"Everything you need to know about gold"
It is pretty much expected today that any investment analysis with justifiable conclusions will be steeped in technical study that includes lots of charts.
This seems especially true of gold.
Which is all well and good, I suppose; except for the obfuscation:
GOLD PRICES
Inflation is the debasement of money by government. The expansion of the supply of money and its subsequent loss in value results in an increase in the general level of prices for goods and services.
Deflation is characterized by a contraction in the supply of money and a decrease in the general price level of goods and services. (What we are currently experiencing is called ‘disinflation’ which is a lower rate of inflation.)
The purpose of this essay is to clarify and explain accurately what to expect regarding gold prices if deflation occurs.
According to Wikipedia: “Inflation reduces the real value of money over time, but deflation increases it. This allows one to buy more goods and services than before with the same amount of money.”
The United States Government, via the Federal Reserve Bank, has been practicing inflation regularly for over one hundred years. They are good at it. Their efforts have resulted in a ninety-eight percent “reduction in the purchasing power per unit of money.”
The reduction in purchasing power of the U.S. dollar is reflected in the higher price of gold.
In 1913, with gold at $20.65 per ounce, twenty U.S. dollars in paper money was equal to twenty dollars in gold. Today gold is at $1270.00 per ounce, more than sixty times higher than in 1913.
The higher price for gold does not mean that gold has experienced an increase in purchasing power. Rather, its higher price reflects the decline in purchasing power of the U.S dollar.
Deflation is different. It is the exact opposite of inflation. And the results are different as well.
As we said earlier, deflation is characterized by a contraction in the supply of money. Hence, each remaining unit is more valuable; i.e. its purchasing power increases.
Government causes inflation and pursues it for its own selfish reasons. A government does not voluntarily stop inflating its currency. And it certainly isn’t going to reduce the supply of money. So what causes deflation?
Government causes deflation, too. Deflation happens when a monetary system can no longer sustain the price levels which have been elevated artificially and excessively.
Governments love the inflation they create. But with even more fervor, they hate deflation. And not because of any perceived negative effects on its citizens. It is because the government loses control over the system which supports its own ability to function.
Regardless of the Fed’s attempts to avoid it, deflation is a very real possibility. An implosion of the debt pyramid and a destruction of credit would cause a settling of price levels for everything (stocks, real estate, commodities, etc.) worldwide at anywhere from 50-90 percent less than currently. It would translate to a very strong US dollar. And a much lower gold price.
Those who hold US dollars would find that their purchasing power had increased. 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.
The relationship between gold and the US dollar is similar to that between bonds and interest rates. Gold and the US dollar move inversely. So do bonds and interest rates. If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining. And, conversely, if interest rates are declining, the value of your bonds is rising. One does not ’cause’ the other. Either result is the actual inverse of the other.
Inflation leads to a U.S. dollar which loses value over time; hence, this is reflected in a higher gold price.
Deflation results in an increase in value/purchasing power for the U.S. dollar; hence, this is reflected in a lower gold price.
Those who expect gold to increase in price during deflation are wrong for several reasons.
Gold is not an investment. And it does not respond to the various headline items that journalists and analysts continue to repeat erroneously. It is not correlated with interest rates and it does not respond to housing statistics. It is not influenced by world events, terrorism, or the stock market.
Gold is real money. The U.S. dollar is a substitute for real money, i.e. gold.
If deflation occurs, there is no other possibility except for lower gold prices.
(to read more about gold and its relationship to the U.S. dollar, see 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 – A BETTER EXPLANATION
The emotional adamancy which dominates most analysis of gold contributes to confusion and misunderstanding. For example, “Backdrop For Gold Today Is As Bullish As It Has Been In A Long Time”; or “Precious Metal Sector Is On Major Buy Signal”. These and other similar claims are often supported by reams of technical analysis – the best that money can buy.
And this is on top of general misstatements of fact. It would appear that there is virtually no justification for lower gold prices except when caused by manipulation associated with conspiratorial forces.
Otherwise world tension, terrorism, natural calamities, social unrest, economic weakness, interest rates, inflation, trade deficits, Indian jewelry demand, etc, etc. all put a ‘floor’ under the price of gold. At least this is what we are told.
And the timing: “It’s now (or never).” “Gold has finally broken through its overhead resistance.” “$2,000/oz by the end of 2017.”
Does understanding gold require a degree in cyclical theory or financial mathematics? Or is it related to climate change?
A simpler and better explanation for gold exists. It only requires a bit of historical observation.
1) First, and foremost, is the simple fact that gold is real money.
Its value (purchasing power) is constant and stable. And its role as money came about through trial and error. Gold has stood the test of time.
2) Second, paper currencies are substitutes for real money.
Gold is also original money. It 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.
3) Third, inflation is caused by government.
One thing that should be clear from history is that governments destroy money. That might sound harsh, but it is true. And when we say “destroy” we mean just that. Inflation is practiced intentionally by governments and central banks. Its effects are severe and unpredictable. The Federal Reserve Bank of The United States has managed to destroy the U.S. dollar by bits and pieces over the past century. The result is a dollar that is worth 98 percent less than in 1913 when the Fed began its grand experiment.
The relationship between gold and the US dollar is similar to that between bonds and interest rates. Bonds and interest rates move inversely. So do gold and the U.S. dollar.
If you own bonds, then you know that if interest rates are rising, the value of your bonds is declining. And, conversely, if interest rates are declining, the value of your bonds is rising. One does not ’cause’ the other. Either result is the actual inverse of the other.
A stable, or strengthening U.S. dollar means lower gold prices. A declining U.S. dollar means higher gold prices.
In other words, higher gold prices are a direct reflection of a weakening U.S. dollar.
And please don’t confuse the U.S. dollar with the U.S. dollar index. The U.S. dollar index(es) do not tell us anything about the price of gold. A dollar index reflects changes in the U.S. dollar’s exchange rate versus other currencies.
Actual changes in the value of the U.S. dollar show up in the ever-increasing general level of prices for all goods and services – over time. (See A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)
The threat of world war is ominously present today. Countries and municipalities are going bankrupt. And acts of terrorism are an almost daily occurrence. This is in addition to an economy that can’t seem to improve enough or sustain an acceptable rate of growth.
So let’s buy gold, right? Maybe, maybe not. You see, gold doesn’t care about those things. It doesn’t care whether or not somebody fires a rocket armed with a nuclear warhead or the state of Illinois declares bankruptcy. And it doesn’t react to comments by Janet Yellen or Donald Trump. Indian jewelry demand is not on its radar. Nor are housing starts.
Gold responds to one thing. Changes in the U.S. dollar. Nothing else.
A continually weaker dollar over time means higher gold prices.
Periods of dollar strength are reflected in a declining gold price.
Lets talk for a moment about North Korea and the threat of war. Its a very scary situation. But even if things get worse, it won’t have an impact on gold prices. Here’s why:
In late 1990, there was a good deal of speculation regarding the potential effects on gold of the impending Gulf War. There were some spurts upward in price and the anxiety increased as the target date for ‘action’ grew near. Almost simultaneously with the onset of bombing by US forces, gold backed off sharply, giving up its formerly accumulated price gains and actually moving lower.
Most observers describe this turnabout as somewhat of a surprise. They attribute it to the quick and decisive action of our forces and the results achieved. That is a convenient explanation but not necessarily an accurate one.
What mattered most for gold was the war’s impact on the value of the US dollar. Even a prolonged involvement would not necessarily have undermined the relative strength of the US dollar.
All of which leads us back to a simpler and better explanation:
Insofar as gold is concerned, it is all about the U.S. dollar.
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!
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!