profit potential in gold

Descending Price Peaks In Latest Gold Charts

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The latest gold charts are pictured below and show a series of descending price peaks dating back to 1980. There are four charts. The first two charts are for the period following the August 2011 peak. The third and fourth charts are for the period after the gold price peaked in 1980. Prices on all charts are monthly average closing prices.

For example, the average closing price for gold in the month of January 1980 was $677 oz. This price ($677) is shown on Chart #3 below. During that same month, the intraday high for gold was $843 oz. The spike in price above $800 was very short-lived and not a reliable indicator of where gold traded during the month of January 1980. Average closing prices are more representative and more realistic for comparative purposes and analyses.

There are two charts for each time period. The first chart plots nominal prices; the second chart shows inflation-adjusted prices. Here is the first chart…

#1 Gold Prices August 2011-June 2024

The average closing price for gold in August 2011 was $1825 oz. After declining for more than four years, the gold price bottomed at $1060 oz. and began rising. The 2011 high was eclipsed and a new high price for gold was set at $1971 oz. in July 2020. After a sharp decline in 2022, the price of gold rose to another new high of $2327 oz., which is also the current closing price on June 28, 2024. The gold price has more than doubled (119%) since its December 2015 low.  That is quite impressive, but, there are some caveats.

Gold’s recent price performance, in total, looks very good if you are short-term oriented. The shouts of joy might be a bit overdone, though, if you have been holding gold since its peak in 2011. In that case, the total price increase for the entire thirteen-year period is only 27%. That is an annualized gain of 1.86%, which is more indicative of a slow-moving wagon, rather than a rocket ship in blastoff mode.

The numbers in both cases are made worse when the effects of inflation are factored in…

#2 Gold Prices (inflation-adjusted) August 2011-June 2024

In Chart #2, the effects of inflation have turned the 2011 high and subsequent new highs in 2020 and 2024 into a series of descending peaks. Each successive peak almost matches, but doesn’t quite reach the previous high point. The total gain of 119% referenced in Chart #1 is almost halved, down to 66%. The meager nominal price increase of 27% is now a net loss (-8%). The $1825 oz. nominal price peak in 2011 correlates to a real (inflation-adjusted) price of $2529 oz. in today’s cheaper dollar(s),

Now, let’s look at gold’s price performance over a longer time period. Here is Chart #3…

#3 Gold Prices January 1980-June 2024

When the gold price peaked in January 1980, it correlated to the effects of inflation that had depleted U.S. dollar purchasing power by 97% over the previous half-century. At $677 oz., the gold price was thirty-three times higher than it was when gold and the dollar were interchangeable, i.e., convertible, at a fixed ratio of $20.67 per ounce. The next major peak for the gold price was in 2011 at $1825 oz., followed by 2020 and 2024. Now, lets look at inflation-adjusted prices dating back to 1980…

#4 Gold Prices (inflation-adjusted) January 1980-June 2024 

In Chart #4, the ever-ascending nominal price increases shown previously in Chart #3 are more severely subdued when the effects of inflation are factored in. In addition, both volatility and time become more apparent.  While the nominal price of gold continues to rise reflecting actual loss of purchasing power in the U.S. dollar, the gold price in real (inflation-adjusted) terms has yet to exceed any of its previous price peaks; and likely never will. That is because gold’s value is in its use as money and is basically constant.

Each price peak in gold beginning in 1980 and including the peaks in 2011, 2020, and 2024 is a reflection of the intervening loss of purchasing power in the U.S. dollar since the previous peak.

CONCLUSION 

After allowing for the effects of inflation, an ounce of gold at $2400 today is no more valuable than it was at $2000 in 2020, or $1825 in 2011, or $677 in 1980. For that matter, the purchasing power of one ounce of gold is the about the same today as it was a century ago when it was priced at $20.67. In other words, if you bought gold at any of those prices and held it until now, you do not have real profits. The higher gold price is not a profit. It represents the dollar’s loss of purchasing power. (There are possible short-term trading opportunities for traders. See Understanding Profit Potential In Gold)

Gold is real money and a long-term store of value. Holding gold provides a measure of protection against depreciating currencies. Over time, the increasing price of gold matches the loss of purchasing power in the U.S. dollar that has already occurred. (also see Gold Has Done It’s Job – Isn’t That Enough?)

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 Has Done Its Job – Isn’t That Enough?

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GOLD HAS DONE ITS JOB

For most of us who understand what gold is (and, what it isn’t), gold continues to perform as reasonably expected. Rather, its price continues to reflect the ongoing loss of purchasing power in the U.S. dollar. Gold, itself, isn’t doing anything at all. (see Not About Gold; All About The Dollar)

Short term nominal profits notwithstanding, gold’s value is the same as it is always. Gold is real money and its value is in its use as money. Gold is a medium of exchange, a measure of value, and a long-term store of value.

There has been no decoupling or modification of any link between the gold price in dollars and the value of the U.S. dollar. Part of the confusion about the link between the U.S. dollar and the gold price results from the tendency of analysts and others to cite current strength in the U.S. dollar index.U.S. DOLLAR INDEX 

“The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies. The Index goes up when the U.S. dollar gains “strength” (value) when compared to other currencies.”  (Wikipedia) 

The “basket of foreign currencies” includes the Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona, Swiss franc. Nowhere is there any reference to gold. The only thing the U.S. Dollar Index tells us is how the U.S. dollar compares to a select group of other currencies. The U.S. dollar index tells us nothing about gold.

It is also a fact that the U.S. Dollar Index doesn’t provide any measurement of the dollar’s value on an absolute basis, but only on a relative basis. Any or all of the various currencies can be gaining or losing value (purchasing power) at any particular time. All that is indicated by changes in the index is how well the dollar is faring on foreign exchange markets against the group/basket of other currencies which comprise the index.

A CENTURY OF INFLATION  

Before the inception of the Federal Reserve in 1913, and for a couple of decades afterwards, gold and the U.S. dollar both circulated as money mediums on a convertible, fixed-exchange rate basis. Both gold and paper dollars were used interchangeably at a fixed rate of $20.67 to one ounce of gold.

Whereas, inflation previously was the domain of governments, the practice of money creation and inflation was eventually granted to central banks. Acting in its authorized capacity, the Federal Reserve embraced its role in assertive fashion and has become the leading exporter of inflation on a worldwide basis.

After more than a century of continuous, intentional inflation (expansion of the supply of money and credit), the U.S. dollar has lost more than ninety-nine percent of it purchasing power. That actual loss of purchasing power in the U.S. dollar is reflected in a gold price which is more than one hundred times higher than its $20.67 oz price when gold and the dollar were interchangeable and convertible. 

The loss of purchasing power in the U.S. dollar shows up in higher prices for the goods and services we buy. Those higher prices are NOT inflation. The higher prices are the effects of inflation; inflation which was previously created by the Federal Reserve. (see Gold, Inflation, And The Federal Reserve)

KEY TO THE GOLD PRICE 

The effects of inflation are the key to the gold price. Specifically, the ongoing higher price for gold reflects the actual loss of purchasing power in the U.S. dollar that has already occurred as a result of the inflation created by the Federal Reserve.

For example, in January 1980 the average closing price for gold was $677 oz., which is representative of a ninety-seven percent loss of U.S. dollar purchasing power. The average closing price for gold in August 2011 was $1825 oz. By then, the additional effects of inflation after 1980 had brought the dollar’s cumulative loss of purchasing power to almost ninety-nine percent. Nine years later, in August 2020, a nearly-full ninety-nine percent loss of purchasing power resulted in a gold price of $1970 (monthly average closing price). As of the end of April, 2024, additional effects of inflation resulted in a gold price of $2285 oz.

Here is what all of this looks like on a chart (source)…

Gold Prices – 100 Year Historical Chart

The chart above shows an ever higher gold price as the ongoing effects of inflation progressively manifest themselves in a U.S. dollar that continues to lose purchasing power. The chart below shows the same action with the gold prices adjusted for the effects of inflation…

Gold Prices (inflation-adjusted) – 100 Year Historical Chart

As can be seen on the second chart, the higher gold price over time, no matter how extreme it seems in the short term, nor how high it goes, is simply a reflection of the long-term effects of prior inflation. The higher gold prices come after the effects of inflation have shown themselves in the form of the U.S. dollar’s actual loss of purchasing power, i.e., higher prices for goods and services.

Also, on the second chart, what shows up as new, ever higher, nominal prices for gold, are not new highs at all after allowing for the effects of inflation.

A very important point of note is that a higher gold price reflecting the dollar’s loss of purchasing power comes only in hindsight – after the fact. Also important is the fact that the effects of inflation are delayed and unpredictable. Until the effects of inflation show up and are absorbed into the economy, there is no reason to expect a new, higher gold price.

LATEST PRICE ACTION FOR GOLD – CONCLUSION

What most investors refer to as a new high in the gold price is a reaction to the effects of inflation that have occurred since August 2020 when gold was priced at $1970 oz. A new nominal high, yes; but, after allowing for the effects of inflation, the gold price has not exceeded its previous peaks in 2020, 2011, and 1980 (see the second chart above for verification).

There is no historical precedent for any expectations that gold will ever exceed its inflation-adjusted price level. This means that the gold price is probably at or near its peak nominal price for now. Only after further clear losses of purchasing power in the U.S. dollar can a higher nominal price for gold be expected. (also see Viewing Gold In Its Proper Context and Understanding Profit Potential In 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!