"Everything you need to know about gold"
The correct definition of inflation is “the debasement of money by government and central banks“.
The effects of inflation show up in the form of higher prices for all goods and services.
Hyperinflation is defined as “out-of-control general price increases in an economy, …typically measuring more than 50% per month.” (source)
There are two specific reasons why hyperinflation re: out of control general price increases for all goods and services, possible US dollar collapse, etc., is unlikely.
GOLD AND US TREASURIES
The price of gold early Friday morning this past week touched $1720. At that level it was down $350 per ounce from its high point of $2070 last August.
The size of the decline is not unusual at face value. But, in light of the expectations for hugely higher inflation rates and much higher gold prices that have dominated the headlines over the past year, the drop might signal a cause for concern among gold bulls.
Meanwhile, eyes are fixed on interest rates for US Treasury bonds. During the same six-month period (August 2020 – February 2021) during which the price of gold fell by seventeen percent, the price of the 20-year US Treasury bond fell by twenty percent. That IS a huge deal, as it corresponds to sharply higher interest rates from less than 1% last August to as high as 2.26% just the other day.
The rush to proclaim correlation between interest rates and gold has resumed. Also, warnings and predictions of much higher inflation from around the globe are increasing.
As we have said on several occasions, there is no correlation between gold and interest rates (see Gold And Interest Rates – There Is No Correlation).
This can be seen on the charts below. The first chart (source) is a history of gold prices over the past fifty-six years and the second chart (source) is a history of interest rates over the same time period…
GOLD PRICES 1965-2021
10 YEAR US TREASURY RATE 1965-2021
During the 1970s, the price of gold rose from $40 per ounce to an intraday peak of $850. All throughout that time, the interest rate on the 10-year US Treasury bond rose higher and higher; from approximately 4% to 12.5%.
However, during the years 2000-2011, while the price of gold rose from $250 to $1900, interest rates on the 10-year US Treasury bond dropped from 6% to 2%.
The two decade-long periods provide contradictory results for the argument that lower interest rates are correlated to higher gold prices.
And for those who argue that the higher rates we are currently seeing are an indication of significantly higher inflation, then why is the gold price declining?
The higher interest rates are possibly a market reaction to the brutal effects of infinite credit creation and interest rate manipulation by the Federal Reserve.
The entire world economy is funded with cheap credit and most economic activity is dependent on it. The prices for all financial assets misrepresent and grossly exaggerate any underlying fundamental value.
Higher rates might trigger a credit collapse so severe that any asset could decline in price by fifty percent or more.
As for gold, it would also decline – to a level commensurate with whatever strength the US dollar attains.
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!
BUBBLICIOUS ASSET PRICES
The words bubbly and delicious might be more descriptively accurate when talking about champagne. However, it is not too difficult to imagine giddy salivation among the owners of Bitcoin, or Tesla stock.
And, while some might be more stringent in their terms of definition and applicability, investors in stocks, bonds, real estate, etc. – pretty much anything with a $ sign in front of it – might want to rethink the current state of affairs as it pertains to valuation of their financial assets.
EVERYTHING IS GOING LOWER
Nothing epitomizes cheap money more than the lofty level of bond prices and their corresponding low yields. The old adage of “never chase yield” seems to have been pushed aside in favor of “buy more when the interest rate approaches zero”.
Yield-hungry investors think they are being conservative, though. Some of that reasoning is due to the obvious volatility of the stock market; especially during the first twenty years of this century.
BONDS BIGGER RISK THAN STOCKS
Even before the latest stock market dump, bonds could be considered a bigger risk than stocks. The risk is greater now than it was in 2007-08; and probably more so than at any other time in history.
We know that inflation is the debasement of money by government. The effects of inflation show up in the form of rising prices over time. The rising prices are a reflection of the loss of purchasing power of the currency involved. For our purposes, that means the U.S. dollar.
The chart below depicts increases in the Consumer Price Index, year-to-year, dating back to 1914…
FEDERAL RESERVE AND MARKET RISK
Analysis and opinions of the financial markets vary depending on who is doing the analyzing. The most critical element that affects the song is the singer.
There is nothing wrong with that. But we should be aware that our own prejudice clouds our perspective. However, there is more that is not so obvious. With that in mind, lets take a look at things.
Today, more than ever before (at least it seems that way), focus is on the Federal Reserve. Even economists and the general public have joined the throngs of interested observers.
Stocks and bonds fell significantly over the past several days, partly in response to statements by Chairman Powell. The Chairman’s remarks indicated the intention of the Fed to continue its push to raise interest rates more aggressively, and without seeming regard to any deleterious effects on the economy and the stock market.
So, we hear criticism that the Fed is guilty of policy error. “The Fed needs to be more accommodative at this time.” Maybe; maybe not.