"Everything you need to know about gold"
ALL HAIL THE FED!
As investors continue to gobble up stocks and the dollar prices of most assets continue to climb, it would appear that all is well. Concerns about weakening economic activity and recession have been moved to the back burner. Now, the focus is squarely on inflation.
WHAT ECONOMIC GROWTH?
From its low in 2020, the economy seems to have rebounded reasonably well, generally speaking. Net of the effects of both inflation and higher interest rates, reported statistics seem to indicate that the economy is growing, albeit slowly at times. Setting aside temporarily the issues of accuracy, revisions, and manipulation, there is plausible evidence of economic growth.
However, a spate of recent announcements by major retailers says that momentum and direction is changing. Target, Walmart, and Walgreens highlight the list of firms that are taking conscious and deliberate action (broad-based price cuts) to attract and encourage increases in customer traffic. Spending, particularly discretionary spending, has declined measurably. (see Thoughts About Target, Retail Sales, And The Economy )
There is also evidence that large firms worldwide are clamping down on employee expenses; namely, travel and entertainment. Cost control is coming back with a vengeance. Question: Are these the delayed effects of serious damage that was inflicted during the forced shutdown of the economy four years ago? If so, might what has been presumed to be potential resumption of a long-term economic growth trend be considered a “dead cat bounce”?
A dead cat bounce is a temporary, short-lived recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend. Frequently, downtrends are interrupted by brief periods of recovery—or small rallies—during which prices temporarily rise.
The name “dead cat bounce” is based on the notion that even a dead cat will bounce if it falls far enough and fast enough. (Investopedia)
For our purpose, we are not referring specifically to asset prices, but to economic activity. In order to see if the term applies in this case, or has merit, let’s look at some charts (source) of economic activity. Below are four charts which can be considered indications of economic activity. The shaded areas are recessions. I will make some comments after each chart and then talk about how the term “dead cat bounce” might apply and discuss some possible implications.
It is apparent from this chart that people are spending less ‘real’ money on cars, boats, televisions, and appliances. The declining, long-term trend in durable goods orders dates back twenty-five years. Since peaking in 1999, the “prolonged decline” has been interrupted by three “temporary, short-lived” recoveries which were each followed by a “continuation of the downtrend”. Sounds like dead cat bounce(s) to me. Question: How many times can a dead cat bounce?
Capacity Utilization refers to the percentage of “resources used by corporations and factories to produce goods in manufacturing, mining, and electric and gas utilities for all facilities located in the United States” (source). As the rate continues to decline it indicates that production plants and factories are being used less; and, more of them are sitting idle. The long-term decline in capacity utilization dates back to the late 1960’s and is more than six decades old. There are five dead cat bounces which are followed by continuations of the downtrend to new lows.
In the case of auto and light truck sales the volume peak came at the turn of the century. There are two cases since then which could be considered indicative of the term dead cat bounce. While a long-term decline in sales isn’t clearly apparent, neither is there any evidence of a long-term increase. There is, however, a great deal of volatility; past and potential.
The peak in housing starts came in the early 1970s. Since then, there have been four instances of extreme lows followed by extended bursts of activity (“if you build it, they will buy it”). The chart refers to actual construction starts – not sales, not prices, not units under construction, etc. The long-term trend for housing starts is down and the periods of increase are followed by a resumption of the long-term declining trend. That fits the definition of dead cat bounce.
CONCLUSION
Long-term economic growth most likely stopped twenty-five years ago at the end of the most productive and prosperous period in U.S. and World history. Since then there has been a series of ups and downs which have taken us broadly lower as far as productivity, abundance, and growth are concerned. Overall quality of goods and services are questionable and customer satisfaction is missing.
Indications that long-term growth is a thing of the past are evidenced by the frequent reversals and declining trends in economic activity shown on the charts above. The latest focus of consumers and retailers on discretionary spending, price conscious actions and policies, customer satisfaction surveys, etc. are warnings that all is not well.
Moreover, what is presumed to be economic growth is not growth at all. Measured progress refers to efforts attempted to recover what was lost and return to where we were before the most recent crisis occurred (pre-Covid; pre-2008 Great Recession, etc.).
The past four years have been highlighted by increases in the effects of inflation, rising interest rates, overblown asset prices, and a general decline in economic activity. Slow growth/no growth is about the best we can hope for. As far as dead cat bounces go, the next one won’t come until after the cat “falls far enough and fast enough”.
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 HAS DONE ITS JOB
For most of us who understand what gold is (and, what it isn’t), gold continues to perform as reasonably expected. Rather, its price continues to reflect the ongoing loss of purchasing power in the U.S. dollar. Gold, itself, isn’t doing anything at all. (see Not About Gold; All About The Dollar)
Short term nominal profits notwithstanding, gold’s value is the same as it is always. Gold is real money and its value is in its use as money. Gold is a medium of exchange, a measure of value, and a long-term store of value.
There has been no decoupling or modification of any link between the gold price in dollars and the value of the U.S. dollar. Part of the confusion about the link between the U.S. dollar and the gold price results from the tendency of analysts and others to cite current strength in the U.S. dollar index.U.S. DOLLAR INDEX
“The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies. The Index goes up when the U.S. dollar gains “strength” (value) when compared to other currencies.” (Wikipedia)
The “basket of foreign currencies” includes the Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona, Swiss franc. Nowhere is there any reference to gold. The only thing the U.S. Dollar Index tells us is how the U.S. dollar compares to a select group of other currencies. The U.S. dollar index tells us nothing about gold.
It is also a fact that the U.S. Dollar Index doesn’t provide any measurement of the dollar’s value on an absolute basis, but only on a relative basis. Any or all of the various currencies can be gaining or losing value (purchasing power) at any particular time. All that is indicated by changes in the index is how well the dollar is faring on foreign exchange markets against the group/basket of other currencies which comprise the index.
A CENTURY OF INFLATION
Before the inception of the Federal Reserve in 1913, and for a couple of decades afterwards, gold and the U.S. dollar both circulated as money mediums on a convertible, fixed-exchange rate basis. Both gold and paper dollars were used interchangeably at a fixed rate of $20.67 to one ounce of gold.
Whereas, inflation previously was the domain of governments, the practice of money creation and inflation was eventually granted to central banks. Acting in its authorized capacity, the Federal Reserve embraced its role in assertive fashion and has become the leading exporter of inflation on a worldwide basis.
After more than a century of continuous, intentional inflation (expansion of the supply of money and credit), the U.S. dollar has lost more than ninety-nine percent of it purchasing power. That actual loss of purchasing power in the U.S. dollar is reflected in a gold price which is more than one hundred times higher than its $20.67 oz price when gold and the dollar were interchangeable and convertible.
The loss of purchasing power in the U.S. dollar shows up in higher prices for the goods and services we buy. Those higher prices are NOT inflation. The higher prices are the effects of inflation; inflation which was previously created by the Federal Reserve. (see Gold, Inflation, And The Federal Reserve)
KEY TO THE GOLD PRICE
The effects of inflation are the key to the gold price. Specifically, the ongoing higher price for gold reflects the actual loss of purchasing power in the U.S. dollar that has already occurred as a result of the inflation created by the Federal Reserve.
For example, in January 1980 the average closing price for gold was $677 oz., which is representative of a ninety-seven percent loss of U.S. dollar purchasing power. The average closing price for gold in August 2011 was $1825 oz. By then, the additional effects of inflation after 1980 had brought the dollar’s cumulative loss of purchasing power to almost ninety-nine percent. Nine years later, in August 2020, a nearly-full ninety-nine percent loss of purchasing power resulted in a gold price of $1970 (monthly average closing price). As of the end of April, 2024, additional effects of inflation resulted in a gold price of $2285 oz.
Here is what all of this looks like on a chart (source)…
The chart above shows an ever higher gold price as the ongoing effects of inflation progressively manifest themselves in a U.S. dollar that continues to lose purchasing power. The chart below shows the same action with the gold prices adjusted for the effects of inflation…
As can be seen on the second chart, the higher gold price over time, no matter how extreme it seems in the short term, nor how high it goes, is simply a reflection of the long-term effects of prior inflation. The higher gold prices come after the effects of inflation have shown themselves in the form of the U.S. dollar’s actual loss of purchasing power, i.e., higher prices for goods and services.
Also, on the second chart, what shows up as new, ever higher, nominal prices for gold, are not new highs at all after allowing for the effects of inflation.
A very important point of note is that a higher gold price reflecting the dollar’s loss of purchasing power comes only in hindsight – after the fact. Also important is the fact that the effects of inflation are delayed and unpredictable. Until the effects of inflation show up and are absorbed into the economy, there is no reason to expect a new, higher gold price.
LATEST PRICE ACTION FOR GOLD – CONCLUSION
What most investors refer to as a new high in the gold price is a reaction to the effects of inflation that have occurred since August 2020 when gold was priced at $1970 oz. A new nominal high, yes; but, after allowing for the effects of inflation, the gold price has not exceeded its previous peaks in 2020, 2011, and 1980 (see the second chart above for verification).
There is no historical precedent for any expectations that gold will ever exceed its inflation-adjusted price level. This means that the gold price is probably at or near its peak nominal price for now. Only after further clear losses of purchasing power in the U.S. dollar can a higher nominal price for gold be expected. (also see Viewing Gold In Its Proper Context and Understanding Profit Potential In 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!
IS GOVERNMENT SPENDING INFLATIONARY?
When the terms ‘spending’ and ‘inflation’, are used in the same sentence, it is usually in reference to government spending habits. For example, Congress recently approved massive, additional amounts of financial aid for Ukraine and Israel. Thus, we might say that “government spending is inflationary”.
President Biden’s ongoing attempts to cancel student loans have been labeled as reckless and inflationary. The support payments and financial aid programs associated with Covid economic shutdown were termed “highly inflationary”.
Lack of fiscal restraint on the part of government can be harmful, damaging, and demoralizing. In some cases, it is downright deplorable. Lack of fiscal restraint can lead to bankruptcy and loss of confidence.
The spending, however (even deficit spending), is not inflationary; nor, are accelerating wage demands and higher prices for consumer goods and services, higher housing costs, etc. Excessive government spending and the higher cost of living are not inflationary; they are the effects of inflation.
INFLATION, GOVERNMENT, AND CENTRAL BANKS
Inflation is a creation of government. All governments intentionally create inflation to foster and support their own spending habits. Governments create inflation by expanding the supply of money and credit. The ongoing inflation of the money supply leads to a loss of purchasing power in all the money in circulation. The loss of purchasing power shows up in the form of higher prices for goods and services. The higher prices are incorrectly referred to as inflation, but they are NOT inflation. The higher prices for goods and services that result from the loss of purchasing power are the effects of inflation.
Today, the role of government in the creation of inflation has been replaced by central banks. The United States Federal Reserve has been creating inflation since its inception in 1913. It efforts have resulted in a dollar that is worth one penny compared to the dollar of a century ago.
Nearly all of the things we commonly refer to today as inflation are not inflation at all. They are the effects of inflation that has already been created by the Federal Reserve via expansion of the supply of money and credit. Without this inflation the government would not be able to spend the multiple trillions of dollars it does to support its egregious spending habit.
INFLATION IS NOT TRANSITORY
Treasury Secretary Janet Yellen and Fed Chair Jerome Powell have received blowback from their comments a few years ago regarding inflation being transitory. When inflation is defined correctly as “the expansion of the supply of money and credit by governments and central banks”, then it is clear that inflation is not transitory. That is because inflation is an intentional, continuous, and ongoing practice of all governments and central banks. In other words, inflation never stops; so it cannot be transitory.
When Ms. Yellen and Mr. Powell made their comments, the term “inflation” was used to describe the surge of higher prices that happened post-Covid economic shutdown. A significant portion of those higher prices resulted from supply chain disruptions which have nothing to do with inflation. The portion of higher prices for goods and services attributable to supply chain disruptions would have occurred with or without the effects of inflation. Since supply chain disruptions are temporary, their effects (shortages, higher prices, etc.) are also temporary; or, in this case, transitory.
It is my opinion that both Powell and Yellen were thinking about supply chain issues when the comments were made. If that is the case, then their comments were not entirely incorrect. There are two problems with that interpretation, though.
The first problem concerns the ratio of how much of the increase in prices is allocated to the effects of inflation and how much is the result of supply chain problems. I think it is reasonable that the subsequent decline in the rate of increasingly higher prices is due to lesser stress from supply chain bottlenecks and the delayed startup in economic activity.
The second problem has to do with accuracy/timing. How much of an impact on prices for goods and services can be expected from any known increase in the money supply? Even given the temporary nature of supply chain disruptions, how long will resolution take and how long before more positive effects of increasing economic activity materialize?
CONCLUSION
Governments and central banks create inflation intentionally and continuously. The effects of that inflation result in a loss of purchasing power of all the money in circulation. The loss of purchasing power shows up in the form of higher prices for goods and services.
The effects of inflation are unpredictable in timing (usually delayed) and magnitude. The Federal Reserve is engaged in a battle to contain the negative effects of the inflation which they created. Egregious government spending is enabled by the inflation (increase in the supply of money and credit) that is created by the Federal Reserve. The spending, itself, for all of its negativity, is not inflationary. The inflation is not transitory because it never stops.
(also see Investors Re: Rate Cuts – “So You’re Telling Me There’s A Chance”)
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 CANNOT EXCEED INFLATION’S EFFECTS
Making such an absolute statement may sound bold; even arrogant to some. There is, however, perfectly sound fundamental reasoning underlying the claim. So before you dismiss it out of hand, hear me out.
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!
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…
As investors, analysts and commentators warm to the idea that “inflation is likely transitory”, much of what we have been hearing from the the Fed and the United States Treasury seems to encourage and support that interpretation.
Team Fed member (aka Secretary of Treasury) Janet Yellen, who has used the word ‘transitory’ on other occasions, followed up her own attempts (here and here) to introduce the word into mainstream financial vocabulary with additional comments in a press conference after the G-7 meeting in London…
GOLD PRICES AND INFLATION
The latest actions by the Federal Reserve have led many to assume that much higher inflation is a foregone conclusion. This leads to a further expectation that much higher gold prices are imminent.
That sounds logical, but it is not that simple.
There is a relationship between higher gold prices and inflation, but the two are not directly related. The confusion results from a misunderstanding about inflation and its effects.