higher gold price

I Bought A Stock (AU) At 20; Now It’s 23 – Am I Rich?

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I BOUGHT A STOCK (AU) AT 20…

…Now, it’s 23. I must be rich. That sounds ridiculous and it is. But, that is how some gold bulls sound when talking about “new highs” for the yellow metal. At least one analyst mentioned the “four year wait” for gold’s breakout, so let’s go back to 2020. More precisely, August of 2020. If anyone had bought a stock which was predicted to “break 20 and go straight to 30” would it have generated the same excitement that predictions for gold to go from $2000 to $3000 did? Not likely; but that did not stop the torrent of predictions and hyped expectations for the rocket launch that some expected. Calls for $5000, $10,000, and higher stoked the fever and emotions of anxious investors.  Alas, we all had to wait for almost four years. Now, those same anxious investors are hoping the rocket launch hasn’t aborted – again.

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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!

You Might Get A Higher Gold Price, But…

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A HIGHER GOLD PRICE

We are currently in the midst of the latest round of projections for new highs in the gold price. Those projections are more the result of anxious anticipation and elevated emotions rather than real fundamentals.

Expectations for a reversal in Fed interest rate policy were given a boost last month with indications from Chairman Powell that there will eventually be some cuts in rates. That was all that investors needed to bid up the prices of financial assets.

Two of the biggest beneficiaries were bonds and gold. (I consider gold to be a financial asset since it is real money.)

The logic for bond bulls is reasonably straightforward and fundamentally correct. A decline in rates correlates inversely to higher bond prices; just the opposite of the action we have experienced over the past couple of years as rising interest rates were directly reflected in bond price declines which totaled as much as fifty percent.

As far as gold is concerned, its price action is a typically knee-jerk reaction based on assumptions that the next round of cheap and easy money is already here.

That is certainly not the case. First of all, the Fed spent nearly four full decades engineering interest rates to abnormally low levels of historic proportion. The current attempt to return interest rates to a higher, more reasonably normal level is only 2-3 years old.

Is it reasonable to think that’s all there is? Back to business-as-usual now? For most investors and analysts, it is difficult to view things in proper perspective when your entire life has been lived in a make-believe world of endless money creation available at artificially low rates.

Current projections for the gold price to move substantially higher are based on the assumption that gold will respond affirmatively to the expected onslaught of cheap money. That is not the way it works.

WHAT CAUSES A HIGHER GOLD PRICE?

The only reason the price of gold increases is to reflect the actual loss of purchasing power in the U.S. dollar. It reflects this decline only in hindsight – after the fact, and never before.

When the price of gold peaked in 1980, it reflected the effects of inflation that had previously eroded ninety-seven percent of the dollar’s purchasing power.

At that time, people were no less fervent in their expectations for a complete collapse in the U.S. dollar. Along with that expected collapse came predictions for the gold price to exceed $1000 oz.

Eventually, it did so; but, it took nearly thirty years to happen. Meanwhile, the U.S. dollar did not totally collapse. It did, however, continue to lose purchasing power from the effects of inflation.

The gold price declined from an average closing price of $677 in January 1980 to a low of $250 during the summer of 2000.

Beginning in 2000-01 and continuing until August 2011, the gold price marched upwards to a new high of $1895 oz.

The “new high” for the gold price was a three-fold increase from its 1980 high and reflected at that time a nearly ninety-nine percent loss in U.S. dollar purchasing power. In inflation-adjusted terms, the prices were similar. In other words, the “new highs” of 2011 reflected the same inflation-adjusted value for gold evidenced in 1980.

Similarly, the “new high” for gold at $2048 in August 2020 reflected the additional loss of purchasing power in the U.S. dollar that had occurred after 2011 and also reflected the same inflation-adjusted value for gold referred to previously.

Here is what the price action looks like on a long-term chart…

Gold Prices (inflation-adjusted) 1980 -2023

New Highs in Gold Chart

As you can see on the chart above, the ending gold price of $2062 for the year 2023 is not a “new high” in real dollars. In fact, the current gold price is actually cheaper by almost $300 oz. compared to its previous peak in August 2020.

The price peak of $2048 oz. for gold in August 2020 cannot be exceeded until the gold price in current, inflation-adjusted dollars exceeds $2336 oz.

PERVERTED LOGIC FOR SOME GOLD BULLS 

When the Fed announced its plan to orchestrate higher interest rates for the expressed purpose of reducing the effects of inflation to a more acceptable level (supposedly in line with their oft-missed 2% target), their efforts resulted in a stronger dollar and a lower gold price; at least temporarily.

The Fed has now indicated that recent evidence is indicative that progress has been made on that front and that the effects of inflation have been reduced measurably, if not entirely subdued; and that continuing to increase rates may not be necessary.

Question: If the reasoning for a stronger dollar and lower gold price was based on the announced efforts by the Fed two years ago; and, since their recent statements indicate they feel they are approaching their goal, even if they haven’t reached it yet; doesn’t that mean that the perception of the inflation threat is not what it was and hence, a stronger dollar and lower gold price are justified?

My purpose in asking is that gold bulls seem to have a tendency to view conflicting evidence through rose-colored glasses.

Here is what it sounds like in sequence: 1) Inflation is very bad; the dollar is going to collapse, so buy gold. 2) Inflation isn’t as bad as previously thought; the Fed may not need to keep raising interest rates, so buy gold.

CONCLUSION

The gold price is always playing catchup to the previous effects of inflation which are manifest in the continual loss of purchasing power in the U.S. dollar.

The current gold price of $2060 oz is one hundred times higher than its original fixed price of $20.67 oz. and reflects the ninety-nine percent loss of $USD purchasing power that has occurred over the past century.

The potential for a gold price increase is always there because the effects of inflation continue indefinitely, however…

The price of gold will not move appreciably higher until after there is further, significant loss of purchasing power in the U.S. dollar.

Since the gold price is currently at or near its inflation-adjusted peaks from 1980, 2011, and 2020, expectations for a much higher gold price at this particular time seem premature.

(Also see What We Know About 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!

Higher Gold Price Not Correlated To Money Supply Growth

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To say that “a higher gold price is not correlated to money supply growth” is fundamentally correct. However, the expectation for a much higher gold price resulting from huge money creation by the Federal Reserve is shared universally by investors, analysts, and others.

In fact, it is considered almost scriptural canon that a huge increase in the money supply will lead inevitably to a huge increase in the gold price. Historical examples of France in the late 18th century, Germany (Weimar Republic) in the 1920s, and Zimbabwe or Venezuela more recently, are often cited as proof of the relationship between money supply growth and its effect on gold prices.

That is not the case, though.

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