"Everything you need to know about gold"
GOLD IS PRICELESS
Over 5000 years of recorded history, gold has proven itself to be real money. Gold’s value is in its use as money. That value is unquestioned.
Whatever arguments are put forth against gold’s use as money are attempts by government to free itself from the restrictions that gold imposes. Gold, when used properly, limits the ability of government to inflate and debase its money.
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?
When it comes to analyzing gold and gold prices there seems to be no limit to the explanations of cause and effect. The number of things presumed to be fundamental, or which are correlated to gold, has grown exponentially as gold receives more attention in the media and from the public.
The state of confusion that exists regarding gold and gold prices is exacerbated by the contradictions and conflicting arguments of almost all concerned parties. This includes investors, traders, analysts, and brokers.
Rather than a desire to understand gold and its singular role, most investors and others are interested in gold only when its price is going up. They buy it and then look for reasons to justify their expectations of even higher prices.
They do look for explanations as to why the price goes down, of course; especially when that happens after they have taken a position on the long side. By then, it is usually too late.
GOLD’S SINGULAR ROLE
There is one overriding fundamental with respect to gold: “GOLD IS REAL MONEY”.
Money has three specific characteristics: 1) medium of exchange; 2) measure of value; 3) store of value. In order for something to be money, it must have all three of these attributes. Otherwise, it is not money.
The US dollar is not money because it does not embody all three of the necessary characteristics. It is an accepted medium of exchange and a measure of value, but it is not a store of value.
Gold is also original money. It was money before the US dollar and all paper currencies, which are merely substitutes for real money; in other words, substitutes for gold.
Lots of things have been used as money during five thousand years of recorded history. Only gold has stood the test of time.
WHAT GOLD IS NOT
The simplest, and most accurate way to say what gold is not, is to state emphatically: “GOLD IS NOTHING ELSE OTHER THAN MONEY’.
Gold is not an investment; nor is it a hedge. Gold is not insurance. Gold is not a safe haven. Gold is not silver’s handsome twin brother. Gold is not a barbarous relic. Gold is not an outdated earlier version of the cryptocurrency craze. Gold as money is not an idea whose time has come and gone.
Gold is nothing other than money. Its use in jewelry is always secondary to its role as money. Gold is money that can be used for adornment, but it is still money, nonetheless. Always.
THE VALUE OF GOLD
The value of gold is in its role and use as money. It is divisible into fractional units for transaction purposes and is a proven store of value.
Gold’s value is constant and unchanging. One ounce of gold today will purchase amounts of goods and services roughly equivalent to what it could have bought fifty, one hundred, or one thousand years ago.
The reason the value of gold does not change is because gold, itself, is unchangeable.
WHY DOES THE PRICE OF GOLD CHANGE?
It is logical and reasonable to ask “If gold is unchangeable, and its value is constant, then why does its price change?
The changing price of gold is attributable to one thing only: changes in the value of the US dollar.
Over the past century, the US dollar has lost between ninety-eight and ninety-nine percent of its purchasing power. Correspondingly, the price of gold has increased by a multiple of fifty ($1050 per ounce) to one hundred ($2060 per ounce) times its original fixed and convertible price of $20.67 per ounce.
The chart (source) below shows a one hundred-year history of rising gold prices…
Over that same one hundred years, what you can buy with an ounce of gold remains stable, or better. (see my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold)
SUMMARY
Gold’s singular role is its use as money. Gold is real money because it carries the qualifying characteristics of money, including that of a store of value.
The value of gold is directly attributable to its use as money. Gold’s value is constant and unchanging. The higher price of gold over time is a reflection of the ongoing loss in purchasing power of the US dollar.
Gold’s value is not determined by world events, political turmoil, or industrial demand. Gold is not correlated to interest rates or anything else. Gold is not a hedge or a safe haven; nor is it an investment.
Gold is real money and nothing else.
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 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.
STOCKS – BITCOIN – GOLD
Stock prices, according to the S&P 500, are up seventy percent from their lows last April. The Nasdaq Composite at its most recent high point was up even more, sporting a ninety-five percent increase from its nadir. A number of individual stocks have done even better.
For the entire year 2020, however, stocks were up a more modest sixteen percent (S&P 500) and only seven percent for the Dow Jones Industrial Average.
However, the outsized performance of the Nasdaq was even more apparent on a full calendar year basis. For 2020 the Nasdaq was up forty-three percent. Relative to its peers, the average Nasdaq stock was up more than three to four times as much as non-Nasdaq stocks.
GOLD – BULLISH OR BEARISH?
What does it mean to say that one is “bullish” on gold? Or “bearish”? Or, more simply, what is a bull or a bear?
“A bull is an investor who thinks the market, a specific security or an industry is poised to rise. Investors who adopt a bull approach purchase securities under the assumption that they can sell them later at a higher price. Bulls are optimistic investors who are attempting to profit from the upward movement of stocks, with certain strategies suited to that theory. …James Chen, Investopedia
According to the definition, then, being bullish on gold is an indication that an investor can optimistically purchase gold and expect to sell it later at a higher price for a profit.
When gold’s price reached $850 per ounce in January 1980, it seemed as if nothing would stop the runaway train that was headed straight for $1000 per ounce. But it was stopped, and began sliding downhill quickly.
By June 1982, two and one-half years later, gold’s price had declined by sixty-five percent. At close to $300 per ounce, the price of gold seemed farther away from the $1000 mark than ever before.
Are gold bulls naively optimistic? They are certainly optimistic; at least as regards their expectation for higher gold prices. But is that all that is needed to make them happy?
If gold marches higher from here, does that signify that all is well? Would the gurus and wanna-be millionaires be proven correct if gold were priced at $10,000.00 per ounce?
We could ask when. But if those who expect big things for gold are correct, then when might not matter.
GOLD NOT AN INVESTMENT
Perception of gold as an investment is fundamentally flawed. No matter the detail behind the analysis, gold is not an investment.
Between the years 1971 and 2011, the price of gold went from $42.00 per ounce to $1900.00 per ounce – a forty-five fold increase. This is depicted on the chart below…
Looking at the chart, it would appear that gold is in a long-term bull market and that continually higher prices over time can be expected. Proponents of this approach to gold cite fundamentals such as a weakening U.S. dollar, social unrest, wars (combat and trade), political instability, etc.
And the numbers seem to bear this out. For the forty-year period between August 1971 and August 2011, the price of gold was up forty-four hundred percent.
But are we really making any money? The chart below paints a clearer picture…
The inflation-adjusted chart immediately above seems to support a severely modified view of gold from that which we mentioned earlier. Rather than long-term, ever-higher, onward and upward, we see strictly defined periods of extreme volatility. Indeed, it appears almost cyclical.
And our previous total return of 4,400 percent for the forty-year period August 1971 to August 2011, is reduced to 900 percent. Even so, that is the equivalent of a 6% average annual return, net of inflation. Which is huge.
(In case you are interested, the average annual return for the S&P 500 – with dividends reinvested – for the same exact time period, is 5.13 percent. That relatively small differential on an annual basis is magnified considerably when you compare cumulative total returns: Gold at 900% vs. S&P 500 at 639%)
So, does the nine hundred percent total return/6% annual return represent a profit? Yes, most definitely. Net of the effects of inflation, the price of gold increased ten-fold; all of which represents added value. Here’s why…
In 1971, the cost for one loaf of bread was $.24. The average cost for one gallon of gasoline was $.36. With gold at $42.00 per ounce, you could purchase one hundred seventy-five loaves of bread or one hundred seventeen gallons of gasoline (or some combination of the two).
Forty years later, in 2011, the average cost for one loaf of bread was $2.42; and one gallon of gasoline was priced at $3.52. Hence, again, using only one ounce of gold (this time priced at $1900.00 per ounce) you could purchase seven hundred eighty-five loaves of bread or five hundred thirty-nine gallons of gasoline.
The additional six hundred ten (785-175) loaves of bread or four hundred twenty-two (539-117) gallons of gasoline represent an increase in real value/purchasing power for gold for the years between 1971 and 2011.
All of this sounds good. But there are some other issues. Looking again at the first chart, we can see that the price of gold increased from $850.00 per ounce at its 1980 high point to $1900.00 per ounce at its 2011 high point. This translates to a gain of $1050.00 ($1900.00 – $850.00) per ounce, or one hundred twenty-three percent.
Unfortunately, on an inflation-adjusted basis, you would have a negative, net return of ten percent. In real terms, the price of gold did not even match its 1980 high. And this result is after waiting for thirty-one years.
Owning gold from January 1980 until August 2011, a total of thirty-one years (during which its price rose from an all-time high of $850.00 per ounce to a subsequent, new all-time high of $1900.00 per ounce), resulted in a cumulative, net loss of ten percent in inflation-adjusted, real terms.
That doesn’t sound good, but it is even worse considering the decline in gold’s price since 2011. With gold currently priced at $1240.00 per ounce, the cumulative net loss balloons to forty-four percent (certainly not a supporting factor for the argument that gold is a long-term inflation hedge).
Another way of looking at it is that all of the real profits – nine hundred percent cumulative total return – from the forty-year period (1971-2011) came in the first nine years, 1971-80.
When President Nixon suspended convertibility of the U.S. dollar into gold in 1971, his action ushered in a decade-long period of U.S. dollar weakness and rejection. The effects of inflation created over the previous four decades, initially in an attempt to extricate us from the economic depression of the thirties, then to fund the country’s expenses relative to its involvement in WWII, etc. came roaring to life in the form of higher prices for all goods and services.
The 1970s were a catch-up period for the price of gold relative to the U.S. dollar’s loss in value over the previous four decades. That, and the anxiety and anticipation created by the realization that things were far worse than we had previously known, led to outsized gains.
Gold’s failure to make a new, inflation-adjusted high in 2011 is perfectly reasonable. This is because gold’s upward price movement reflected the extent of ongoing U.S. dollar devaluation that had occurred since the eighties. Whereas, the price movement upward in the seventies reflected U.S dollar devaluation that had occurred over the prior forty years – a period more than twice as long.
Gold’s price is not an indication of its value. The value of gold is constant and does not change. Its price is a reflection of the value of the U.S. dollar. Nothing more. Nothing less. Nothing else.
And what is happening to the US dollar? It is in a state of constant deterioration, punctuated with periods of relative stability.
And the peaks and low points for those periods are seen clearly on both charts (1933, 1971, 1980, 2001, 2011) and correspond with highs and lows for the price of gold, both in nominal and real terms.
Gold is not an investment. 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.
In light of all this, what can we expect from gold looking ahead? Or, better phrased, what can we expect from the U.S. dollar; and how does that translate to expectations for the price of gold?
One possibility is that the U.S. dollar could continue to stabilize and strengthen along with an improving economy. The price of gold would stabilize and move lower reflecting the dollar’s relative strength. This is similar to what happened between 1980 and 2001, and what we are currently experiencing since 2011. And it could go on this way for years. During periods like this, you should not expect gold’s price to increase.
Another scenario is that the dollar could renew its long-term decline in rapidly accelerating fashion, eventually ending in complete rejection and repudiation. In which case, owning gold is imperative for wealth preservation and financial survival. But any profits would be elusive. At a time like that, the U.S. dollar price of gold becomes meaningless. What does matter, and what is critical, is how much gold you own.
Lastly, attempts by the Federal Reserve to unwind its horrendously bloated balance sheet and encourage a return to a relatively normal level of interest rates could backfire. We could see a another credit collapse. This one would be much worse than anything we have experienced to date, and the unwinding of prices for all assets (stocks, bonds, real estate, commodities) denominated in dollars would trigger a full-scale depression and lead to a suppression of most economic activity. Don’t look for gold to save you. The U.S. dollar would increase in value; thus, gold’s price in dollars would decline significantly. The US dollar would actually buy more, not less. But the supply of US dollars would be significantly less. This is true deflation, and it is the exact opposite of inflation.
There are, of course, variations and combinations of the above scenarios that may play out. Any actions or responses by government and the Federal Reserve will affect the magnitude and duration of various crises.
Whatever the course of events, or how they unfold, there is no fundamental reason for gold to make new inflation-adjusted highs.
The case for gold is not about price. It is about value. And its value will become readily apparent when governments and individuals are scrambling amid the ruins of our financial system looking for something, anything, to replace worthless paper currencies. which are nothing more than substitutes for 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!