"Everything you need to know about gold"
GOLD IS PRICELESS
Over 5000 years of recorded history, gold has proven itself to be real money. Gold’s value is in its use as money. That value is unquestioned.
Whatever arguments are put forth against gold’s use as money are attempts by government to free itself from the restrictions that gold imposes. Gold, when used properly, limits the ability of government to inflate and debase its money.
GOLD AND US DOLLAR HEGEMONY
The US dollar is the world’s reserve currency. That isn’t likely to change anytime soon.
All currencies are substitutes for real money, i.e. gold. And because all governments inflate and destroy their own currencies, any potential alternatives to the US dollar are as bad or worse.
That doesn’t stop the dollar bashing, of course. In a general long-term sense, the condemnation is well-deserved. After all, the US dollar, under the care and watch keeping of the Federal Reserve Bank of the United States, has lost more than ninety-eight percent of its purchasing power.
GOLD MARKET MANIPULATION
Some gold bulls have bought in heavily to the argument that gold price suppression has been an ongoing activity for years, even decades. Supposedly, trading in the gold market is manipulated in ways that depress the market price for gold.
Assertions are made that the manipulation takes place in a shroud of secrecy; and the unexpected lower prices for gold, or prices that don’t meet wildly bullish expectations, are cited as evidence of conspiratorial activity.
The claim is made that the price of gold would be much higher if this manipulative trading activity were exposed, acknowledged, and prohibited. But…
When gold’s price reached $850 per ounce in January 1980, it seemed as if nothing would stop the runaway train that was headed straight for $1000 per ounce. But it was stopped, and began sliding downhill quickly.
By June 1982, two and one-half years later, gold’s price had declined by sixty-five percent. At close to $300 per ounce, the price of gold seemed farther away from the $1000 mark than ever before.
Between the years 1971 and 2011, the price of gold went from $42.00 per ounce to $1900.00 per ounce – a forty-five fold increase. This is depicted on the chart below…
Looking at the chart, it would appear that gold is in a long-term bull market and that continually higher prices over time can be expected. Proponents of this approach to gold cite fundamentals such as a weakening U.S. dollar, social unrest, wars (combat and trade), political instability, etc.
And the numbers seem to bear this out. For the forty-year period between August 1971 and August 2011, the price of gold was up forty-four hundred percent.
But are we really making any money? The chart below paints a clearer picture…
The inflation-adjusted chart immediately above seems to support a severely modified view of gold from that which we mentioned earlier. Rather than long-term, ever-higher, onward and upward, we see strictly defined periods of extreme volatility. Indeed, it appears almost cyclical.
And our previous total return of 4,400 percent for the forty-year period August 1971 to August 2011, is reduced to 900 percent. Even so, that is the equivalent of a 6% average annual return, net of inflation. Which is huge.
(In case you are interested, the average annual return for the S&P 500 – with dividends reinvested – for the same exact time period, is 5.13 percent. That relatively small differential on an annual basis is magnified considerably when you compare cumulative total returns: Gold at 900% vs. S&P 500 at 639%)
So, does the nine hundred percent total return/6% annual return represent a profit? Yes, most definitely. Net of the effects of inflation, the price of gold increased ten-fold; all of which represents added value. Here’s why…
In 1971, the cost for one loaf of bread was $.24. The average cost for one gallon of gasoline was $.36. With gold at $42.00 per ounce, you could purchase one hundred seventy-five loaves of bread or one hundred seventeen gallons of gasoline (or some combination of the two).
Forty years later, in 2011, the average cost for one loaf of bread was $2.42; and one gallon of gasoline was priced at $3.52. Hence, again, using only one ounce of gold (this time priced at $1900.00 per ounce) you could purchase seven hundred eighty-five loaves of bread or five hundred thirty-nine gallons of gasoline.
The additional six hundred ten (785-175) loaves of bread or four hundred twenty-two (539-117) gallons of gasoline represent an increase in real value/purchasing power for gold for the years between 1971 and 2011.
All of this sounds good. But there are some other issues. Looking again at the first chart, we can see that the price of gold increased from $850.00 per ounce at its 1980 high point to $1900.00 per ounce at its 2011 high point. This translates to a gain of $1050.00 ($1900.00 – $850.00) per ounce, or one hundred twenty-three percent.
Unfortunately, on an inflation-adjusted basis, you would have a negative, net return of ten percent. In real terms, the price of gold did not even match its 1980 high. And this result is after waiting for thirty-one years.
Owning gold from January 1980 until August 2011, a total of thirty-one years (during which its price rose from an all-time high of $850.00 per ounce to a subsequent, new all-time high of $1900.00 per ounce), resulted in a cumulative, net loss of ten percent in inflation-adjusted, real terms.
That doesn’t sound good, but it is even worse considering the decline in gold’s price since 2011. With gold currently priced at $1240.00 per ounce, the cumulative net loss balloons to forty-four percent (certainly not a supporting factor for the argument that gold is a long-term inflation hedge).
Another way of looking at it is that all of the real profits – nine hundred percent cumulative total return – from the forty-year period (1971-2011) came in the first nine years, 1971-80.
When President Nixon suspended convertibility of the U.S. dollar into gold in 1971, his action ushered in a decade-long period of U.S. dollar weakness and rejection. The effects of inflation created over the previous four decades, initially in an attempt to extricate us from the economic depression of the thirties, then to fund the country’s expenses relative to its involvement in WWII, etc. came roaring to life in the form of higher prices for all goods and services.
The 1970s were a catch-up period for the price of gold relative to the U.S. dollar’s loss in value over the previous four decades. That, and the anxiety and anticipation created by the realization that things were far worse than we had previously known, led to outsized gains.
Gold’s failure to make a new, inflation-adjusted high in 2011 is perfectly reasonable. This is because gold’s upward price movement reflected the extent of ongoing U.S. dollar devaluation that had occurred since the eighties. Whereas, the price movement upward in the seventies reflected U.S dollar devaluation that had occurred over the prior forty years – a period more than twice as long.
Gold’s price is not an indication of its value. The value of gold is constant and does not change. Its price is a reflection of the value of the U.S. dollar. Nothing more. Nothing less. Nothing else.
And what is happening to the US dollar? It is in a state of constant deterioration, punctuated with periods of relative stability.
And the peaks and low points for those periods are seen clearly on both charts (1933, 1971, 1980, 2001, 2011) and correspond with highs and lows for the price of gold, both in nominal and real terms.
Gold is not an investment. When gold is characterized as an investment, the incorrect assumption leads to unexpected results regardless of the logic. If the basic premise is incorrect, even the best, most technically perfect logic will not lead to results that are consistent.
In light of all this, what can we expect from gold looking ahead? Or, better phrased, what can we expect from the U.S. dollar; and how does that translate to expectations for the price of gold?
One possibility is that the U.S. dollar could continue to stabilize and strengthen along with an improving economy. The price of gold would stabilize and move lower reflecting the dollar’s relative strength. This is similar to what happened between 1980 and 2001, and what we are currently experiencing since 2011. And it could go on this way for years. During periods like this, you should not expect gold’s price to increase.
Another scenario is that the dollar could renew its long-term decline in rapidly accelerating fashion, eventually ending in complete rejection and repudiation. In which case, owning gold is imperative for wealth preservation and financial survival. But any profits would be elusive. At a time like that, the U.S. dollar price of gold becomes meaningless. What does matter, and what is critical, is how much gold you own.
Lastly, attempts by the Federal Reserve to unwind its horrendously bloated balance sheet and encourage a return to a relatively normal level of interest rates could backfire. We could see a another credit collapse. This one would be much worse than anything we have experienced to date, and the unwinding of prices for all assets (stocks, bonds, real estate, commodities) denominated in dollars would trigger a full-scale depression and lead to a suppression of most economic activity. Don’t look for gold to save you. The U.S. dollar would increase in value; thus, gold’s price in dollars would decline significantly. The US dollar would actually buy more, not less. But the supply of US dollars would be significantly less. This is true deflation, and it is the exact opposite of inflation.
There are, of course, variations and combinations of the above scenarios that may play out. Any actions or responses by government and the Federal Reserve will affect the magnitude and duration of various crises.
Whatever the course of events, or how they unfold, there is no fundamental reason for gold to make new inflation-adjusted highs.
The case for gold is not about price. It is about value. And its value will become readily apparent when governments and individuals are scrambling amid the ruins of our financial system looking for something, anything, to replace worthless paper currencies. which are nothing more than substitutes for real money.
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!
WHAT’S UP WITH GOLD?
What are we waiting for? The other shoe to drop; the next big move?
Gold’s reign as the “next big thing” ended seven years ago. Too many people don’t want to admit that, but its true. Those who are ‘bullish’ on gold cannot let go.
Their behavior is typical of those who have missed the boat. And they don’t want to admit it, or believe it. And their problem is compounded by the fact that they originally viewed gold as a quality investment.
Now they continue to point out all of the fundamental reasons gold should go much higher. We are told it is undervalued, unappreciated, unloved. And, of course, the price is manipulated, too.
Those things may provide a bit of consolation, but they don’t mask the pain of losing big bucks. And the interminable wait drags on.
We could say it was simply a matter of (poor) timing. However, most people who have a basic understanding of investment fundamentals would argue otherwise.
And they would be right. In the long-term, time works in our favor – not against us. An investment with good fundamentals – over time – becomes more valuable, not less valuable. And that relentless march upwards helps protect us against our own timing errors.
We don’t have to be perfect market-timers to be successful investors.
And it isn’t that gold’s price can’t go a lot higher, either. It can. And it probably will. And it has done so in the past.
After peaking at $850.00 per ounce in January 1980, the price of gold dropped as low as $250.00 per ounce twenty years later and then soared to $1900.oo per ounce in August 2011. But will you (or can you) wait thirty-one years to be vindicated?
There is a better explanation.
At the heart of disappointment regarding gold’s price action is the specter of unrealistic expectations:
“believing that rational individuals would sooner or later realize the trend and take it into account in forming their (opinions)”
But there is more to it. Much more. And it involves fundamentals. And an understanding of price versus value.
To wit, gold has only one basic fundamental: it is real money.
To further clarify, this means that gold is not an investment.
Do people view gold as an investment? Absolutely. Which is why they are continually surprised and confused at their investment results. They buy gold because they expect the price to go up; and logically so.
The problem is that the premise is wrong. When someone invests in gold, they are expecting the price to go up as a result of certain factors which they believe are “drivers of gold”. In other words, they believe that gold responds to certain factors. These factors may include interest rates, social unrest, political instability, government policies/actions, a weak economy, jewelry demand, and various ratios comparing gold to any number of other things.
But, again, that assumes that gold is an investment which is affected by the various things listed. It is not.
And when gold is characterized as an investment, the incorrect assumption leads to unexpected results regardless of the logic. If the basic premise is incorrect, even the best, most technically perfect logic will not lead to results that are consistent.
The price versus value issue is rooted in gold’s fundamental role as real money.
Gold is real money because it meets the qualifications of money. It is a medium of exchange, a measure of value, and a store of value.
The U.S. dollar is a substitute for real money. It is a medium of exchange and a measure of value. But it is not real money because it is not a store of value.
The U.S. dollar, in its role as ‘official’ money, has lost more than ninety-eight percent of its value over the past century.
The price of gold, on the other hand, has increased more than sixty times from $20.67 per ounce to in excess of $1300.00 per ounce.
Gold’s price increase does not mean that it increased in value by sixty-fold. Its price increase is a direct reflection of the ninety-eight percent decline of the U.S. dollar.
Gold is worth somewhere between $1000.00 per ounce and $2000.00 per ounce. This price range correlates to a decline in the U.S. dollar’s value of somewhere between ninety-eight and ninety-nine percent.
At $1300.00 per ounce, gold’s price reflects a decline of 98.3 percent in the value of the U.S. dollar since the inception of the U.S. Federal Reserve Bank in 1913.
Let’s recap.
Gold is real money. It is a store of value. The U.S. dollar (and all paper currencies) are substitutes for real money/original money; i.e., gold.
Gold’s characterization – incorrectly – as an investment (which it is not) leads to unrealistic expectations and unexpected results.
Gold’s value is in its role as real money. Its changing price (ever higher over time) is a direct reflection of changes in the value (ever lower over time) of the U.S. dollar.
As far as gold is concerned, nothing else matters.
(also see How Much Is Gold Really Worth?)
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!
What’s next for gold? Seems like a fairly simple question. Unfortunately, it is nearly impossible today to get a simple answer. That’s the problem.