"Everything you need to know about gold"
HOW MUCH IS GOLD WORTH?
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.
What is a fair price for gold? How can we know if 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 the value of our gold/money is realistically priced?
We know that gold is currently priced at more than $1800 per ounce; so the value of gold today is what we can buy with one thousand eight hundred dollars.
But is $1800 dollars per ounce realistic? Does it represent fair value? 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?
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.
DOES DEMAND FOR GOLD SEND ITS PRICE HIGHER?
Gold is original money. As such, it is the measure of value for everything else.
Gold was money before the US dollar and other paper currencies. All paper currencies are substitutes for gold, i.e., real money.
So, how much is money worth? Money is worth what you can buy with it. In my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold, I compared the cost to purchase bread and gasoline over the past one hundred years using US dollars vs. gold.
The article illustrates the single reason that separates gold from all other forms of money: gold is a store of value; nothing else is.
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!
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!