country.

Wake up! The Federal Reserve does not exist and operate with the intention of acting in our best interests financially, economically, or in any other way.

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A Lesson About Gold – How Bullish Can It Be?

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A Lesson About Gold

Apparently, there is no limit. This seems especially true right now with all of the “obvious” signs and indicators staring you in the face. It is almost blasphemous to speak cautiously. Better to let your imagination run wild and join in the revelry.

I can’t do that. I don’t choose to be dumped into the same cauldron of boiling fantasy with other analysts and advisors, who tout and promote based on the latest headlines. There has to be more to it. I think there is.

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Gold Explodes, Then Implodes – Again

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GOLD EXPLODES, THEN IMPLODES

It shouldn’t be a surprise to anyone, because it has happened before.

Gold’s quick roundtrip from $1540 to $1610 and back again ($1539 earlier today) had its roots in actions and words between the United States and Iran. Prognosticators say there is more to come. Maybe; maybe not. But there is historical precedent for gold’s action.

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Is Bitcoin Money? Does It Have Value?

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IS BITCOIN MONEY?

Writing about Bitcoin is a challenge for several reasons. It has a short history (ten years), it is highly complex, and there is a certain vagueness to the logic behind the concept. When reading about it, or listening to explanations, I wonder whether or not I understand it adequately. I also wonder how many others do.

Much has already been written and discussed, such that further commentary might be superfluous. But some additional perspective likely won’t hurt. So, for those who asked…

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Gold Stocks Vs Gold – Not A Good Bet

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Gold Stocks vs Gold…

Earlier this year,  various gold stock indices (XAU, HUI, GDX) gained more than fifty percent in just three months. Most of the negativity associated with the sector was brushed aside and replaced by positive expectations for the future.

Of course, the 90-day rush to this year’s highs did not occur in a vacuum. The price of gold rose by twenty percent over the same three-month period. The mining shares, however were considerably stronger.

Going back to the fall of 2018, the price of gold increased by thirty percent and gold mining shares increased by about sixty-five percent. The resulting differential of more than 2-to-1 in favor of the mining shares lends possible credence to the argument for shares over bullion.

Nevertheless, when we dig a bit deeper, we see a different picture.See the chart below…

HUI to Gold Ratio (source)

This interactive chart shows the month-end ratio of the NYSE Arca Gold Bugs Index (HUI) to the price of gold bullion back to 1996. The 6 month moving average has been added to smooth out volatility and show the longer-term trend.

Looking at the chart above, we can see that gold stocks have declined much more severely than the price of gold bullion.

The potential advantage of owning gold mining stocks rather than physical gold, turned into a horrible disadvantage. The price of gold declined by forty-five percent but gold stocks dropped by more than eighty percent.

In other words, gold stocks dropped by nearly twice as much as gold bullion after gold peaked in 2011.

The results were not that good before that, either. Except for a brief three-year period between 2000-03, owning physical gold was less risky and provided better overall returns.

Below is a second chart, this one of the XAU gold stock index…

XAU to Gold Ratio (source)

This interactive chart shows the month-end ratio of the Philadelphia Gold and Silver Index (XAU) to the price of gold bullion back to 1983. The current month shows the latest daily closing values.

As can be seen, going back as far as 1983, the presumed advantage of owning gold shares over physical gold, does not appear to be evident.

Looking at the first chart again, we see that the HUI to gold ratio is at the same level as it was twenty years ago, when gold was at $275 per ounce. And, it has failed to exceed the level it reached three years ago in the summer of 2016.

Since that point in the summer of 2016, the price of gold has risen by as much as fifteen percent earlier this year. Currently, gold is up ten percent from that point.

Gold stocks, on the other hand, failed to even match their previous high, and are currently about thirteen percent lower than their peak levels of 2016. This can be seen on the chart below…

GDX – VanEck Vectors Goldminers ETF (source)

So how does this year’s performance for gold stocks vs. gold measure up historically? Below is the first chart above (HUI to Gold Ratio), again. This time the current year, 2019, is labeled. As you can see, this year’s outsized gains for gold stocks relative to gold is just a small blip…

Gold stocks have been a horrible, losing investment for decades. Compared to physical gold, their results are pathetic.

 

 

Gold Peaked In 1980

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When gold’s price reached $850 per ounce in January 1980, it seemed as if nothing would stop the runaway train that was headed straight for $1000 per ounce. But it was stopped, and began sliding downhill quickly.

By June 1982, two and one-half years later, gold’s price had declined by sixty-five percent. At close to $300 per ounce, the price of gold seemed farther away from the $1000 mark than ever before.

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Fed Is Chasing Its Own Tail

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FED IS CHASING ITS OWN TAIL 

Did you ever watch a dog get caught up in the act of chasing its own tail? It continues to run in a circle as the object of its fascination and intention continues to elude it. The action is quite comical, almost hilarious.

The expectations of the animal are both foolish and amusing. You might feel inclined to want to communicate the unrealistic expectations to the engaged participant, but you know your efforts would be in vain.

Observing the actions of the US Federal Reserve Bank over the past several years brings to mind similar recollections…

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Gold And Silver – Fundamentals Be Damned

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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!

 

$25000 Gold

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$25000 GOLD…

Forty years ago gold was in uncharted territory. Its price had risen sharply from $35.00 per ounce to a temporary peak at just under $200.00 per ounce in 1976. Then, in just a little more than two years,  it fell nearly fifty percent to $103.00 per ounce.

Having risen from that point to over $500.00, talk about $1000.00 gold was becoming commonplace. After gold peaked at $850.00 in 1980 and fell back to under $500.00, the talk about $1000.00 gold increased.

Some believed that $1000.00 gold would arrive in short order and that it would sound the death knell for the US dollar. Now, others are saying similar things about gold and the dollar.

A potential gold price of $10,000 has been mentioned often over the past several years. Even $25,000 gold is in the headlines.

I’m sure that others are already calculating and anticipating what $25,000 gold might mean to holders of the shiny, yellow metal. It makes previous targets of $10,000.00 per ounce sound blandly conservative.

But, is $25,000 per ounce for gold a reasonable number? And, when might we expect it?

Pierre Lassonde, Canadian philanthropist and co-founder of Franco-Nevada, says gold could hit $12,500 an ounce by 2049; and that under the “right” conditions, it could go as high as $25,000.

The difference between the “average price target” of $12,500, and the possible $25,000 price is huge. But it is not an unrealistic differential. Extreme differences in average prices and peak prices appear normal for gold.

In January 1980, gold’s price peaked at $850 per ounce. For the entire year of 1980, the average closing price for gold was $614 per ounce. Prior to its peak price, for all of 1979, golds average closing price was $307.

And, in 2011, the year in which gold’s price peaked at close to $1900 per ounce, the average closing price for gold was $1573. The year before that, it was $1226.

So which price should we focus on; the average price target of $12,500 or the possible peak price of $25,000?

For now, lets turn our attention to $25,000. That is the number in the headlines, and it is the number that investors and others are likely dreaming about. Most people don’t fantasize about ‘average’ prices, so we won’t either.

The $25,000 price target by 2049 is thirty years away, though. That is a long time to wait; even if you are right. A lot can happen in thirty years.

Gold’s  current  price is near $1500 per ounce. If gold’s price hits $25,000 by 2049, that is an average annual return of 10%. That sounds very good; maybe too good.

Historically speaking, gold’s most profitable 30-year period for price appreciation occurred between 1970 and 2000. Gold’s price at the beginning of the period was $35 per ounce. At the end of the period it was $280. The average annual return was just slightly over 7%.

Unfortunately, all of the gains came in the first ten years, when gold’s price soared from $35 per ounce to a peak of $850. For the ten-year period, gold’s price increased at an average annual rate of 37%. After that, it was all downhill for the next twenty years.

The next most profitable ten-year period for gold price appreciation occurred between 2001 and 2011. During that period, the price of gold appreciated at an average annual rate of almost 22%.

That was followed by four and one-half years of declining prices and negative annual rates of return.

The pattern of long periods of declining gold prices interwoven with the sharply higher increases over shorter periods has led to decreasing average annual rates of return for gold.

This is because the effects of inflation are continuing to lessen (see Fed Inflation Is Losing Its Intended Effect). Expecting a 10% average annual return for gold prices from this point in time forward seems highly optimistic.

It is also quite possible that gold might be headed significantly lower before it heads higher in earnest. In other words, new highs in gold are probably not just around the corner. (see What If Gold Is NOT In A New Bull Market?)

Expectations for much higher gold prices are rooted in certain assumptions about gold which are the result of seemingly fundamental logic. However, the logic is faulty because it is based on faulty assumptions. For example, some would say that there is increasing demand for gold which translates into higher prices. Or, they may conclude that higher prices for gold means that its value is increasing. They mistakenly believe that gold’s higher   prices indicate that it is becoming more valuable. As a result, they ‘invest’ in it.

But gold is not an investment. Nor, is it an alternative investment, or a hedge. It is one thing only – real money.

Anything else is a substitute for real money. This includes all paper currencies, especially the US dollar. It also includes crypto currencies.

Gold is priced in US dollars. International trades are settled in US dollars. The changing price of gold in US dollars is a reflection of changes in the value of the US dollar.

Gold is the original measure of value. The price of gold in dollars tells us what the dollar is worth – NOT what gold is worth. The same thing would apply if gold were priced in Euro, or Yuan, or any other currency. Gold’s value is rock-solid stable. It does not change.

Now back to the $25,000 price projection for gold. In a certain sense, it is a very reasonable number. But, by the time you see it, it will not make much difference to you. Certainly, it will not make you rich.

For the past century, the Federal Reserve has been intentionally practicing inflation by expanding the supply of money and credit. The debasement of money leads to a loss of purchasing power which results in higher prices generally for all goods and services.

This is why it costs more today to sustain lifestyle and pay your living expenses than it did ten years ago; or one hundred years ago. The US dollar and all paper currencies continue to lose value. So, the prices you pay  in dollars (or yen, euro, etc.) for the goods and services you buy, continues to increase.

Today, the US dollar is worth only a fraction of what it was worth one hundred years ago. Its purchasing power equates to approximately one and one/half cents compared to the dollar of a century ago. That is a decline of between ninety-eight and ninety-nine per cent.

Correspondingly, this is reflected in the price of gold in dollars, which is about seventy times ($20.67 per ounce x 70 = $1447 per ounce) greater today than it was one hundred years ago.

The only thing that will result in higher prices for gold, such as $25,000 per ounce, is continued depreciation of the US dollar. That continued depreciation and subsequent loss of purchasing power means that you will pay much, much more for the goods and services you buy.

For example, how rich will you be if you are paying $50.00 for one loaf of bread thirty years from now? Or fifty dollars for one gallon of gasoline? Your gold “profits” will be needed just to maintain your standard of living. (see A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)

This is just as true, and probably more so, if we saw a significantly rapid decline in the US dollar over a shorter time frame; say five or ten years. The deteriorating social conditions that would accompany that rapid a decline in the dollar’s value, as evidenced by a $25,000 gold price, would border on anarchy.

Finally, a complete repudiation of the US dollar makes the price of gold in dollars meaningless. We might as well be talking about $100,000 gold, or $1,000,000 gold.

Will you sell your gold for one billion dollars of Monopoly money?

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!