gold and U.S. dollar

Gold And Interest Rates – No Correlation

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GOLD AND INTEREST RATES 2001-11

Over and over again, the following statement or something similar continues to find its way into commentary about gold:

“…prospects of higher US interest rates have the ability to limit upside gains. It must be kept in mind that Gold is a zero-yielding asset that tends to lose its allure in a high-interest rate environment”  

A variation of that statement:

“Because gold doesn’t bear interest, it struggles to compete when interest rates rise.” 

The statements imply a correlation between gold and interest rates. And the implied correlation suggests that higher interest rates result in lower gold prices.

If that is the case, then there should be some historical precedent to corroborate the correlation. There is. And we only need to go back a few years or more to find it. But it does not corroborate the correlation; it refutes it.

During the ten-year period 2001-2011, gold’s price increased from $275.00 per ounce to a high of nearly $1900.00 per ounce. And interest rates continued their long-term decline throughout that entire period.

In this example the original correlation is inferred to be supported by the opposite scenario  – lower interest rates and higher gold prices. So far, so good.

GOLD AND INTEREST RATES 1970-80

However, let’s go back a bit further along the time line. Between 1970 and 1980, the price of gold increased from $35.00 per ounce to $850.00 per ounce. But rather than declining, interest rates were on a tear.

Rather than “struggling to compete” gold was galloping ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments.

The higher rates were a reflection of lower prices for bonds and particularly U.S. Treasury securities. The 10-year U.S. Treasury bond yield exceeded 15%. Which makes you sort of wonder when you read something like this:

“Higher rates boost the value of the dollar by making U.S. assets more attractive to investors seeking yield.” 

Two ten-year periods of outsized gains in the price of gold. And interest rates were doing something exactly opposite during each period. There simply is no correlation between gold and interest rates.

Additionally, there is no correlation between gold and 1) social unrest, or 2) global terrorism; or 3) world wars. Gold is not a safe haven hedge and it is not an investment. It is real money.

WHY DOES GOLD PRICE CHANGE?

But is there something that correlates with gold? Anything at all? Why does its price change? And so dramatically, it seems?

With respect to gold and its price changes, there is only one thing that correlates. The U.S. dollar.

The U.S dollar is a substitute for gold. Gold is original money. The price of gold is an inverse reflection of the changing value of the U.S. dollar. The ongoing, never-ending deterioration of the dollar’s value means ever rising gold prices over time.

Gold is the standard; not the U.S. dollar. Gold has earned its designation as real money over five thousand years of history. It is original money. And it is real money because it is a store of value.

And there is historical evidence to support the correlation of gold’s price to the value of the U.S. dollar. Every change of significance in time and price for gold correlates with an inverse change in the value of the U.S. dollar. Higher prices for gold correlate with a lower value for the U.S. dollar. Lower gold prices correlate with stability and strength for the U.S. dollar.

The correlation between gold and the U.S. dollar is implicit. One does not ’cause’ the other. Either one is the inverse of the other.

Some have said that the argument about correlation of interest rates and gold depends on making a distinction between real interest rates and nominal interest rates. No correlation there, either.

That is because any patterns that appear to confirm correlation between real or nominal interest rates and gold need to include the U.S. dollar. The U.S. dollar is the determining correlative factor re: gold.

Without taking into account the relative strength or weakness of the U.S. dollar relative to gold’s price, any other correlations are either meaningless, misleading, or contradictory.

There are six major turning points (1920, 1934, 1971, 1980, 2001, 2011) on the chart (source) below. All of them coincided with – and reflect – inversely correlated turning points in the value of the U.S. dollar…

Gold Prices: 100-Year History
                                                                                               

The U.S. dollar is the world’s reserve currency and gold trades are settled in U.S. dollars. Since gold is priced in U.S. dollars and since the U.S. dollar is in a state of perpetual decline, the U.S. dollar price of gold will continue to rise over time.

There are ongoing subjective, changing valuations of the U.S. dollar from time-to-time and these changing valuations show up in the constantly fluctuating value of gold in U.S. dollars.  (read more here)

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 Under $1000 Is A Very Real Possibility

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GOLD UNDER $1000

‎After gold peaked in January 1980 at $850.00 per ounce, it dropped in price by two-thirds (66%) over the next five years. The low in February 1985 was $284.00 per ounce.

At that point it began a strong move upwards over a three-year span peaking at just under $500.00 ($499.75) per ounce in December 1987. That translates to an increase of seventy-six percent.

The advance was solid and well-defined. Those who had been waiting for the price of gold to go back up were confirmed fundamentally and technically. Or so they thought.

With the “clear, technical confirmations” of a “new, bull market in gold” came a deluge of predictions regarding $1,000.00 gold and higher. At the time that would have marked a nearly four-fold increase from its previous  low of $284.00. (That equates similarly to today’s predictions of $4000.00 gold assuming that $1040.00 was the low in December 2015.)

It was not to be. In January 1988, gold began a long an arduous decline which lasted fifteen years. Trading in gold was confined to a range between $300-400.00 per ounce for the next ten years. Then, seemingly as a result of sheer exhaustion, gold broke down through $300.00 per ounce and traded as low as $252.00 per ounce in September 1999. From its temporary peak at $500.00 per ounce to its ultimate low of $252.00 per ounce, gold’s price had dropped fifty percent.

Even after reaching its ultimate low of $252.00 per ounce, gold continued to trade mostly at under $300.00 per ounce for nearly three more years (April 2002).

Let’s see how this compares to more recent history regarding gold.

From its peak in September 2011 at $1895.00 per ounce, gold declined to $1040.00 per ounce over a period of four and one-half year.

Subsequent to that, gold’s price increased by almost thirty percent to $1363.00 per ounce in a period of seven months. Almost fifteen months later, gold has not traded any higher.

Question No. 1: Are we in the midst of a three-year period similar to that which occurred between 1985-88 (with respect to the price of gold)?

Question No. 2: If so, what might we possibly expect going forward?

It is certainly a realistic possibility that the answer to question no. 1 is yes. This is possible even if gold’s price goes higher first.

It seemed a well-known fact that after dropping in price by two-thirds, gold had seen its ultimate low at $284.00 per ounce.  With three successive years of incredibly profitable gains, who would proclaim otherwise? And the technical signals confirmed it.

The situation today is not entirely dissimilar. Whether $1360.00 per ounce is a long-term intermediate/reaction top or not, the prospect for gold to resume a longer-term price decline would not be out of context with its earlier history.

Gold’s initial decline from its peak price in January 1980 lasted for five years and totaled sixty-six percent. Its initial decline from the recent peak in September 2011 lasted for four and one-half years and totaled forty-five percent. Reasonably similar.

Gold’s price increase from its low in February 1985 lasted for three years and totaled seventy-six percent. Its price increase from the recent low in December 2015 has lasted for twenty-two months. At its peak of $1360.00 last summer and again recently this represents an increase of thirty percent. Considerably smaller percentage gains, but not entirely dissimilar when considering the broader picture.

And if gold were to move higher soon it would not negate the possibility of going much lower again and disappointing lots of people.

The additional technical confirmations and increased comfort level that came as gold increased in price from $284.00 to $500.00 between 1985-88 did nothing to stop the subsequent fifteen-year decline to new lows.

If gold were to decline back towards $1000.00 per ounce, how low might it go? What might we expect?

One possibility is that it could trade between $1100.00 and $1300.00 for several years. And then break down below $1000.00. And depending on how quickly it establishes its eventual low point, it might trade for several years under $1000.00. Gold might settle out somewhere just above its previous all-time high in 1980 at $850.00 per ounce. Say $875-$975.00 per ounce.

There are also technical studies that point to a gold price as low as $700.00 per ounce before a resumption of the “eternal” bull market.

Ironically, none of the above is about gold.  It is about the U.S. dollar.

Whatever you think or expect regarding gold, you need to make sure your expectations for the dollar are inversely similar. (see here)

During the entire fifteen year period of gold’s price decline between 1988-2002, the U.S. dollar was gaining in value. When the U.S. dollar peaked in January 2002, gold was priced at $282.00 per ounce (gold had posted its low price of $252.00 a year or two before this but was still trading under $300.00).

At that point, gold and the dollar reversed directions simultaneously. Over the next eleven years, the U.S. dollar gave up nearly thirty percent of its peak value. Gold, meanwhile, gained five hundred and seventy percent in price. That increase seems a bit outsized on the surface, but it is not dissimilar to the outsized declines gold suffered during the previous twenty years while the dollar was gaining in value.

Between September 2011 and January 2016 the U.S. dollar gained significantly and gold’s price declined in similar fashion. The low so far for gold was the $1040.00 per ounce in December 2015.  The peak for the dollar occurred just a few short weeks later in January 2016.

After January 2016, both reversed directions again. The dollar headed lower and gold reversed and went higher. Similar turning points occurred in the summer of 2016 and December 2016.

Which brings us to the present. If gold moves higher from here it will be because of continuing weakness in the U.S. dollar. Conversely, if the U.S. dollar moves higher, it will be reflected in a lower gold price.

(for a scenario about possible gold prices see Gold Price – US$700 Or US$7000?)

 

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!