gold

Only One Fundamental For Gold

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ONLY ONE FUNDAMENTAL FOR GOLD

There have been several articles recently proclaiming and detailing the fundamentals for gold. A few of them have some excellent points. Most of them don’t. And there have been some polite discussions of applicability, meaning, and intent with regards to specific claims.

Some of the discussions involve protracted technical analysis and are quite lengthy.  And some analysts have a special formula or barometer of their own, which they use to justify their claims or indicate correlation between gold and a wide variety of unrelated items.

There are commonly accepted – sometimes erroneous – statements of fact and also convoluted explanations which are unclear and long-winded.

A bit of brevity might help. The definition of fundamental is as follows:

“a basic principle, rule, law, or the like, that serves as the groundwork of a system; essential part…”

There is only one basic fundamental that needs to be known about gold:  Gold is real money.

GOLD IS NOT AN INVESTMENT

To further clarify, this means that gold is not an investment. Nor, is it a hedge against inflation or deteriorating world conditions. It is also not insurance; or a commodity with special attraction; or a barbarous relic.

Do people view gold as an investment? Absolutely. Which is why they are continually surprised and confused at their investment results. They buy gold (invest in it) because they expect the price to go up; which is logical.

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 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.

Have you ever “invested” in money?  More specifically, when was the last time you called your financial advisor and placed an order for U.S. dollars?

Gold is quoted in U.S. dollars and the dollar is the world’s reserve currency.  The ‘price’ of gold in U.S. dollars is an inverse reflection of the value of the U.S. dollar.  The changes in price are continuous and ongoing.   Confidence (or lack of it) and expectations (realistic or not) plays a part.

There are more extreme changes for shorter periods of time which don’t correlate exactly to changes in purchasing power of the U.S. dollar.  But the most extreme changes occur after longer periods of time when the cumulative effects of inflation are recognized more fully by holders of the depreciating paper currency (i.e. U.S. dollar).  And, since paper currencies and credit can be manipulated by government, expectations and reactions become more volatile.

Without a clear understanding of the above paragraph, we will continue to see unexpected results which defy our logic if we ‘invest’ in gold as a “hedge against the chaos and resulting breakdown of society”; unless that chaos results in a significant decline and/or breakdown of the U.S. dollar itself.

VALUE OF GOLD

If gold is real money, and not an investment, then what determines its value? Its value is in its purchasing power. Gold, or any other money, is worth what we can buy with it. And gold’s designation as ‘real’ money is precisely because it is a store of value.

Gold is original money. It was money long before the U.S. dollar.  And it will still be money after the U.S. dollar meets its inevitable end.

By definition, if someone does not believe that gold is real money, then they are saying that something else is. And that is why it is difficult for most people to understand and analyze gold.

Most people tend to equate money with wealth and abundance.  This leads to placing value on things in terms of how many dollars an item is worth.  Viewed this way gold seems to hold no value unless it is continually rising in price according to our own expectations and investment logic.

When gold is viewed and treated as an investment, it complicates things.

Applying investment logic to gold leads to erroneous conclusions. Gold does not react or correlate with anything else – not interest rates, not jewelry demand, not world events.

CHANGES IN GOLD’S PRICE

Changes in gold’s price are the direct result of changes in the value of the US dollar. Nothing else matters.

Insisting that interest rates (either nominal or ‘real’) affect the price of gold is incorrect.  As far as gold is concerned, it does not matter what is happening to interest rates. It might matter to the U.S. dollar.

Whether interest rates – real or nominal – are rising or declining does not impact the price of gold. Changes in the value of the U.S. dollar do.

This is true of all the other factors which people assume have an impact on the price of gold, too.  It is the U.S. dollar – and only the U.S. dollar – that causes changes in the price of gold.

Historically, there is no period of time of any consequence in the last one hundred years, wherein the price of gold in U.S. dollars rose when the value of U.S dollar was not declining. The inverse is also true. Periods of decline in gold’s price were reflected inversely in the rising value of the U.S. dollar.

All of this is in the context of an intentional, century-long decimation of the U.S. dollar’s value by the Federal Reserve and the U.S. Government.

Inflation is caused by government.  The effects of that inflation show up gradually, generally, in the form of rising prices for goods and services.  Since the U.S. dollar is a substitute for real money (i.e. gold) it is particularly vulnerable to the effects of the government’s inflation.

The US dollar has lost more than ninety-eight percent of its value over the past one hundred years. The price of gold (real money) reflects that decline in value at $1220.00 per ounce. Otherwise, gold would still be at $20.00 per ounce (or close to it) and would be equal in value to $20.00 in U.S. currency as was the case in 1913 when the Fed “was born”.

The U.S. dollar is terminally ill.  It cannot be saved; only sustained. The Federal Reserve knows this. This is why the ‘can’ of responsibility is always kicked down the road.

(also see: History Of Gold As 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!

 

Gold-Silver Ratio: Debunking The Myth

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A 16-to-1 gold to silver ratio has been the Holy Grail of some silver investors since the mid-sixties.

Unfortunately, fifty years later, it is a quest that continues unabated without success.

In fact, there is evidence that contradicts and widens the chasm that separates wishful thinking from reality. 

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$10,000 Gold May Be Reasonable; Or Wishful Thinking; Or Meaningless

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Is $10,000 gold reasonable?

Right now, from gold’s current price point of $1240.00 per ounce, we are speaking of an eight fold increase to get to that gloriously celebrated number.  Even if the specific price target is more modest – say $7000.00 per ounce – it is still a huge jump from where we are today. 

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How Much Is Gold Worth?

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Just how much is gold worth? Lots of varying opinions, but is there a consensus?

Everyone has an opinion as to what something is worth, whether the object of consideration is their home, a late grandfather’s pocket watch, or a specific stock.

The price of a specific item or asset at any given time is a reflection of all those varying opinions.

Some are based on fundamentals, some are based on technical factors. But the combination of all the opinions, and the resulting expectations (some expect the price to go up, others expect it to go down or remain the same), plus all of the other known factors at the time that might possibly impact the price, provide us with the clearest possible indication of current value for the item in question: its market price.

If we believe that gold is money, we might have a different opinion or expectation than someone who sees gold as an investment; or someone else who deems gold to have no useful value.

If we don’t believe that gold is money, then we are saying that something else is.  That something else, practically speaking, is fiat, paper currency issued by a government or central bank (dollars, euros, yen, etc.).

With that in mind, let’s rephrase our original question: “How much is money worth?”

In the simplest of terms, money is worth  whatever it can be exchanged for.  This means that the value of money is in its purchasing power.

With that fundamental understood, the logic leads to a clean and simple statement: Gold, or any other money, is worth what we can buy with it. 

So, what can we buy with it?  And how do we know that our gold/money is realistically priced?

With gold currently priced at $1750 oz., the value of gold today is what we can buy with seventeen hundred fifty dollars.

But, is $1750 oz. an accurate reflection of gold’s purchasing power?  Are there reasons why we might expect that price to rise or decline to any substantial degree that would influence our choice to hold money in gold vs. US dollars?

Let’s go back to a time when the US dollar and gold were both money and equal in value (i.e., purchasing power).

SOME GOLD PRICE HISTORY

In 1913, both gold and US dollars were legal tender, and interchangeable. Either was convertible into the other at a fixed price.  A one ounce (.9675 ounces) gold coin was equal to twenty US dollars and vice-versa.  (note: the official gold price was $20.67 per ounce, which multiplied by .9675 ounce of gold in a gold coin equals $20.00).

On the surface, it would seem that one ounce of gold over the past century has increased in value by eighty-four hundred percent ($20.67 in 1913 vs $1750 today).  If that is true, we should be able to buy eighty-five times as much with one ounce of gold today as we could in 1913. However, that is not the case.

We said earlier that the value of money is what we can buy with it, or what we can acquire in exchange for it. What should be obvious by now is that even though the price of gold increased by eighty-four hundred percent, we don’t know whether there was an increase in actual value or possibly a decrease in value if gold was unable to maintain its original purchasing power.

We can however, draw some conclusions about relative performance.  The specifics are that gold gained in price by eighty-four hundred percent relative to the US dollar’s loss in value/purchasing power of almost ninety-nine percent. (see A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)

Gold has maintained its value, and increased its purchasing power in absolute terms, over the century-long period under consideration.

What we don’t know is the extent to which the current price of $1750 oz. reflects accurately the loss in US dollar purchasing power. How much value has the US dollar lost since 1913? Is it ninety-eight percent, or less; ninety-nine percent, or more?

The current market price for gold of $1750 oz. indicates a fairly specific loss of 98.8 percent in US dollar purchasing power.  A full ninety-nine percent decline translates to a one hundred-fold increase in gold’s price, or $2060 oz.

In August 2020 gold traded at $2057 oz., which indicates a loss in purchasing power in the US dollar of ninety-nine percent since 1913.

As recently as January 2016, gold traded as low as $1040.00 per ounce.  That price indicates a decline in US dollar value closer to ninety-eight percent.  In fact, it is nearly exactly equivalent to that mark.  A ninety-eight percent decline in US dollar value equates to a fifty-fold increase in the gold price since 1913 (100 percent minus 98 percent = 2 percent;  100 percent divided by 2 percent = 50; $20.67 per ounce times 50 = $1033.50 per ounce)..

HOW MUCH IS GOLD WORTH TODAY?

Gold, in US dollars, is worth somewhere between $1000.00 and $2000 oz. That may seem like a broad range for price-conscious investors, but it is consistent with gold’s price action historically.

The current price of gold at $1750 oz. reflects a specific loss of 98.8 percent in US dollar purchasing power.

The US dollar is the only barometer you need to watch.  The elements of surprise and timing are critical.  Most especially so, if you are short-term oriented in your thinking.

Items for consideration that could have a substantial impact on the US dollar include  1) new and unexpected actions by the Federal Reserve;  2) accelerated or delayed effects of inflation previously created by the Fed; 3) complete repudiation of the US dollar; 4) a credit implosion; 5) Fed’s reaction to a credit implosion.

Some of the listed items, or variations of them, can affect the value of the U.S. dollar positively, too; which is why you need to keep your eye on the dollar, and not the specific event.

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 And Unrealistic Expectations – Gold Is Not An Investment

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GOLD AND UNREALISTIC EXPECTATIONS

Gold has been characterized as insurance, a hedge against inflation/social unrest/instability, or, more simply, just a commodity.  But it is treated most of the time, by most people, as an investment.  

This is true even by those who are more negative in their attitude towards gold. “Stocks are a better investment.”  In most cases, the logic used and the performance results justify the statement. But the premise is wrong.

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Gold, Mansa Musa, And Inflation

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GOLD AND MANSA MUSA  

From Wikipedia…

 Musa Keita I (c. 1280 – c. 1337) was the tenth Mansa, which translates as  “sultan” (king) or “emperor”, of the wealthy West African Mali Empire. 

During his reign Mali may have been the largest producer of gold in the world at a point of exceptional demand. One of the richest people in history, he is known to have been enormously wealthy; reported as being inconceivably rich by contemporaries, “There’s really no way to put an accurate number on his wealth” (Davidson 2015). 

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Gold Is Still About The US Dollar Part II

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GOLD IS STILL ABOUT US DOLLAR PART II

In my original article I made the following statements:

“It means that holders of any non-USD currency who want to exchange it for gold, must first exchange it for US dollars and then exchange the US dollars for gold.

When anyone is selling gold, the proceeds are always paid in US dollars. The dollars can be held as such, or they can be exchanged for other currency.”  

Another professional labeled the above statements as “fiction”.

I do not agree.  But I do see the possibility for others to infer something other than what was intended.  Therefore, I apologize. And I have replaced the statements in question with the following:

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Gold Is Still About The US Dollar

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GOLD IS STILL ABOUT THE US DOLLAR

The US dollar is the world’s reserve currency.  And that isn’t likely to change in any radical way, anytime soon.  Unless there is some kind of calamitous implosion of the dollar.  I am talking about outright rejection and repudiation.  And that could happen.  The problem is that there isn’t another currency that could likely take its place.  By the time that possibility becomes a reality, any possible candidates would likely be in worse shape. This includes the Euro and Chinese Yuan.

All currencies are substitutes for real money, i.e. gold.  And because all governments inflate and destroy their own currencies, the possibility of gold reasserting itself as the international medium of exchange increases considerably under the aforementioned conditions.

But, a lot of bad stuff has to happen before we get to that point. And governments around the world have too much at stake to capitulate when it comes to ceasing to issue ‘funny money’.

So, for the time being, lets focus on things as they are.  Which leads us back to the title of this article.

Gold is priced in US dollars and trades in gold are settled in US dollars because of the hegemony of the dollar and its role as the world’s reserve currency.  But what does that mean to others around the world?  For example, those who live and work in Germany (euro), Japan (yen), China (Yuan)?

When someone in Switzerland, for example, exchanges Swiss Francs for gold, they are quoted a price in Swiss Francs. That seems pretty straight-forward. But how is the price for gold in Swiss Francs calculated when the international market for gold is priced in US dollars?

The amount that someone pays in Swiss Francs (or any other non-USD currency) is determined by calculating the exchange rate between the US dollar and the specific non-USD currency involved.  Based on that calculation, it is then known how many Swiss Francs are needed to equal the transaction amount in US dollars.

What is particularly important here isn’t necessarily obvious. But it is a critical factor when assessing a transaction of this nature. And here is why.

On December 31, 2013, gold traded at $1210 per ounce. And on that day one euro could be exchanged for 1.3776 USD. Hence, 842 euros ($1210 USD divided by 1.3776 = 842) could be exchanged for $1210 USD which could then subsequently be exchanged for one ounce of gold.

Nine months later, on September 30, 2014, gold again traded at $1210 per ounce.  But the exchange rate for one euro was 1.2629 USD.  Even though the gold price in US dollars was unchanged, the cost for an ounce of gold in euros had increased nine percent to 958 ($1210 divided by 1.2629 = 958).  To be technically correct, the cost of US dollars had increased for holders of euros.

On May 31, 2016, twenty months later, gold was again trading at $1210 per ounce.  The euro had weakened further relative to the US dollar and the exchange rate for one euro was 1.1131 USD. Using the same math as before, the cost for $1210 US dollars had again increased, this time by an additional thirteen percent to 1087 euros.

Over the entire two and one-half year period (twenty-nine months in all) the cost to acquire gold for holders of euros had increased by twenty-four percent. And yet, gold itself, priced in US dollars was the same.

There are several things we can learn from this.

For one thing, there is always a demand for US dollars since they are needed for use in international trade (oil transactions are priced in US dollars, too).

For another, the potential for changes in exchange rates of any other currencies relative to the US dollar must be considered for these transactions.

The possible combinations are numerous and always different. An increase in the value of the euro relative to the US dollar in the examples above would have given us results opposite to those which actually occurred.  And, of course, every currency other than the US dollar would show different results based on their changes in value relative to the US dollar.

Currency exchange rates are continuously changing and so is the US dollar  price of gold. It is possible to have an increasing US dollar price for gold and, simultaneously, a stronger US dollar relative to another currency.  This results in a ‘double whammy’ to the holder of a non-USD  currency – unless you already own the gold.

In our examples earlier, the US dollar price of gold could actually have declined for the periods indicated and still resulted in a higher cost for holders of euros.

The US dollar price of gold does not tell us “what gold is doing”. It tells us what the US dollar is doing.  Or rather, what people think is happening to the US dollar.

But what people think is happening changes all the time. Also, the information we are ‘fed’ by the Fed is suspect and inaccurate. Hence, changes in the US dollar relative to gold are ongoing and can be quite volatile. Over time, however, the gold price in US dollars is a reasonably accurate reflection of the value of the US dollar.

The US dollar price of gold does not tell us anything about other countries and their currencies. To know that we must look at exchange rates of those currencies relative to the US dollar.

Let’s be clear about something. The ‘value’ of gold does not change.  It is original money and its value is constant and stable. And has been for several millenniums.

The value of the US dollar, however, changes all the time. This is precisely because the supply of dollars is manipulated by the Federal Reserve via the ongoing expansion and contraction of the supply of money and credit.  Mostly expansion.

For an historical, real-life example of value and purchasing power as they relate to gold and the US dollar, see my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of 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!

Analysis Of Gold Is Lacking

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Any analysis of gold must have a correct premise.  And terms used in that analysis must be clearly understood.  For example…

“Are you pro-gold?”  Just exactly what does that mean?   Is it a political or moral issue?  In other words, does someone’s position on gold indicate ideology or lifestyle choice?  Can a political liberal be pro-gold? And if someone answers the original question in the affirmative, does that mean they are anti-something else?

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Gold And Interest Rates – A Mass Of Confusion

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Over the past several months there have been numerous articles referencing a relationship between gold and interest rates. Most of them are well-meaning attempts to convey information about recent changes in the markets as interest rates head higher.

In several instances, however, the author(s) have tried to explain a ‘perceived’ correlation between rising interest rates and the value of the US dollar – in a very positive manner. And they have imputed a similar correlation – albeit negative – in other statements with respect to Gold.  In both cases they are incorrect.  

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