You Might Get A Higher Gold Price, But…

by

A HIGHER GOLD PRICE

We are currently in the midst of the latest round of projections for new highs in the gold price. Those projections are more the result of anxious anticipation and elevated emotions rather than real fundamentals.

Expectations for a reversal in Fed interest rate policy were given a boost last month with indications from Chairman Powell that there will eventually be some cuts in rates. That was all that investors needed to bid up the prices of financial assets.

Two of the biggest beneficiaries were bonds and gold. (I consider gold to be a financial asset since it is real money.)

The logic for bond bulls is reasonably straightforward and fundamentally correct. A decline in rates correlates inversely to higher bond prices; just the opposite of the action we have experienced over the past couple of years as rising interest rates were directly reflected in bond price declines which totaled as much as fifty percent.

As far as gold is concerned, its price action is a typically knee-jerk reaction based on assumptions that the next round of cheap and easy money is already here.

That is certainly not the case. First of all, the Fed spent nearly four full decades engineering interest rates to abnormally low levels of historic proportion. The current attempt to return interest rates to a higher, more reasonably normal level is only 2-3 years old.

Is it reasonable to think that’s all there is? Back to business-as-usual now? For most investors and analysts, it is difficult to view things in proper perspective when your entire life has been lived in a make-believe world of endless money creation available at artificially low rates.

Current projections for the gold price to move substantially higher are based on the assumption that gold will respond affirmatively to the expected onslaught of cheap money. That is not the way it works.

WHAT CAUSES A HIGHER GOLD PRICE?

The only reason the price of gold increases is to reflect the actual loss of purchasing power in the U.S. dollar. It reflects this decline only in hindsight – after the fact, and never before.

When the price of gold peaked in 1980, it reflected the effects of inflation that had previously eroded ninety-seven percent of the dollar’s purchasing power.

At that time, people were no less fervent in their expectations for a complete collapse in the U.S. dollar. Along with that expected collapse came predictions for the gold price to exceed $1000 oz.

Eventually, it did so; but, it took nearly thirty years to happen. Meanwhile, the U.S. dollar did not totally collapse. It did, however, continue to lose purchasing power from the effects of inflation.

The gold price declined from an average closing price of $677 in January 1980 to a low of $250 during the summer of 2000.

Beginning in 2000-01 and continuing until August 2011, the gold price marched upwards to a new high of $1895 oz.

The “new high” for the gold price was a three-fold increase from its 1980 high and reflected at that time a nearly ninety-nine percent loss in U.S. dollar purchasing power. In inflation-adjusted terms, the prices were similar. In other words, the “new highs” of 2011 reflected the same inflation-adjusted value for gold evidenced in 1980.

Similarly, the “new high” for gold at $2048 in August 2020 reflected the additional loss of purchasing power in the U.S. dollar that had occurred after 2011 and also reflected the same inflation-adjusted value for gold referred to previously.

Here is what the price action looks like on a long-term chart…

Gold Prices (inflation-adjusted) 1980 -2023

New Highs in Gold Chart

As you can see on the chart above, the ending gold price of $2062 for the year 2023 is not a “new high” in real dollars. In fact, the current gold price is actually cheaper by almost $300 oz. compared to its previous peak in August 2020.

The price peak of $2048 oz. for gold in August 2020 cannot be exceeded until the gold price in current, inflation-adjusted dollars exceeds $2336 oz.

PERVERTED LOGIC FOR SOME GOLD BULLS 

When the Fed announced its plan to orchestrate higher interest rates for the expressed purpose of reducing the effects of inflation to a more acceptable level (supposedly in line with their oft-missed 2% target), their efforts resulted in a stronger dollar and a lower gold price; at least temporarily.

The Fed has now indicated that recent evidence is indicative that progress has been made on that front and that the effects of inflation have been reduced measurably, if not entirely subdued; and that continuing to increase rates may not be necessary.

Question: If the reasoning for a stronger dollar and lower gold price was based on the announced efforts by the Fed two years ago; and, since their recent statements indicate they feel they are approaching their goal, even if they haven’t reached it yet; doesn’t that mean that the perception of the inflation threat is not what it was and hence, a stronger dollar and lower gold price are justified?

My purpose in asking is that gold bulls seem to have a tendency to view conflicting evidence through rose-colored glasses.

Here is what it sounds like in sequence: 1) Inflation is very bad; the dollar is going to collapse, so buy gold. 2) Inflation isn’t as bad as previously thought; the Fed may not need to keep raising interest rates, so buy gold.

CONCLUSION

The gold price is always playing catchup to the previous effects of inflation which are manifest in the continual loss of purchasing power in the U.S. dollar.

The current gold price of $2060 oz is one hundred times higher than its original fixed price of $20.67 oz. and reflects the ninety-nine percent loss of $USD purchasing power that has occurred over the past century.

The potential for a gold price increase is always there because the effects of inflation continue indefinitely, however…

The price of gold will not move appreciably higher until after there is further, significant loss of purchasing power in the U.S. dollar.

Since the gold price is currently at or near its inflation-adjusted peaks from 1980, 2011, and 2020, expectations for a much higher gold price at this particular time seem premature.

(Also see What We Know About Gold)

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!

Gold Price, Inflation, Dollar Collapse, & BRICS

by

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.

Read more

What We Know About Gold

by

What we know about gold is simple and straight forward. Gold is real money and a long-term store of value.

Gold’s value is in its use as money. Its price has nothing do with its value. In fact, the price of gold has nothing to do with gold at all.

The higher price of gold over time is a reflection of the loss of purchasing power in the U.S. dollar.

The U.S. dollar and all paper currencies are substitutes for real money, i.e., gold. All governments inflate and destroy their own currencies.

As the dollar and other currencies lose purchasing power, the ‘price’ of gold increases. This price increase does not mean that gold is more valuable.

The value of gold is constant and stable. As original money, gold was the measure of value for everything else.  Prices for various goods and services were denominated in fractional weights of gold (ounces, grams, grains).

In order to encourage the use of dollars, a ratio of convertibility was fixed at $20.67 to one ounce of gold.

With the inception of the Federal Reserve and central banking, the use of fiat money was expanded and amplified. Eventually, the United States government suspended convertibility and cancelled any official link between the U.S. dollar and gold.

Subsequently, the gold price rose dramatically between 1971 and 1980. The increase in the gold price to an average monthly closing price of $677 in January 1980 reflected an accumulated loss of purchasing power in the U.S. dollar totaling ninety-seven percent.

This represented several decades of ongoing inflation and its effects which had previously not been factored into the fixed gold price. For the gold price it was a period of catch up and realignment with the actual purchasing power of the U.S. dollar.

There was nothing predictive or subjective about it. The value of gold had not changed. The change in its price was due to the effects of inflation that had previously occurred and their impact on the purchasing power of the U.S. dollar. (see Gold Is Cheaper Now Than In 1980)

GOLD SINCE 1980 

When the gold price peaked in 2011 at $1895 ounce, it represented a nearly ninety-nine percent loss of purchasing power in the U.S. dollar and accounted for the effects of inflation that had occurred between 1980 and 2011. It was another catch-up period for the gold price.

Likewise, the 2020 gold price high of $2048 was a reflection of further loss of dollar purchasing power and confirmed an accumulated total loss of ninety-nine percent.

The price of gold increases in hindsight to reflect the effects of previous inflation that have shown up in a loss of U.S. dollar purchasing power. The three major peaks (1980, 2011, and 2020) in the gold price are shown on the chart below…

Gold Prices (inflation-adjusted) 1970-2023

Golds Price Over the Years. Gold Facts Chart

GOLD AFTER 2023 – NEW HIGHS?

Predictions for new highs in gold should be viewed with skepticism. Any substantial and lasting new highs in the gold price will come only after a further loss of purchasing power in the U.S. dollar that is maintained for a reasonable period of time.

Inflation never stops. Its effects are sometimes quite mild and, at other times, more severe. Even so, gold might take several years to reflect the ongoing, cumulative effects of inflation.

For example, gold has approached (and briefly exceeded) its nominal peak price of $2048 several times since August 2020. However, the effects of inflation and loss of U.S. dollar purchasing power since then are such that gold would need to be $2340 in current dollars just to match that previous peak.

At $1950-80, gold is almost $400 oz. below its August 2020 peak. That doesn’t sound like gold is “knocking at the door of new highs”.  Any declines in the gold price would widen the gap.

WHAT WE DON’T KNOW ABOUT GOLD 

“What we don’t know about gold” might be better phrased as ‘what we don’t know about the U.S. dollar and the effects of inflation”.

We don’t know the end result of the Fed’s attempt to raise interest rates to a more normal level. What is more important is that we don’t know how the U.S. dollar will respond and whether or not it can continue its pattern of relative strength versus other currencies and gold.

We also cannot see the effects of inflation before they show up in the system, regardless of how bad or how mild they might be.

After the hugely inflationary efforts of the Federal Reserve in 2008-2010, most expected a big jump in the effects of inflation and a speedy resumption of economic activity. Not so. It took almost a full decade to get back on track. And, even then, the effects of inflation remained muted.

After Covid, the effects of inflation combined with disruptions in the supply chain sent consumer prices up dramatically. This led to a new round of projections and predictions for the price of gold.

CONCLUSION

The potential for extreme inflation is a very real possibility. So, too, is the potential for deflation. Then, again, things could continue in muted fashion for years.  We won’t know until after the fact.

The gold price will not reflect any of those scenarios until after they happen. Gold is not forward-looking.

In addition, as can be seen on the chart above, there can be long periods of time before the gold price catches up to the effects of previous inflation.

To whatever extent the price of gold moves higher, it is only to catch up to the effects of previous inflation and to compensate for the actual loss of purchasing power in the U.S. dollar. (see Gold Bulls Are Too Price-Dependent)

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!

Government Default Could Mean Lower Gold Price

by

GOVERNMENT DEFAULT

In the world of “all things gold”, every event is viewed within the context of how it will affect gold prices – on the upside.

Earlier this year, it was bank failures. Before that and since then, the focus was/is on the Fed with regards to a possible reduction of interest rates.

Two years ago, it was Russia vs Ukraine. Last month, it was Hamas vs Israel (see Gold Price And Geopolitical Concerns).

Read more

The Gold Price And Geopolitical Concerns

by

GOLD PRICE AND GEOPOLITICAL CONCERNS 

Investors and others often use the term geopolitical to describe investment risk arising from various conflicts between individual countries and, also, among nations in general on a worldwide basis.

Read more

Treasury Bonds Update

by

TREASURY BONDS

There is an important Treasury Bonds update you should know of. There must have been poison gas inside the Treasury Bond price balloon. It appears that bond traders were overcome with it and lost consciousness while still at their desks with their fingers on the sell key.

We know there are buyers for all sellers, of course; but, at what price? Equilibrium in the bond market is like a fantasy mirage in the middle of a desert sandstorm – it is nowhere to be found. Here is the latest chart (source) for TLT, the 20+ Year Treasury Bond ETF…

Treasury Bonds Update Chart

The chart covers trading activity for the past two weeks beginning with Monday, September 25th, and ending with Friday, October 6th.

During those ten trading days, TLT losses totaled almost eight percent. For anything other than U.S. Treasury bonds, that might not seem so bad, but…

These are U.S. Treasury bonds. They are a long-term version of the same securities that are considered a standard for “risk-free” investments – U.S. Treasury bills.

Yes, we know that a longer maturity has more exposure to interest rate risk. Even allowing for an understanding of that risk, though, doesn’t provide much consolation when you watch a “safe”, AAA rated, income-oriented investment that promises to pay interest annually and all your money back at maturity, go up in smoke.

Let’s not forget the “full faith and credit of the United States government” behind those bonds. That should make anyone feel comfy and secure.

BLOODLETTING OR BLOOD-DRAINING? 

It took four decades for the Federal Reserve to engineer interest rates downward to near zero from north of 15% on the very same U.S. Treasury bonds that currently yield 4.7%.

In order to return interest rates to something more historically normal (we’re not there yet), we have endured three years of money destruction.

The past two weeks have accelerated the bloodletting process and the patient may not get a transfusion.

CONCLUSION

In conclusion, this is the summary of the treasury bonds update.  The drop in U.S. Treasury bonds continues. The percentage drop in Treasury bond prices since 2020 now totals more than 53 percent.

The effects are felt in all markets, including auto loans, mortgages, retail consumer credit, etc.

A credit collapse (think 2008) is a very real possibility and so is a washout in stocks. No one is immune. Just ask Silicon Valley Bank.

Things will get worse before they get better; a lot worse for a lot longer.

(also see Bond Market Tells The Real Story)

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!

Gold Continues 3-Year Decline

by

GOLD CONTINUES DECLINE

Gold continued its downward path this past week and all but confirmed that lower prices are ahead. Below is a chart of price action dating back to the peak in 2020…

Gold Prices (inflation-adjusted) 2020-23Gold Price Decline Chart

Read more

Bond Market Tells The Real Story

by

BOND MARKET TELLS REAL STORY

While everyone else twiddles their thumbs and waits for the next missive from the Federal Reserve, the bond market has spoken loudly and clearly about the near-term (and, possibly long-term) direction of interest rates.

Read more

Is Silver Underpriced Compared To Gold?

by

SILVER NOT UNDERPRICED

Silver bulls have for decades made the argument that the white metal is underpriced relative to gold. Their enthusiasm is fueled by expectations for a return to the original fixed ratio of 16:1 in favor of gold.

Using the current gold price of $1925 oz., a return to the ratio of 16:1 would require a silver price of $120 oz. – right now.

Read more

The Danger Of Trade Tariffs

by

The renewed danger of trade tariffs by various presidential candidates is a clear and present danger to free trade and the world economy.

In today’s globalized world, trade is the lifeblood of economies; connecting nations and fostering prosperity. However, there is a contentious tool that is often used in international trade relations: tariffs.

Tariffs are taxes imposed on imported goods, ostensibly to protect domestic industries or gain a competitive edge. They are sometimes recommended and promoted by those who think they have identified an “unfair advantage” existing between trade partners.

Even though politicians say otherwise, tariffs are guaranteed to produce net negative results that are much worse than any short-term theoretical benefits.

ECONOMIC DISRUPTION

The primary danger of trade tariffs is the economic disruption they can cause.

When tariffs are imposed, they disrupt the equilibrium. Domestic industries might benefit in the short term, but at what cost?

Since the prices of imported goods rise due to tariffs, consumers end up paying more for the things they want to buy.

Trade tariffs often trigger a chain reaction, leading to retaliatory measures from affected countries.  Full-blown trade wars can result…

“America’s last major trade war happened after imposition of the 1930 Smoot-Hawley Tariff, which increased 900 import tariffs from 40-48%. It was supposed to support U.S. farmers whose land had been devastated by the Dust Bowl, but it resulted in higher food prices for Americans who were already crippled by the Great Depression.

America’s trade partners at the time hit back with their own tariffs and global trade fell by 65%, worsened the depression, and contributed to the beginning of World War II.

After Smoot-Hawley, the country suffered tremendously. The general public had little understanding of tariffs or trade agreements.” Tariffs And Trade Wars… by Anna Kucirkova

NEGATIVE IMPACT ON SMALL BUSINESS

Small businesses bear the brunt of trade tariffs. Without the resources to absorb the increased costs imposed by tariffs, They struggle to compete with larger companies that have more significant financial reserves.

Moreover, the uncertainty created by trade tariffs can deter small businesses from growing and expanding, stifling growth and harming the overall economy in the long run.

INEFFICIENT RESOURCE ALLOCATION

Trade tariffs can distort the allocation of resources within an economy. When protectionist measures artificially support certain industries through tariffs, it can lead to inefficiencies.

Resources can flow to industries that are protected rather than those that are genuinely competitive.

This misallocation of resources hinders economic growth and productivity. It may also delay the necessary transitions to more sustainable industries, as resources are tied up in less efficient sectors.

CONCLUSION

Regardless of the intentions of the countries involved, and irrespective of who levies the first assessment (penalty), tariffs and other protectionist trade measures come with unintended consequences which outweigh exponentially any perceived benefits. In addition, they hinder cooperation on other global issues.

In short, they do not work. Historically, they have always failed – despite the near-sighted promises and illogic of the politicians.

It is no different this time. Beating up on China won’t solve any problems. As bad as things appear to be economically for both the United States and China, expect them to get worse if either country takes action.

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!