gold and inflation

Gold Has Done Its Job – Isn’t That Enough?

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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)…

Gold Prices – 100 Year Historical Chart

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…

Gold Prices (inflation-adjusted) – 100 Year Historical Chart

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!

U.S. Dollar Best Of The Worst; Gold Best Of The Best

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Among the major fiat currencies in the world today, the U.S. dollar is “the best of the worst.” What that means is that there are no better alternatives.

BRICS – QUESTIONABLE MOTIVES

That is especially true when one considers all of the nonsense and suppositions stemming from statements made by member nation representatives of BRICS. Both Russia and China are foremost in their efforts to talk the dollar into disrespect and disrepute. Their motives, however, have nothing to do with providing a better alternative.

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Gold Price, Inflation, Dollar Collapse, & BRICS

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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.

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Gold And The Shrinking Money Supply

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GOLD AND THE MONEY SUPPLY

A recent article (Credit Crunch: The Money Supply Has Shrunk For Eight Months In A Row) by Ryan McMaken of the Mises Institute explained clearly the historical significance of the contraction in the money supply that has occurred over the past eight months.

In this article, I will be talking about the possible effects of this ongoing contraction as they relate to the price of gold.

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Gold Cannot Exceed Inflation’s Effects

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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.

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The Gold Price And Inflation

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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 – The Waning Effects Of Inflation

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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…

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Higher Gold Price Vs. Inflation Expectations

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HIGHER GOLD PRICE VS. INFLATION

The actions by the Federal Reserve over the past year have led many to assume that much higher inflation is a foregone conclusion.  This leads to a further expectation that a much higher gold price is 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.

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The End of Inflation?

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A current headline says “fears of currency debasement drive gold price higher”. Seems reasonable; and it is. It is also reasonable, however, that a potential end of inflation is near.

Historically, governments have been “debasing” their currencies for centuries. The debasement leads to a loss of purchasing power in the currency in use.

Since gold is original money and has proven itself to be a true store of value, then it should not be unexpected that gold’s higher price over time reflects that currency debasement.

The debasement leads to a loss of purchasing power in the currency in use.

All currencies are substitutes for ‘real money’, i.e., gold; and all governments inflate and destroy their own currencies. 

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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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