gold is real money

What Happens To Gold Price If The Fed Doesn’t Cut Rates?

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GOLD PRICE IF THE FED DOESN’T CUT

With the increasing gold price of late comes the assumption that the expected cut in interest rates will open a torrent of cheap money that will bring the U.S. dollar down with a thud.  But, what would happen to the gold price if the Fed doesn’t cut interest rates?

What seemed like a universally expected event may not be as likely as some have assumed. In fact, the Fed has a history that includes examples of pivots and re-pivots; or, ignoring the presumed pivot and staying the course.
You can read more about the possibility that the Fed might not cut interest rates in my article Investors Are Too Anxious For Rate Cuts.

In this article we will address the implications for gold if the Fed doesn’t cut interest rates. It matters not what the reasoning is behind such a possibility. What matters is that much of what has happened to prices for gold, stocks, bonds, etc., is based on the presumption that several interest rate cuts are forthcoming, possibly before the end of the year. Hence, there is a potential shock for investors who have relied on that presumption, as well as the particular logic mentioned in our opening paragraph above, should the Fed not follow through.

IMPLICATIONS AND POSSIBILITIES

Ignoring for now the finer (and more critical) point of inflation-adjusted returns, both gold and stocks are at all-time highs. What might happen to gold if a “potential shock” becomes a reality? It depends.

To the extent that a more significant portion of money used to fund the purchase of gold recently was done so based on the presumed cuts in interest rates and a clear change in direction, then we could see a significant decline in the gold price; at least temporarily. This might also happen if interest rate cuts are delayed. Market participants in both stocks and gold would likely see any inaction or hesitancy by the Fed regarding interest rate cuts as negative for their investment outcomes and expectations.

Another possibility is that any effects on the gold price could be muted. That has more to do with other factors, not interest rates. For example, if the prevailing thoughts dominant in the minds of those placing a larger portion of the money flowing into gold is not based on concern about interest rates, rather on anything else, then it is entirely possible that the gold price might show little reaction to non-cuts in interest rates.

OTHER FACTORS, SUMMARY

Some buyers in the gold market are not thinking so much about interest rates. Their concerns have more to do with the continual loss of purchasing power in the U.S. dollar. The erosion of U.S. dollar purchasing power is the result of ongoing inflation, which is the intentional debasement of money by governments and central banks. The continuous expansion of the supply of money and credit for more than a century has resulted in a dollar which has lost ninety-nine percent of its purchasing power.

Over time the gold price is historically correlated to that decline in the purchasing power of the dollar. Gold is real money and a long-term store of value.

Whether buyers of gold are individuals (retail investors), speculators, hedge funds, governments, or central banks; and whatever the reasoning behind their purchases, which reasoning is quite often temporary; in the end, it is still all about the U.S. dollar. (also see U.S. Dollar Best Of The Worst; Gold Best Of The Best)

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!

Justification For Gold

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Justification for gold to move substantially higher in price continues to press the boundaries of imagination. In this article we will try to filter the noise in the headlines and also simplify what has been marketed as something much more complex.

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Viewing Gold In Its Proper Context

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Viewing gold in its proper context seems to be difficult for most gold bugs. The excitement associated with anticipation of gold at $3000, $10,000, or higher tends to overide real fundamentals and common sense.

Not a few of the predictions for a new, higher gold price are just wild guesses. Some of the reasons given to support those guesses include a Fed pivot and reduction in interest rates, geopolitical concerns, a recession and weak economic activity, and a collapse in the U.S. dollar. There are others, but for now, lets look at these.

GOLD AND INTEREST RATES 

Financial writers in the media continue to refer to “gold’s correlation with interest rates”. The theory is that higher interest rates are negative for gold (the gold price) because gold doesn’t pay interest. Hence, investors tend to shun gold when interest rates are rising and look elsewhere for a higher return.

Time and again, the following statement or something similar finds its way into gold commentary:

“…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. The implied correlation suggests that higher interest rates result in lower gold prices, however…

Between 1970 and 1980, the price of gold increased from $35.00 per ounce to $850.00 per ounce. Rather than declining, though, interest rates were rapidly rising.

Gold galloped ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments including U.S. Treasury Bonds. The 10-year U.S. Treasury bond yield exceeded 15%!!! This contrasts markedly from what happened thirty years later.

During the ten-year period 2001-2011, the price of gold increased from $275.00 per ounce to a high of almost $1900.00 per ounce. Yet, interest rates, which had been declining since the 1980s, continued  their descent (helped along by the Fed, of course).

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

GOLD AND GEOPOLITICAL CONCERNS 

Any apparent effects from geopolitical issues are temporary at best, and there is no reason to expect them to have any measurable or lasting impact on the gold price unless the U.S. dollar is affected negatively.

(See my article The Gold Price And Geopolitical Concerns for examples; i.e., Russia vs. Ukraine, Israel vs. Hamas, The War with Iraq, etc.).

GOLD AND RECESSION FEARS

A recession is a period of weak economic activity. Even a severe recession will not have an appreciable effect on the gold price.

If the recession deepens and economic activity declines severely,  the result could be a full-scale depression.

In most cases, events of this nature are accompanied by deflation. Deflation is the opposite of inflation and results in a stronger currency (USD) which gains in purchasing power.

The gain in purchasing power means you can buy more with your dollars – not less. The downside is that there are fewer dollars to go around. There would be a huge price collapses in prices for all assets, investments, goods and services. The gold price would be similarly affected.

GOLD AND DOLLAR COLLAPSE 

There are expectations by some for a complete collapse in the U.S. dollar resulting in hyperinflation; similar to Germany in the 1920s, Zimbabwe, or Venezuela.

That is possible, but it is unlikely.  A credit collapse and deflation are more likely since the Federal Reserve fuels inflation with cheap credit. A credit collapse would trigger huge price declines in all assets, including gold. The most likely result would be a full-scale depression that could last for years.

Even if the U.S. dollar were to collapse, the price of gold in dollars would be meaningless.

VIEWING GOLD IN ITS PROPER CONTEXT 

Gold is real money and a long-term store of value. It is also original money. Gold was money before the U.S. dollar and all paper currencies; and, all paper currencies are substitutes for gold, i.e., real money.

The higher price of gold over time reflects the ongoing loss of purchasing power in the U.S. dollar. In other words, the price of gold tells us nothing about gold.

The gold price tells us only what has happened to the U.S. dollar. The same thing is true if gold is priced in any other fiat currency.

Over the past century, the dollar has lost ninety-nine percent of its purchasing power. This means that it costs one hundred times more for the things you buy today than it would absent the effects of inflation.

The original fixed price of gold was $20.67 oz. Convertibility allowed exchange of $20.00 in paper money for one ounce of gold and vice versa.

At $2000 oz., gold today is one hundred times higher and reflects the actual ninety-nine percent loss of USD purchasing power.

The gold price only moves higher to reflect the dollar’s loss of purchasing power after the fact;  never before.

Expectations for a much higher gold price based on anything other than the loss of U.S. dollar purchasing power will not be realized.

A much higher gold price can only present itself after further, significant loss of U.S. dollar purchasing power.

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 We Know About Gold

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What we know about gold is simple and straight forward. Gold is real money and a long-term store of value.

Gold’s value is in its use as money. Its price has nothing do with its value. In fact, the price of gold has nothing to do with gold at all.

The higher price of gold over time is a reflection of the loss of purchasing power in the U.S. dollar.

The U.S. dollar and all paper currencies are substitutes for real money, i.e., gold. All governments inflate and destroy their own currencies.

As the dollar and other currencies lose purchasing power, the ‘price’ of gold increases. This price increase does not mean that gold is more valuable.

The value of gold is constant and stable. As original money, gold was the measure of value for everything else.  Prices for various goods and services were denominated in fractional weights of gold (ounces, grams, grains).

In order to encourage the use of dollars, a ratio of convertibility was fixed at $20.67 to one ounce of gold.

With the inception of the Federal Reserve and central banking, the use of fiat money was expanded and amplified. Eventually, the United States government suspended convertibility and cancelled any official link between the U.S. dollar and gold.

Subsequently, the gold price rose dramatically between 1971 and 1980. The increase in the gold price to an average monthly closing price of $677 in January 1980 reflected an accumulated loss of purchasing power in the U.S. dollar totaling ninety-seven percent.

This represented several decades of ongoing inflation and its effects which had previously not been factored into the fixed gold price. For the gold price it was a period of catch up and realignment with the actual purchasing power of the U.S. dollar.

There was nothing predictive or subjective about it. The value of gold had not changed. The change in its price was due to the effects of inflation that had previously occurred and their impact on the purchasing power of the U.S. dollar. (see Gold Is Cheaper Now Than In 1980)

GOLD SINCE 1980 

When the gold price peaked in 2011 at $1895 ounce, it represented a nearly ninety-nine percent loss of purchasing power in the U.S. dollar and accounted for the effects of inflation that had occurred between 1980 and 2011. It was another catch-up period for the gold price.

Likewise, the 2020 gold price high of $2048 was a reflection of further loss of dollar purchasing power and confirmed an accumulated total loss of ninety-nine percent.

The price of gold increases in hindsight to reflect the effects of previous inflation that have shown up in a loss of U.S. dollar purchasing power. The three major peaks (1980, 2011, and 2020) in the gold price are shown on the chart below…

Gold Prices (inflation-adjusted) 1970-2023

Golds Price Over the Years. Gold Facts Chart

GOLD AFTER 2023 – NEW HIGHS?

Predictions for new highs in gold should be viewed with skepticism. Any substantial and lasting new highs in the gold price will come only after a further loss of purchasing power in the U.S. dollar that is maintained for a reasonable period of time.

Inflation never stops. Its effects are sometimes quite mild and, at other times, more severe. Even so, gold might take several years to reflect the ongoing, cumulative effects of inflation.

For example, gold has approached (and briefly exceeded) its nominal peak price of $2048 several times since August 2020. However, the effects of inflation and loss of U.S. dollar purchasing power since then are such that gold would need to be $2340 in current dollars just to match that previous peak.

At $1950-80, gold is almost $400 oz. below its August 2020 peak. That doesn’t sound like gold is “knocking at the door of new highs”.  Any declines in the gold price would widen the gap.

WHAT WE DON’T KNOW ABOUT GOLD 

“What we don’t know about gold” might be better phrased as ‘what we don’t know about the U.S. dollar and the effects of inflation”.

We don’t know the end result of the Fed’s attempt to raise interest rates to a more normal level. What is more important is that we don’t know how the U.S. dollar will respond and whether or not it can continue its pattern of relative strength versus other currencies and gold.

We also cannot see the effects of inflation before they show up in the system, regardless of how bad or how mild they might be.

After the hugely inflationary efforts of the Federal Reserve in 2008-2010, most expected a big jump in the effects of inflation and a speedy resumption of economic activity. Not so. It took almost a full decade to get back on track. And, even then, the effects of inflation remained muted.

After Covid, the effects of inflation combined with disruptions in the supply chain sent consumer prices up dramatically. This led to a new round of projections and predictions for the price of gold.

CONCLUSION

The potential for extreme inflation is a very real possibility. So, too, is the potential for deflation. Then, again, things could continue in muted fashion for years.  We won’t know until after the fact.

The gold price will not reflect any of those scenarios until after they happen. Gold is not forward-looking.

In addition, as can be seen on the chart above, there can be long periods of time before the gold price catches up to the effects of previous inflation.

To whatever extent the price of gold moves higher, it is only to catch up to the effects of previous inflation and to compensate for the actual loss of purchasing power in the U.S. dollar. (see Gold Bulls Are Too Price-Dependent)

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 – Insurance, A Hedge, An Investment

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After decades of concerted effort by governments and central banks, the focus away from gold as money has led to its characterization as an investment, a hedge, insurance, etc. Some still refer to it as a barbarous relic. Are any of these descriptions valid?

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Gold’s Singular Role

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When it comes to analyzing gold and gold prices there seems to be no limit to the explanations of cause and effect. The number of things presumed to be fundamental, or which are correlated to gold, has grown exponentially as gold receives more attention in the media and from the public.

The state of confusion that exists regarding gold and gold prices is exacerbated by the contradictions and conflicting arguments of almost all concerned parties. This includes  investors, traders, analysts, and brokers.

Rather than a desire to understand gold and its singular role, most investors and others are interested in gold only when its  price is going up. They buy it and then look for reasons to justify their expectations of even higher prices.

They do look for explanations as to why the price goes down, of course; especially when that happens after they have taken a position on the long side. By then, it is usually too late.

GOLD’S SINGULAR ROLE

There is one overriding fundamental with respect to gold: “GOLD IS REAL MONEY”.

Money has three specific characteristics: 1) medium of exchange; 2) measure of value; 3) store of value. In order for something to be money, it must have all three of these attributes. Otherwise, it is not money.

The US dollar is not money because it does not embody all three of the necessary characteristics. It is an accepted medium of exchange and a measure of value, but it is not a store of value.

Gold is also original money. It was money before the US dollar and all paper currencies, which are merely substitutes for real money; in other words, substitutes for gold.

Lots of things have been used as money during five thousand years of recorded history.  Only gold has stood the test of time.

WHAT GOLD IS NOT

The simplest, and most accurate way to say what gold is not, is to state emphatically: “GOLD IS NOTHING ELSE OTHER THAN MONEY’.

Gold is not an investment; nor is it a hedge. Gold is not insurance. Gold is not a safe haven. Gold is not silver’s handsome twin brother. Gold is not a barbarous relic. Gold is not an outdated earlier version of the cryptocurrency craze. Gold as money is not an idea whose time has come and gone. 

Gold is nothing other than money. Its use in jewelry is always secondary to its role as money. Gold is money that can be used for adornment, but it is still money, nonetheless. Always.

THE VALUE OF GOLD

The value of gold is in its role and use as money. It is divisible into fractional units for transaction purposes and is a proven store of value.

Gold’s value is constant and unchanging. One ounce of gold today will  purchase amounts of goods and services roughly equivalent to what it could have bought fifty, one hundred, or one thousand years ago.

The reason the value of gold does not change is because gold, itself, is unchangeable.

WHY DOES THE PRICE OF GOLD CHANGE? 

It is logical and reasonable to ask “If gold is unchangeable, and its value is constant, then why does its price change?

The changing price of gold is attributable to one thing only: changes in the value of the US dollar.

Over the past century, the US dollar has lost between ninety-eight and ninety-nine percent of its purchasing power. Correspondingly, the price of gold has increased by a multiple of fifty ($1050 per ounce) to one hundred ($2060 per ounce) times its original fixed and convertible price of $20.67 per ounce.

The chart (source) below shows a one hundred-year history of rising gold prices…

Over that same one hundred years, what you can  buy with an ounce of gold remains stable, or better.  (see my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)

SUMMARY

Gold’s singular role is its use as money. Gold is real money because it carries the qualifying characteristics of money, including that of a store of value.

The value of gold is directly attributable to its use as money. Gold’s value is constant and unchanging. The higher price of gold over time is a reflection of the ongoing loss in purchasing power of the US dollar.

Gold’s value is not determined by world events, political turmoil, or industrial demand. Gold is not correlated to interest rates or anything else. Gold is not a hedge or a safe haven; nor is it an investment.

Gold is real money and nothing else.

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, Original Money, Fiat Money

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The first gold coins appeared around 560 B.C.  Over time it became a practice to store larger amounts of gold in warehouses.  Paper receipts were issued certifying that the gold was on deposit.  These receipts were negotiable instruments of trade and commerce which could be signed over to others.  They were not actual currency but are a presumed forerunner to our modern checking system.

Gold is original money. It was money before paper receipts were issued. The paper receipts were not money. They were substitutes for real money. Today, all paper currencies are substitutes for real money. 

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“A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold” Revisited

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One of the earliest articles I wrote was “A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold”.  The information contained in the article is basic to a fundamental and accurate understanding of gold.

The convolution and complication of basic fundamentals reigns supreme in almost all analysis of gold.  That is unfortunate, because it obscures the simple truth.

The simple truth is that gold is real money. Even that simple truth, however, deserves some further explanation.

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Gold Nuggets And Silver Bullets

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It is very difficult to let go of someone – or something – when we have invested so much time and energy in it. It is even harder when we have invested so much of ourselves in it; when the outcome is not what we expected; when our reputation is at stake.

In this particular case, that something is gold and silver.

The emotional proclamations just a few weeks ago seemed quite strong, almost being religious in their fervor. But after two thrusts of the dagger to the heart, the explanations afterwards seem a bit hollow. 

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What’s Up With Gold?

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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!