real money

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!

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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Only One Fundamental For Gold

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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!

 

Analysis Of Gold Is Lacking

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Any analysis of gold must have a correct premise.  And terms used in that analysis must be clearly understood.  For example…

“Are you pro-gold?”  Just exactly what does that mean?   Is it a political or moral issue?  In other words, does someone’s position on gold indicate ideology or lifestyle choice?  Can a political liberal be pro-gold? And if someone answers the original question in the affirmative, does that mean they are anti-something else?

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Warren Buffett Is Right (And Wrong) About Gold

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Warren Buffett is right – and wrong – about gold. And many others are, too.

Among their various characterizations of gold are the following:  it is an unproductive asset; it doesn’t ‘do’ anything; it just sits there; it’s too volatile; stocks are a much better investment.

And, of course, they are right.  Up to a point.  

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Silver Is Not Real Money

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Is silver real money?  I don’t think so.  But I know that my proclamation will likely draw vociferous contradictions  from others who consider themselves “hard-money advocates”.

That’s okay.  Let’s look at the facts.   

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A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold

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The average cost for a loaf of bread in 1930 was ten cents ($.10). The average cost for a gallon of gasoline was also ten cents.

With gold priced in U.S. dollars at $20.00 to the ounce, you could at that time purchase two hundred loaves of bread or two hundred gallons of gasoline (or some combination thereof).

Twenty dollars of paper currency OR one ounce of gold valued at $20.00, usually in the form of a U.S. Double Eagle ($20.00 gold coin, legal tender), were equal in “purchasing power”.

Over the next four decades the cost for a loaf of bread/gallon of gasoline  continued to increase such that in 1970 the respective costs were twenty-five cents/thirty-six cents.  An ounce of gold (at $40.00) would purchase  one hundred sixty loaves of bread/one hundred eleven gallons of gasoline.   That is considerably less than the two hundred units of either item which could have been purchased in 1930.  But the numbers are even worse when we look at what twenty dollars of U.S. paper currency would buy in 1970: eighty loaves of bread/fifty-five gallons of gasoline.  Both gold and the U.S. dollar lost purchasing power over the forty-year period 1930-70 but  the U.S. dollar was the “biggest loser”.

Time for a bit of history to help us understand what had happened historically over the course of that forty-year period.  In 1933, President Franklin Roosevelt issued an executive order prohibiting private ownership of gold by U.S. citizens and revaluing gold at $35.00 to the ounce.  Also, U.S. paper currency would no longer be convertible into gold for U.S. citizens.  Foreign holders (primarily foreign governments) could continue to redeem their holdings of U.S. dollars for gold at the “new, official” rate of $35.00 to the ounce.  But what does that really mean?

If you are a foreign holder of U.S. dollars, you had just been told that your stash of “money” (in the form of U.S. currency) was now worth forty-one percent less than previously.  It was a tacit admission by the U.S. government that they had been “inflating” the money supply aggressively as evidenced by the cumulative effects of that inflation showing up in the cost of goods and services (i.e. average cost of loaf of bread/gallon of  gasoline).

The Depression (1930s) and World War II (1940s) “conveniently” received much of the blame. But things progressed reasonably well (economically speaking) throughout the fifties and sixties. By the late 1960’s and early 1970’s foreign governments were demanding returns of their gold on deposit here in the U.S.  Some of that gold was the result of new redemptions of the accumulation of U.S. dollars which they held and which were promised as redeemable in gold.

In 1968, the United States Government again revalued gold “officially” at $40.00 to the ounce and at the same time acknowledged a “free market” price for gold which could operate on its own, independently. However, the U.S. would not recognize the free market price in any official dealings/transactions.

By 1971 things were getting a bit dicey.  Foreign governments wanted their gold, but the U.S. did not want to release it.  Or, they didn’t have it.  Probably some combination of both.  So, in August 1971, President Nixon suspended any further convertibility of U.S. dollars into gold by non-U.S. citizens.  All hell broke loose. Literally.

Prices of goods and services in the United States began rising rapidly (historically speaking) and the U.S. dollar price of gold peaked in 1980 at $850.00 to the ounce.  The average price for gold in 1980 was $615.00 to the ounce.

By 1980 the average cost of a loaf of bread was $.50 (double what it was in 1970) and the average cost of a gallon of gasoline had settled out at $1.19 (several years after the Arab Oil Embargo of early 1970’s).  The above stated average U.S. dollar price of gold ($615.00 to the ounce) would purchase twelve hundred thirty loaves of bread or five hundred sixteen gallons of gasoline.  And the good old U.S. dollar?  Twenty dollars in U.S. paper currency would buy forty loaves of bread/seventeen gallons of gasoline.

Ten years later, in 1990, a loaf of bread had increased to $.70 and a gallon of gasoline to $1.34.  With gold at $338 USD/oz you could purchase four hundred eighty-two loaves of bread/two hundred fifty-two gallons of gasoline. Twenty U.S. dollars would buy twenty-eight loaves of bread/fifteen gallons of gasoline.

So where are we today?  The average cost of a loaf of bread and a gallon of gasoline are approximately the same – about $2.50. With gold at $1300.00 to the ounce you can purchase five hundred twenty loaves of bread or five hundred twenty gallons of gasoline which is nearly one hundred sixty percent MORE than the amount you could have purchased with one ounce of gold in 1930.

And twenty dollars in U.S. currency will purchase eight loaves of bread or eight gallons of gasoline which is ninety-six percent LESS than the amount you could have purchased with twenty dollars in U.S. currency in 1930.

What else do you need to know?  Get some 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!

Gold “A Pet Rock”?

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Is gold “a pet rock”?

“A pet rock” is how a noted financial columnist has described gold on a couple of occasions within the past year or two. Which is not surprising given the premise for the logic used to arrive at his conclusion.  That premise, or assumption, is the reason that most people (financial writers, advisors, investors, and economists included) are incorrect in their analysis of the yellow metal.

That premise/assumption is that gold is an investment.  It is not.  It is also not insurance or a hedge against chaos.  It is real money.

There is only one thing anyone needs to know with regards to the value of gold.  And that is the value of the U.S. dollar.

Gold is quoted in U.S. dollars and the dollar is the worlds reserve currency.  The “price” of gold in U.S. dollars is an inverse reflection of the value of the U.S. dollar.  And yes, it does change continuously, and ongoing.  And yes, there are more extreme changes for short 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 (including government debt) can be manipulated by government, expectations and reactions become more volatile.

Without a clearly explicit 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.

What is particularly ironic is that the writer states in his article “gold has also preserved its purchasing power over remarkably long periods”.  Which is exactly the point.  Gold is a store of value and, hence, real money.  It is the U.S. dollar which is volatile, and which continues to lose value.

With respect to concerns about some of the more dramatic changes in the price of gold  over shorter periods of time, most of the time when those particular examples are cited, they are referenced to the exclusion of more telling facts.

For example, it is a  well-known fact that gold in January was priced at $800.00 to the ounce and that its price  in U.S. dollars some twenty years later was $275.00 to the ounce.  Sounds horrible if you are looking at gold as an investment, right?  Of course.  But lets assume that our logic based on a faulty assumption (i.e. that gold is an investment) is correct.  And then what would have happened if you had bought gold at $275.00 to the ounce in 1999?  Its recent price at $1250.00 to the ounce is a nearly three hundred fifty percent increase.  And what if you had bought gold prior to 1980?  What if you were prescient enough to exchange your U.S. dollars for gold in 1971 at $35.00 to the ounce?  By 1980 you would have a profit of nearly twenty-two hundred percent!  Are these examples any less valid? No. It is a matter of perspective.  And that perspective gets clouded sometimes depending on an individual’s point of view.

Quoting from the same article, “In the shorter term, gold fluctuates so wildly that it is a surprisingly poor hedge against increases in the cost of living.” Does that mean that stocks and real estate are also “poor hedge(s) against increases in the cost of living”?  How would your stock broker answer that question?

For most of my lifetime (sixty-eight years) I have owned gold for what I think are the right reasons.  It may be a ‘pet rock’ to some folks, but to me it is real 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!