US dollar

What Happens To Gold Price If The Fed Doesn’t Cut Rates?

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GOLD PRICE IF THE FED DOESN’T CUT

With the increasing gold price of late comes the assumption that the expected cut in interest rates will open a torrent of cheap money that will bring the U.S. dollar down with a thud.  But, what would happen to the gold price if the Fed doesn’t cut interest rates?

What seemed like a universally expected event may not be as likely as some have assumed. In fact, the Fed has a history that includes examples of pivots and re-pivots; or, ignoring the presumed pivot and staying the course.
You can read more about the possibility that the Fed might not cut interest rates in my article Investors Are Too Anxious For Rate Cuts.

In this article we will address the implications for gold if the Fed doesn’t cut interest rates. It matters not what the reasoning is behind such a possibility. What matters is that much of what has happened to prices for gold, stocks, bonds, etc., is based on the presumption that several interest rate cuts are forthcoming, possibly before the end of the year. Hence, there is a potential shock for investors who have relied on that presumption, as well as the particular logic mentioned in our opening paragraph above, should the Fed not follow through.

IMPLICATIONS AND POSSIBILITIES

Ignoring for now the finer (and more critical) point of inflation-adjusted returns, both gold and stocks are at all-time highs. What might happen to gold if a “potential shock” becomes a reality? It depends.

To the extent that a more significant portion of money used to fund the purchase of gold recently was done so based on the presumed cuts in interest rates and a clear change in direction, then we could see a significant decline in the gold price; at least temporarily. This might also happen if interest rate cuts are delayed. Market participants in both stocks and gold would likely see any inaction or hesitancy by the Fed regarding interest rate cuts as negative for their investment outcomes and expectations.

Another possibility is that any effects on the gold price could be muted. That has more to do with other factors, not interest rates. For example, if the prevailing thoughts dominant in the minds of those placing a larger portion of the money flowing into gold is not based on concern about interest rates, rather on anything else, then it is entirely possible that the gold price might show little reaction to non-cuts in interest rates.

OTHER FACTORS, SUMMARY

Some buyers in the gold market are not thinking so much about interest rates. Their concerns have more to do with the continual loss of purchasing power in the U.S. dollar. The erosion of U.S. dollar purchasing power is the result of ongoing inflation, which is the intentional debasement of money by governments and central banks. The continuous expansion of the supply of money and credit for more than a century has resulted in a dollar which has lost ninety-nine percent of its purchasing power.

Over time the gold price is historically correlated to that decline in the purchasing power of the dollar. Gold is real money and a long-term store of value.

Whether buyers of gold are individuals (retail investors), speculators, hedge funds, governments, or central banks; and whatever the reasoning behind their purchases, which reasoning is quite often temporary; in the end, it is still all about the U.S. dollar. (also see U.S. Dollar Best Of The Worst; Gold Best Of The Best)

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!

Destruction Of Money Keeps Inflation In Check

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DESTRUCTION OF MONEY 

The “biggest collapse in the money supply since the Great Depression” continues unabated at this point. (See Ryan McMaken’s article here.)

The decline in the money supply is nearly three years old and dates back to April 2021.

This decline is a destruction of money and is the opposite of what might be expected if one is looking for evidence that could support some of the more extreme expectations and projections for inflation and its effects.

That is because most, if not all, of the analysis about inflation and its effects focuses on the supply of money and its seemingly unlimited growth.

Discussion about money creation by governments and central banks almost universally excludes mention of the demand for money.

DEMAND FOR MONEY 

Money has a demand side, too. We are not talking about the demand for goods and services. We are talking about the demand for money, itself. People need money to pay taxes and transact business; to save and invest.

As long as the supply of money is relatively stable and sufficient to finance existing normal economic activity, then the result is price stability. Without price stability, the economy cannot function reasonably.

Since the inception of the Federal Reserve, excessive growth in the money supply has led to a ninety-nine percent loss of purchasing power in the U.S. dollar.

Currently, though, the money supply is not growing. It is shrinking.

A SHRINKING MONEY SUPPLY 

A shrinking money supply is directly opposite to that which has happened which has made the U.S. dollar nearly worthless compared to a century ago.

It is also not supportive to arguments that the U.S. dollar is about to collapse and that hyperinflation is on the way.

Without the continual infusions of “new” money,  the previous inflationary “highs” cannot be maintained, let alone increased.

If a shrinking money supply continues, the end result is deflation. (see An End To Inflation – Three Possibilities)

WHAT IS DEFLATION? 

Deflation is the exact opposite of inflation. The result is a stronger currency. Instead of losing purchasing power, your dollars would buy more – not less.

Deflation is not bad. However, some of the accompanying economic effects would be very difficult to endure. The U.S. dollar would go further, but there would be fewer dollars to go around.

There would be huge price reductions in real and financial asset prices, depressed economic activity and high unemployment. Conditions would rival and probably exceed those of the Great Depression of the 1930s.

Fortunately, at least for now, we are not there yet.

CONCLUSION 

An infusion of new money might temporarily reverse the shrinking money supply and its negative economic effects, but that is not necessarily a good thing.

Think of it this way. Would you recommend a new fix to a drug addict who is undergoing withdrawal symptoms resulting from curtailing their drug use and attempting a return to sobriety?

Intentional inflation by government and central banks in the form of cheap and easy credit has created artificial financial highs, bubbles in asset prices, and a false sense of economic security.

You cannot ignore fundamental financial and economic law forever. Sooner or later (more likely sooner), we will all pay the price. (also see Gold And The Shrinking Money Supply)

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!

 

Cash Is King Right Now, Not Gold

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CASH IS KING FOR NOW

Amidst the fallout of stock markets crashing worldwide, gold (silver, too) and oil imploding, and the scare of coronavirus, the dollar itself stands tall. That is not what some were expecting. Nevertheless, unrealistic expectations abound today, so let’s see what we can learn from this.

When investors sell en masse, they generally turn to cash as a resting place for their money. Cash for most people today still means US dollars. This implies an increase in demand for US dollars.  Gold investors and their advisors seem to have been expecting just the opposite.

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A Lesson About Gold – How Bullish Can It Be?

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A Lesson About Gold

Apparently, there is no limit. This seems especially true right now with all of the “obvious” signs and indicators staring you in the face. It is almost blasphemous to speak cautiously. Better to let your imagination run wild and join in the revelry.

I can’t do that. I don’t choose to be dumped into the same cauldron of boiling fantasy with other analysts and advisors, who tout and promote based on the latest headlines. There has to be more to it. I think there is.

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Price Of Gold Is A Reflection of US Dollar; Not US Dollar Index

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Several articles by others recently have pointed out the apparent inconsistency of the US dollar’s action relative to the price of gold. For example, over the past year the US dollar Index has continued to strengthen, while gold has also risen in price.

That would seem to indicate that the US dollar’s value is not a primary factor in determining the price of gold. As we have said, though, the US dollar Index is not the same thing as the US dollar. The two are not interchangeable.

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Gold And US Dollar, Buffett, Trump, – Nothing Has Changed

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GOLD AND US DOLLAR

“Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire…” — Warren Buffett Feb2012

During that same period (1965 – 2012) the price of gold increased from $35.00 per ounce to more than $1800.00 per ounce – a whopping 5000%. 

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Gold Is Still About The US Dollar Part II

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GOLD IS STILL ABOUT US DOLLAR PART II

In my original article I made the following statements:

“It means that holders of any non-USD currency who want to exchange it for gold, must first exchange it for US dollars and then exchange the US dollars for gold.

When anyone is selling gold, the proceeds are always paid in US dollars. The dollars can be held as such, or they can be exchanged for other currency.”  

Another professional labeled the above statements as “fiction”.

I do not agree.  But I do see the possibility for others to infer something other than what was intended.  Therefore, I apologize. And I have replaced the statements in question with the following:

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Gold Is Still About The US Dollar

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GOLD IS STILL ABOUT THE US DOLLAR

The US dollar is the world’s reserve currency.  And that isn’t likely to change in any radical way, anytime soon.  Unless there is some kind of calamitous implosion of the dollar.  I am talking about outright rejection and repudiation.  And that could happen.  The problem is that there isn’t another currency that could likely take its place.  By the time that possibility becomes a reality, any possible candidates would likely be in worse shape. This includes the Euro and Chinese Yuan.

All currencies are substitutes for real money, i.e. gold.  And because all governments inflate and destroy their own currencies, the possibility of gold reasserting itself as the international medium of exchange increases considerably under the aforementioned conditions.

But, a lot of bad stuff has to happen before we get to that point. And governments around the world have too much at stake to capitulate when it comes to ceasing to issue ‘funny money’.

So, for the time being, lets focus on things as they are.  Which leads us back to the title of this article.

Gold is priced in US dollars and trades in gold are settled in US dollars because of the hegemony of the dollar and its role as the world’s reserve currency.  But what does that mean to others around the world?  For example, those who live and work in Germany (euro), Japan (yen), China (Yuan)?

When someone in Switzerland, for example, exchanges Swiss Francs for gold, they are quoted a price in Swiss Francs. That seems pretty straight-forward. But how is the price for gold in Swiss Francs calculated when the international market for gold is priced in US dollars?

The amount that someone pays in Swiss Francs (or any other non-USD currency) is determined by calculating the exchange rate between the US dollar and the specific non-USD currency involved.  Based on that calculation, it is then known how many Swiss Francs are needed to equal the transaction amount in US dollars.

What is particularly important here isn’t necessarily obvious. But it is a critical factor when assessing a transaction of this nature. And here is why.

On December 31, 2013, gold traded at $1210 per ounce. And on that day one euro could be exchanged for 1.3776 USD. Hence, 842 euros ($1210 USD divided by 1.3776 = 842) could be exchanged for $1210 USD which could then subsequently be exchanged for one ounce of gold.

Nine months later, on September 30, 2014, gold again traded at $1210 per ounce.  But the exchange rate for one euro was 1.2629 USD.  Even though the gold price in US dollars was unchanged, the cost for an ounce of gold in euros had increased nine percent to 958 ($1210 divided by 1.2629 = 958).  To be technically correct, the cost of US dollars had increased for holders of euros.

On May 31, 2016, twenty months later, gold was again trading at $1210 per ounce.  The euro had weakened further relative to the US dollar and the exchange rate for one euro was 1.1131 USD. Using the same math as before, the cost for $1210 US dollars had again increased, this time by an additional thirteen percent to 1087 euros.

Over the entire two and one-half year period (twenty-nine months in all) the cost to acquire gold for holders of euros had increased by twenty-four percent. And yet, gold itself, priced in US dollars was the same.

There are several things we can learn from this.

For one thing, there is always a demand for US dollars since they are needed for use in international trade (oil transactions are priced in US dollars, too).

For another, the potential for changes in exchange rates of any other currencies relative to the US dollar must be considered for these transactions.

The possible combinations are numerous and always different. An increase in the value of the euro relative to the US dollar in the examples above would have given us results opposite to those which actually occurred.  And, of course, every currency other than the US dollar would show different results based on their changes in value relative to the US dollar.

Currency exchange rates are continuously changing and so is the US dollar  price of gold. It is possible to have an increasing US dollar price for gold and, simultaneously, a stronger US dollar relative to another currency.  This results in a ‘double whammy’ to the holder of a non-USD  currency – unless you already own the gold.

In our examples earlier, the US dollar price of gold could actually have declined for the periods indicated and still resulted in a higher cost for holders of euros.

The US dollar price of gold does not tell us “what gold is doing”. It tells us what the US dollar is doing.  Or rather, what people think is happening to the US dollar.

But what people think is happening changes all the time. Also, the information we are ‘fed’ by the Fed is suspect and inaccurate. Hence, changes in the US dollar relative to gold are ongoing and can be quite volatile. Over time, however, the gold price in US dollars is a reasonably accurate reflection of the value of the US dollar.

The US dollar price of gold does not tell us anything about other countries and their currencies. To know that we must look at exchange rates of those currencies relative to the US dollar.

Let’s be clear about something. The ‘value’ of gold does not change.  It is original money and its value is constant and stable. And has been for several millenniums.

The value of the US dollar, however, changes all the time. This is precisely because the supply of dollars is manipulated by the Federal Reserve via the ongoing expansion and contraction of the supply of money and credit.  Mostly expansion.

For an historical, real-life example of value and purchasing power as they relate to gold and the US dollar, see my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of 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!

Inflation – What It Is, What It Isn’t, And Who’s Responsible For It

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INFLATION – WHAT IT IS

Inflation is the debasement of money by the government. Period.

It is not an increase in the general level of prices for goods and services.

The above statements are critical to an understanding and correct interpretation of events which are happening today – or expected to happen  – that are casually attributable to inflation.  So, let’s go one step further.

There is only one cause of inflation: government.  The term government also includes central banks, especially the US Federal Reserve Bank.

Inflation is not caused by “greedy” businesses, excessive wage demands, or accelerated consumer spending.  Even government’s own propensity to spend, as reckless as it is, does not cause inflation.  And that does not contradict my earlier statement that government is the only cause of inflation.  They are.  But not because of their spending habits.

Economic growth does not lead to higher inflation.  There are statements made often that imply a link between growth in our economy and inflation.  And that we have to “manage the growth” so the economy doesn’t “grow too quickly” and “trigger higher inflation”.  These statements are false and misleading.

Also, inflation will not “accelerate over the next couple of years due to higher energy prices and stronger wage growth that leads firms to raise prices”…Gus Faucher/PNC Bank/WSJ  (It is possible that inflation will accelerate over the next couple of years, but it can’t/won’t be for the reasons stated.)

So how does the government cause inflation?  It’s time for a bit of history…

Early ruling monarchs would ‘clip’ small pieces of the coins they accumulated through taxes and other levies against their subjects.

The clipped pieces were melted down and fabricated into new coins. All of the coins were then returned to circulation. And all were assumed to be equal in value. As the process evolved, and more and more clipped coins showed up in circulation, people became more outwardly suspicious and concerned. Thus, the ruling powers began altering/reducing the precious metal content of the coins. This lowered the cost to fabricate and issue new coins. No need to clip the coins anymore.

From the above example it is not hard to see how anything (grains and other commodities for example) used as money could be altered in some way to satisfy the whims of government. But a process such as this was cumbersome and inconvenient. Of course it was. What a shame. There had to be a better way. And there was.

Enter: Paper Money

With the advent of the printing press (moveable type) and continued improvements to the mechanics of replicating words and numbers in an easily recognizable fashion, paper money was now in vogue – big time.

However, people viewed the new ‘money’ with healthy skepticism and coins with precious (or semi-precious) metal content continued to circulate alongside the new paper money. Hence, it was necessary, at least initially, for government to maintain a link of some kind between money of known value vs. money of no value (in order to encourage its use).

Over time, eventually, that link was severed; partially at first, then completely. And it was done by fiat (a decree or order of government).

Not only does our money today have no intrinsic value, it is inflated (and therefore debased) continuously and ongoing through subtle and more sophisticated ways such as fractional-reserve banking and expansion of credit. The printing press is still at the core and is humming 24/7 but the digital age has ushered in new and ingenious ways to fool the people.

Government causes inflation by expanding the supply of money and credit.  And that expansion of the money supply cheapens the value of all the money.  Which is precisely why, over time, the US dollar continues to lose value.  It takes more dollars today to purchase what could have been purchased ten years ago, twenty years ago, etc.  And it has been going on for over one hundred years.  It dates back to the origin of The Federal Reserve Bank in 1913.

What most people refer to as ‘inflation’ or its causes are neither. They are the effects of inflation.   The increase in the general level of prices for goods and services is the result of the inflation that was already created.

More history…  The Arab Oil Embargo in 1973 and the demands for more money for oil which led to the formation of the Organization Of Petroleum Exporting Countries (OPEC) followed close behind then President Nixon’s severance of all ties of the US dollar to Gold.  The underlying fact of the matter was that the dollars which they were receiving for their oil were worth less (not quite ‘worthless’) and had been losing value for several decades.  And the price had been fixed for decades.

To understand this better, imagine that you were a company selling widgets for $1 each and according to your contract you cannot receive any more than that. Fast forward twenty or thirty years.  You are still selling lots of widgets and  still receiving $1 for each one you sell.  But your costs over the years have continued to climb.  And it also costs you more for everything you buy to maintain your standard of living.  And it’s not just you.  Everyone is paying more for everything.  Yet, on an ongoing, year-to-year basis, things seem reasonably normal.  But prices now are rising more frequently and the rate of increase is higher than before. What is going on?

The effects of inflation are showing up.  Those effects can be very subtle at first, or not noticed at all.  But at some point in time the cumulative effects of inflation become more obvious and everyone starts acting differently.  Businesses try to plan for it and individuals invest with inflation in mind.

If your dollars were freely convertible into equivalent amounts of gold based on the prices in effect at the time of your original contract to produce widgets – or sell barrels of oil – then you could just exchange your dollars for gold.  Which is exactly what happened.  Foreign governments in the late sixties began to demand the gold to which they were legally entitled.  And countries which produced and sold oil wanted a higher price for their oil.  Wouldn’t you?

As people become more aware of the effects of inflation they start looking for reasons.  And for guilty parties.  Government is quick to act of course.  They start by implementing wage and price controls.  This is like setting the stove burner on ‘high’ and putting a lid on the pot with no release for the pressure.  And they talk a lot.

They have talked enough over the past thirty years to frighten us into thinking that our own spending and saving habits are the problem.  Sometimes the blame is directed at foreign countries and their currencies (China/Yuan for example).

Our sense of ‘unfairness’ over China’s attempts to weaken the Yuan seem to be misplaced.  We criticize them for doing the same things the US government and Federal Reserve have been doing for over one hundred years.

The inflation (expansion of the supply of money and credit) produced by the Federal Reserve is deliberate and intentional. And ongoing.  The effects of that inflation are volatile and unpredictable.

Even with the hugely, inflationary response of the Federal Reserve in 2008 and afterwards we did not see the “obvious substantial increase in the general level of prices for goods and services” that some expected and predicted.  But we did see a resurgence of higher prices for financial assets like stocks and real estate.

During the seventies, prices for basic necessities were rising on a weekly, even daily, basis.  But things eventually settled down and we had an extended period of stability and relative US dollar strength for a couple of decades.

And yet, the effects of inflation are very clear.  How much are you paying  for things today compared to fifteen years ago?  Ten years ago?

As time marches on, the effects of government inflation will become more extreme and more unpredictable.  And the loss of purchasing power of the US dollar will reflect that.

 

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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