$4000 Gold – Insurance, A Hedge, An Investment

GOLD AS INSURANCE

There is a seemingly plausible argument for calling gold a hedge or insurance given volatile conditions in our society today. But the logic leading to those classifications ignores the single factor that affects the price of gold. That single factor is the actual loss in purchasing power of the paper money substitute in which gold is priced.

Historic instances of extreme civil unrest, political instability and insurrection are most times associated with amplified concerns regarding the local fiat currency. A higher price for gold is a reflection of the cumulative deterioration of the currency in which it is priced.

It is especially important to remember this today. If you wake up some morning this fall and find that gold is priced at $4000 oz., it can only happen after the US dollar has lost additional purchasing power of fifty percent.

In other words, by the time gold is at $4000 oz., it will cost you twice as much for everything you need. You will need $100,000 per year to pay for what costs you $50,000 per year now.

This does not mean that further increases in the supply of money and credit are guarantees that the dollar will collapse or that its purchasing power will disappear overnight. (see Gold Price Is Not Correlated To Money Supply)

GOLD AS A HEDGE

As far as being a “hedge against inflation”, some clarification is in order.

Inflation is the debasement of money by government.
All governments (and central banks) inflate and destroy their own currencies.
What most people mean by the term ‘inflation’ are really the effects of inflation. Those effects are volatile and unpredictable. (People expected hyperinflation in the late 1970s and early 1980s. It didn’t happen. They expected it again after 2011. It didn’t happen. Similar expectations are voiced daily about the prospects for hyperinflation now. It is less likely now than before.)

Some say inflation is back and that it has returned with a vengeance; but inflation never went away. It is ongoing, continuous, and deliberate. (see Inflation – What It Is, What It Isn’t, And Who’s Responsible For It)

Gold acts as a restraint on government’s propensity to inflate its way to prosperity; or a central bank’s desire to create money in perpetuity that it can lend to all comers.

Gold is not immune to inflation, though. (See  Mansa Musa, Gold, And Inflation)

GOLD AS 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.

If we think of gold as an investment, then it’s not too hard to see why some might refer to it as a barbarous relic. As indicated in the chart (source) below, gold’s price performance when viewed as an investment is not strong enough to merit the consideration of most investors and financial advisors…

Gold Price vs Stock Market – 100 Year Chart

gold-price-vs-stock-market-100-year-chart-2021-06-04-macrotrends

It is hard to argue favorably about gold’s merit as an investment when stocks have outperformed it by a margin of 6 to 1. That gap continues to widen dramatically in favor of stocks.

There is potential, however, for a more favorable view of gold as an investment when we look at the following chart…

Gold Price vs Stock Market – 20 Year Chart

gold-price-vs-stock-market-100-year-chart-2021-06-04-macrotrends-2

As can be seen, it has been more profitable to hold gold rather than stocks for the duration of the 21st century. But that is somewhat misleading since the ratio turned in favor of stocks again after gold peaked in 2011. See the chart below…

Gold Price vs Stock Market – 10 Year Chart

gold-price-vs-stock-market-100-year-chart-2021-06-04-macrotrends-3

Quite plainly, stocks have reasserted their deserved role as a preferred long-term, buy and hold investment. Over the past decade, stocks have outperformed gold by a 9 to 1 margin.

That really is as it should be; at least insofar as gold is concerned. That is because gold is not an investment. It is real money; original money.

Holding gold rather than stocks is similar in theory to selling stocks and holding cash. Cash is preferable for shorter periods. Gold is a better option for longer periods because its rising price will compensate for the continuous decline in the US dollar.

Don’t impute any value to holding gold other than its use as real money. If you want the potential investment returns of stocks, then buy stocks.

The use of strategy and timing involving gold does not change its characteristics. And a profitable trade in gold is not indicative of any special considerations regarding gold’s investment value. There are none. (see Gold’s Not An Investment – You Won’t Get Rich).

SUMMARY AND CONCLUSION

  1. Gold is real money – original money. Gold’s higher price over time reflects the cumulative loss in purchasing power of the US dollar.
  2. Gold is not an investment and it is not forward-looking. Higher gold prices at this point in time will come only after a further, significant loss in US dollar purchasing power is evident in fact; not in theory. Sometimes that takes several years, maybe decades. (think 1980 -2008; and 2011-2020)
  3. Gold is not a hedge against inflation. Inflation is the intentional debasement of fiat currencies by governments and central banks to suit their own purposes. Owning gold helps to compensate for the loss of  purchasing power which occurs as a result of that inflation.
  4. If a complete breakdown in the US dollar occurs, the price of gold in dollars will skyrocket. So will the price of everything else we buy and sell. If you own gold before a dollar  collapse, then your gold will maintain its purchasing power. The higher dollar price per ounce will offset the higher prices you pay for everything else – just to survive.

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!

Are Silver Prices Really Cheap; And Does It Matter?

Whether it is a deficit in new production of silver or the gold-to-silver ratio, there is always something to talk about; so let’s talk.

Below is a chart (source) of silver prices for the past century…

Silver Prices – 100 Year Historical Chart

silverchartnewarticle

The chart is plotted using average closing prices for spot silver so the peak shown in 1980 is $36 oz., which is an average of closing prices for the month of February 1980. The peak intraday price was $49 oz. in January 1980.

In either case, with spot silver currently under $28 oz., silver is definitely cheaper than it was in early 1980.

That does not, however, make silver a bargain at its current price. The actual average price for the entire year 1980 was $20.98 oz. With the average closing price for 2021 at more than $26 oz., then silver is more costly by an average of $5 oz., or twenty-four percent.

The two parallel lines identify a price zone for silver between $20 – $40 oz. The total time that silver prices were actually within that range or higher amounts to less than five years.

Since the chart includes a total of 106 years, that means silver has traded at prices below $20 oz. for more than ninety-five percent of the past century.

Conversely, we might say that silver at $27 oz. is not cheap. In fact, after adding the exorbitant premiums that accompany the purchase of physical silver (Silver Eagles, junk silver coins, etc.), silver is quite expensive; more than almost any other time shown on the chart.

However, a realistic assessment of silver prices is not complete unless we consider inflation-adjusted prices. Here is the same chart as above, but with silver prices adjusted for inflation…

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

silverchartnewarticle2

In the chart above, the same parallel lines of $20 and $40 are shown. On an inflation-adjusted basis, most of the price history for silver is still under $20 oz.

An imaginary line at $30 oz. compares more closely to the $20 oz. in the first chart and reinforces how significant the recent $30 oz. stopping point is in silver’s price history.

Even on an inflation-adjusted basis, silver is still more expensive than almost any other time in the past one hundred years. After adding premiums for actual physical silver in various forms, the acquisition price approaches $35-40 oz.

Some will argue that expectant price increases for silver will make any of this type of analysis unnecessary, or moot. However, the reasoning behind those expectations are more grounded in fantasy than actual fundamental fact.

SILVER SUPPLY-DEMAND GAP

One of the so-called fundamentals that seem to attract unwarranted attention is the supply-demand gap in production (mining) of silver relative to consumption.

“The gap in consumption over production that existed in the late sixties and early seventies was one of several things that contributed to much higher silver prices. But when all is said and done, and after decades of ‘fundamental’ arguments about such an imbalance, silver has failed to show any further signs of a need for revaluation in price because of consumption/production gaps, past or current.” (see No Silver Lining Here)

GOLD-TO-SILVER RATIO

Another favorite argument trumpeted in silver’s behalf is the reliance on a return to gold-to-silver ratio of 16:1. The ratio currently stands at 67 and was as high as 120 last year. Below is a chart of the ratio…

gold-to-silver-ratio-2021-05-21-macrotrends

Silver investors who are depending on a declining gold-to-silver ratio are betting that silver will outperform gold going forward. But, if anything, the chart (see link above) shows just the opposite. For more than fifty years, the ratio has held stubbornly above a rising trend line taking it to much higher levels.

In the Mint Act of 1792, the U.S. government arbitrarily chose a 16:1 ratio of gold prices to silver prices. The actual prices were set at $20.67 per ounce for gold and $1.29 per ounce for silver.

“There is no fundamental reason which justifies any particular ratio between gold and silver.” (see Gold-Silver Ratio: Debunking The Myth and Gold-Silver Ratio And Correlation)

SILVER – WHAT NOT TO EXPECT

SILVER – WHAT NOT TO EXPECT

  1. Don’t expect silver to outperform gold. Gold is real money and its higher price reflects the actual loss in purchasing power of the US dollar. As long as the dollar continues to lose purchasing power, the price of gold will continue to move higher relative to silver.
  2. Don’t expect silver’s price to rise if stocks collapse. A collapse in stock prices more likely would usher in hard times economically; maybe recession or depression. Silver is primarily an industrial commodity, so it is very price sensitive to economic slowdowns. When stocks fell at the onset of Covid-inspired closures and shutdowns last year, the price of silver fell by a larger percentage, before moving higher along with most everything else.
  3. Don’t expect silver to rise above $30 oz. and stay there. That would be a refutation of everything we know about silver historically.
    Don’t expect a special circumstance or event to void any of the above.

SILVER – WHAT SHOULD YOU DO?

What you do depends on your reasons for owning silver.

  1. If you own silver and are expecting large-scale fantasy price increases, reread this article and the other ones referenced.
  2. If you got in early on the latest upswing and have some nice profits, take them.
  3. If you own some silver coins against the possibility of a collapse in the US dollar, keep them and go about your business.
  4. If you have larger amounts of wealth you want to protect, consider gold. It is a much better choice.

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!

A Fair Price For Gold – $1000 Or $2000?

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?

Let’s go back to a time when both gold and the US dollar circulated as money, were freely convertible, and were equal in value.

A century ago, both gold and US dollars were legal tender, and interchangeable. Either was convertible into the other at a fixed price. A one ounce (.97 ounces) gold coin was equal to twenty US Dollars and vice-versa (the official gold price was $20.67 per ounce, which multiplied by .97 ounce of gold in a gold coin equals $20.00).

With the current price of gold at $1800, some would be tempted to say that the value of gold over the past one hundred years has increased by eighty-six hundred percent. But that would mean that one ounce of gold today will buy eighty seven times as much as it would a hundred years ago. We know that is not the case.

The specifics are two-fold: 1) Gold gained in price by eight-six hundred percent relative to the US dollar. 2) The US dollar declined by more than ninety-eight percent relative to gold.

GOLD AND US DOLLAR PURCHASING POWER

Now we need to know how both gold and the U.S. dollar fared in absolute terms regarding purchasing power. You can read about that in my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold

The results are clear. Gold has maintained its value, and even 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 $1800 per ounce reflects accurately the effects of inflation that have occurred to this point. More specifically, how much purchasing power has the US dollar lost? Is it ninety-eight percent or less; ninety-nine percent or more?

A gold price at $1800 indicates a specific loss of 98.8% in US dollar purchasing power. A ninety-nine percent decline in the value of the US dollar translates to a gold price of over $2000 per ounce. If the decline is closer to ninety-eight percent, then the gold price should be closer to $1,000 per ounce.

In August 2011, gold peaked at almost $1900.00 per ounce. That indicates a loss in purchasing power of the U.S. dollar close to ninety-nine percent (98.9%).

Nearly four and one-half years later, in January 2016, gold traded as low as $1040.00 per ounce. That price indicates a decline in U.S. dollar purchasing power closer to ninety-eight percent. A ninety-eight percent decline in U.S. dollar value equates to a fifty fold increase in the gold price (100 percent minus 98 percent = 2 percent; 100 percent divided by 2 percent = 50; $20.67 per ounce times 50 = $1033.50 per ounce).

Last August (2020) the gold price peaked at $2060. That indicates a loss in purchasing power of the U.S. dollar at ninety-nine percent, which translates to a one-hundred fold increase in the gold price (100 percent minus 99 percent = 1 percent; 100 percent divided by 1 percent = 100; $20.67 per ounce times 100 = $2067.00 per ounce).

CONCLUSIONS:

  1. The US dollar has lost between ninety-eight and ninety-nine percent of its purchasing power over the past century.
  2. Gold is realistically priced at anywhere between $1000 and $2000 per ounce.
  3. Further increases in gold’s price will come only after further actual and apparent losses in US dollar purchasing power.

Expectations for further deterioration in the US dollar will not lead to further increases in gold’s price. That is because the price of gold in dollars represents the actual loss in purchasing power that has already occurred.

In other words, gold is approaching its upper boundary ($2060)) based on actual accrued losses in US dollar purchasing power (99%).

Items for consideration that could have a substantial impact on the US dollar include 1) new and unexpected actions by the Federal Reserve; 2) a clearer picture of the enormity of the Fed’s balance sheet; 3) accelerated, delayed effects of inflation previously created by the Fed; 4) a credit implosion; 5) Fed’s reaction to a credit implosion; 6) Deflation and Depression.

Some items above can affect the value of the US dollar positively, 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!

Overheated Economies Don’ t Cause Inflation

Later that same day, she said this…

“It’s not something I’m predicting or recommending. If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.”

Also last week, we heard from the Federal Reserve which released the following statements on Thursday, May 6, 2021…

  • Rising asset prices are posing increasing threats to the financial system, the Federal Reserve warned in a report Thursday.
  • “Asset prices may be vulnerable to significant declines should risk appetite fall,” the central bank said.

Before we can understand how to interpret these statements and any possible conflictions, there are four key topics that need to be explained: inflation, the Federal Reserve, interest rates, and the economy.

INFLATION IS CAUSED BY GOVERNMENT

Inflation is the debasement of money by government and central banks. The debasement is accomplished by continually expanding the supply of money and credit. Also, the inflation created by the Federal Reserve is intentional.

The Federal Reserve has been expanding the supply of money and credit intentionally for more than one hundred years.

FEDERAL RESERVE IS A BANKER’S BANK

The purpose of the Fed is to provide a structured environment for the creation of money, so that banks can lend money (i.e., a banker’s bank). The expansion of the supply of money and credit (inflation) allows banks to continue to lend money in perpetuity.

The Fed’s inception in 1913 was authorized by Congress with the understanding that the Federal Reserve would try to mange financial activity in such a way as to avoid panics and crashes.

What wasn’t publicly known was that in order to harness political support for the bill authorizing the Fed’s creation, a promise was made to the United States Government that it would always provide whatever money was necessary for the government to fund its operations.

INTEREST RATES AND THE ECONOMY

The effects of inflation are volatile and cannot be quantified in advance, no matter how much we know about money supply growth.

Panics and crashes have become more severe and their damaging economic effects are longer lasting than prior to inception of the Federal Reserve.

In order to induce economic activity that will encourage retail lending and consumer spending, the Fed has resorted to interest rate manipulation.

Artificially low interest rates for the past several decades have fostered an economy dependent on cheap credit. A rise in interest rates to more normal levels would create cataclysmic conditions.

On the other hand, if the Fed continues to maintain artificially low interest rates, they run the risk of overstimulation (think drug overdose).

There is a difference between higher asset prices and economic activity. Higher asset prices themselves are not a cause or symptom (effect) of inflation and they are not indicative of an economy in danger of overheating.

The reason for the high, over-inflated asset prices is the cheap and abundant credit supplied by the Fed.

Sometimes, statements are made that imply a link between growth in our economy and inflation:

“We have to “manage the growth” so the economy doesn’t “grow too quickly” and “trigger higher inflation”.

Statements like this are false and misleading.

POWELL AND YELLEN – TEAM FED PART 2

Ms. Yellen knows all of this, of course; so why the subterfuge?

Her allegiance has not changed. She is still a member of the same team (see Powell And Yellen – Team Fed), but she plays the game at a different position.

Secretary Yellen has said that “interest rates will have to rise somewhat…”.

What she is saying is that rates cannot remain at artificially low levels without expectant, long-term damage.

Chairman Powell has said that as long as interest rates stay low, the valuations are justified. That is not exactly correct…

The reason for the high, over-inflated asset prices is the cheap and abundant credit supplied by the Fed. An abundance of cheap credit does not justify the extreme valuations; but it does explain them.

Taken together, both Chair Powell’s and Treasury Secretary Yellen’s statements, coupled with statements released by the Fed on May 6, 2021, are telling us that something big is about to happen.

A WARNING!

Here is what you need to know…

Both the Federal Reserve and the United States Treasury have warned us that something big is about to happen.

The warnings are an indirect admission that those who are supposedly charged with maintaining the integrity and stability of our financial and economic systems have lost control.

Expect interest rates to rise. Expect asset prices and financial markets to drop.

An asset price crash and credit collapse are likely upon us soon.

(Also see Asset Price Crash Dead Ahead. You can read about the Electronic Communications Network here.)

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 Price During Hyperinflation

Let’s start by defining hyperinflation…

“Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.” (source)

In addition, hyperinflation is described as “an extreme case of monetary devaluation that is so rapid and out of control that the normal concepts of value and prices are meaningless.”

The latter description is much more characteristic of the potential threat that most people envision when they invoke the term hyperinflation.

Before answering that, let’s look at what happened to the prices of bread and fuel.

The lady pictured above is stuffing German marks into her wood burning stove. Such action was cheaper since the paper currency would burn longer than the amount of firewood they could afford to buy with the worthless ‘money’.

HYPER-HYPERINFLATION

During a period of stabilization for approximately six months during 1920, 1400 German marks was equal to 1 oz. gold. Three years earlier the ratio was 100 marks to 1 oz. gold.

However, a fourteen-fold increase in the ratio of marks to gold was nothing compared to what was about to happen.

“By July 1922, the German Mark fell to 300 marks for $1; in November it was at 9,000 to $1; by January 1923 it was at 49,000 to $1; by July 1923, it was at 1,100,000 to $1. It reached 2.5 trillion marks to $1 in mid-November 1923, varying from city to city.” (source)

Using the ratio of 1 trillion marks to the US dollar in July 1923, the equivalent price for one ounce of gold was 20 TRILLION German marks!

HOW IT HAPPENED; WHAT IT MEANT

Germany (Weimar Republic) had rejected gold convertibility and abandoned the gold standard prior to the end of World War I. Since their obligations to pay reparations resulting from their activities during the war required them to remit funds in hard currencies, they continued to ramp up the presses.

Any plans to borrow money had been abandoned earlier. They printed whatever marks were needed in order to buy other currencies which they could use to pay their obligations, and hopefully chase away the inflationary effects of their efforts.

Here is another example of how those effects translated in real life…

“A student at Freiburg University ordered a cup of coffee at a cafe. The price on the menu was 5,000 Marks. He had two cups. When the bill came, it was for 14,000 Marks. “If you want to save money,” he was told, “and you want two cups of coffee, you should order them both at the same time.”

If we use a price of 5 cents per cup of coffee in US dollars, then the ratio at that time was 140,000 marks to $1. Even though the worst was yet to come, this still represents a 27,900 percent increase in the price of a cup of coffee from five years earlier.

At one point in 1923, the price for one loaf of bread was more than 200 billion marks.

WHAT’S THE POINT?

Some (not just a few) people today think that the higher the gold price goes, the richer they will be. That is not the case.

One ounce of gold in 1920 was the equivalent 1400 German marks. Three years later, that same ounce of gold was priced at the equivalent of 20,000,000,000,000 German marks.

If you were prescient enough to secure to yourself one ounce of gold before the fun started, you could have become a multi-trillionaire almost overnight. Great!

Now, how will you spend your money? Better get something to eat first before tackling a plan for your finances. You could buy a loaf of bread for two hundred billion marks and a cup of coffee for fifty billion marks.

If you buy the loaf directly from the baker, you might score a free cup of coffee. Nobody even knows what price to charge for a cup of coffee anyway, and the baker desperately needs to sell that bread. He is only inclined to make that offer if he is paid in gold, though.

You decide to buy five loaves since you don’t know how much bread will cost next week. You give the baker 1/20th oz of gold which is the equivalent of one trillion marks ( 5 loaves x 200 billion marks = 1 trillion marks). You and your friends enjoy drinking the five free cups of coffee and you break bread with them.

You are not as jovial as you were before your purchase, though. You know that you are not as rich, either. Doing some quick math, you realize that if you spend 1/20th oz gold every day, you will be a pauper again in three weeks.

What you could buy with your gold after its price went up did not make you rich. The value of your gold is the same as it was three years earlier. The price for the bread and coffee is the same as it was just a few years earlier: 1/20th oz of gold.

CONCLUSION

If you own gold and are betting on a much higher gold price because you expect hyperinflation anytime soon, don’t expect to be any richer than you are now. The higher price for gold will only compensate you for the loss in purchasing power of the US dollar

(also see Gold’s Singular Role)

Kelsey Williams is the author of two books: Gold’s Singular Role  and  Gold’s Singular Role

Higher Gold Price Is Not Correlated To Money Supply Growth

In fact, it is considered almost scriptural canon that a huge increase in the money supply will lead inevitably to a huge increase in the gold price. Historical examples of France in the late 18th century, Germany (Weimar Republic) in the 1920s, and Zimbabwe or Venezuela more recently, are often cited as proof of the relationship between money supply growth and its effect on gold prices.

That is not the case, though. Below is a chart that shows the ratio of gold prices to the monetary base dating back to 1918…

gold-to-monetary-base-ratio-2021-04-25-macrotrends

Since the gold price peaked in 1980, the ratio has declined starkly. The low point (.28) was reached in December 2015. All of this decline occurred within the context of quantifiably larger growth in the supply of money and credit.

More telling is that all of this decline occurred while the price of gold increased from $850 to $2000 per ounce; whereas the decline in the ratio between 1934 and 1970 occurred while the gold price remained fixed at $35 per ounce.

So, we have an ongoing increase in the gold price, yet the ratio of the gold price to the monetary base continues to decline. Seems like it should be the other way around. Or, maybe it is not the money supply growth which determines the gold price. Maybe the gold price is reflective of something other than the supply of money.

In fact, it is. The higher price of gold is correlated to the loss in purchasing power of the US dollar.

Equally important is that the loss in purchasing power of the US dollar is NOT quantifiably predictable. In other words, a doubling of the money supply over any specific period of time, does not necessarily mean that the US dollar will lose half of its purchasing power.

The expansion of the supply of money (and credit) IS inflation. The effects of that inflation, such as loss in purchasing power of the US dollar, are volatile and unpredictable.

(Read more about the US dollar and the gold price in my article Gold And US Dollar Hegemony.)

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 Prices – Don’t Get Too Excited

Contrastingly, the chart of GLD prices pictured below doesn’t look all that great…

At this point, a further one-hundred dollar increase in the price for gold (GLD) will not break the downtrend line of overhead resistance dating back to August 2020.

For some additional perspective, here is a chart (source) of gold prices for the past ten years…

The magnitude and severity of gold’s price decline is quite apparent. Also, the potential for further downside shouldn’t be dismissed.

As it is, the price of gold could decline back to $1330-1360 without breaking the ascending line of support which dates back to December 2015; which happens to be the point where gold reached its lowest price after peaking in August 2011. That’s the good news.

BAD NEWS

Below is a one-hundred-year history of gold prices:

On this chart, the long-term ascending rise in gold prices has a line of support dating back to 1970.

Assuming that the ascending line of support is a valid reference point for analyzing gold’s price movements over the past half-century, then gold’s price trend is well-supported.

But, the line of support shown in chart no. 2 previously, and again in the chart immediately above, is not as long in duration and not likely as strong. Hence, the possibility of gold prices below $1300 is not remote.

In fact, if gold prices are unable to hold support at the $1330 – $1360 level, then a decline to just above $1000 per ounce becomes a strong possibility.

MORE BAD NEWS

Our final chart is also a one-hundred year history of gold prices, this time inflation-adjusted…

Again, referencing the same line of support dating back to 1970, and allowing for the possibility of the gold price not holding the five year line of support in the mid $1300s (if it gets that low), then the new potential downside price target for gold is closer to $600 per ounce.

That is a sobering thought if you are betting on much higher gold prices. Also consider that in real terms, after allowing for the effects of inflation, gold at $2000 per ounce today is cheaper than it was at $600 per ounce in 1980.

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!

Proliferation Of Acronyms In The Investment World

For example, home mortgages get packaged and sold as CMOs (collateralized mortgage obligations). Yet CMOs are only one type of CDO (collateralized debt obligation).

Often described as financial abbreviations, the list is long and never-ending. It includes ARMs, CDs, ETFs, MMKTs, REITs, TSAs (no, not that TSA), UITs, etc.

Even individual stocks have their own trading symbols, such as BA (Boeing), AAPL (Apple), T (AT&T), TSLA (Tesla).

BANKING AND CORPORATE ACRONYMS

The banking world has its own terms of description. They include AIR, APR, EFT (not to be confused with ETF), FDIC.

Others terms of note include CAGR, CAPEX, COB, EPS, LLC, MTD, NAV, NDA, P&L, P/E, ROA, ROI, ROIC, RONA, ROS, SIV, and TSR.

Also, there are cute descriptive terms to describe various products. Some of these are general (strips and spreads); others are more specific (TGREs, pronounced ‘tigers’; and SPDRs, pronounced ‘spiders’).

And if all that isn’t enough, let’s go to the corporate world where officers in senior management are identified by their position. A CFO is Chief Financial Officer, a COO is Chief Operating Officer, and a CAO is Chief Accounting Officer.

More designations include CFA, CFM, CIA (Certified Internal Auditor), CMA, CPA, and CSO.

The corporate world’s tendency to assign three-letter designations to its officers also includes a CMO. This person’s full title is Chief Marketing Officer and has nothing to do with the CMO (collateralized mortgage obligation) referred to earlier in this article.

ACRONYMS FOR BROKERS

Apart from the tendency to describe and define using acronyms and financial abbreviations, there are brokers who in the investment world who identify themselves with various activities. Among these are stock brokers, bond brokers, commodity brokers, and foreign exchange brokers.

Yet the tendency persists. Foreign exchange is abbreviated as FOREX, or simply FX. And some FOREX brokers are known as ECN brokers, or, ECN Forex brokers.

The acronym ECN stands for Electronic Communication Network.

“ECN or Electronic Communication Network is a technology bridge built with the purpose to links retail Forex market participants or traders to liquidity providers. So eventually ECN is a non dealing desk bridge with straight-through processing execution that enables execution in a direct connection between the parties.”

There are also NDD Forex brokers and STP Forex brokers.

GOVERNMENT ACRONYMS AND MORE

No where is the proliferation of acronyms more prevalent than in government. Their use borders on excessive and the list is mind boggling. Here are some government agencies – NSA, NSC, CIA, NTSB, FDA, DEA, OMB, FAA, UST, IRS, HEW, OSHA, TSA, GAO, BATF, FBI, SBA, SEC and EPA.

The sports world is full of them: NBA, NFL, NHL, NCAA, PGA, NASCAR, NHRA.

Acronyms are all around us. Texting and social media reinforce their use for reasons of speed and expediency.

I suppose if there is an argument against their use, it is that we may have dampened our capacity for linguistics and conversation. I wonder how many of us know what a specific acronym stands for when we read something in which one or more of them are referenced; or when we hear them mentioned in a news report.

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!

For a look at all of today’s economic events, check out our economic calendar.

No Fear Of Inflation; Threat Of Deflation

The Fed wants to have their cake and eat it too, but the cake is stale. Jerome Powell’s remarks in testimony before the Senate last week provoked considerable attention.

Responses, interpretation, and analysis by observers were many and varied. Unfortunately, no one learned anything different from what they thought they knew before Powell’s testimony.

The Fed is well aware of the problem. It is systemic in nature and goes far beyond corporate due diligence, bank liquidity, and the safety of your broker.

Most everyone else (with the exception of Janet Yellen, Ben Bernanke, and Alan Greenspan) thinks they understand the problem, but their limited understanding doesn’t allow for the subtleties of Fed Chair behavior.

Chairman Powell and his “inner circle” want very much for you to focus on inflation. By talking about inflation, they hope that possibly it will spur behavior that might provoke a resurgence of economic activity and stave off the coming economic collapse.

That last piece of stale cake is never as tasty and satisfying as the first piece, cut from that freshly baked culinary delight. It might do us all well to know what is in that cake.

The Fed’s recipe has never changed. For more than one hundred years, they have been baking an inflationary cake that is making people sick. The cake is now old, stale, and crumbling.

PURPOSE OF THE FEDERAL RESERVE

The Federal Reserve and all central banks, in conjunction with their respective governments, inflate and destroy their own currencies intentionally. It is a plan with purpose and real intent that allows banks to do what they do best – lend money.

The Federal Reserve was formed for the purpose of cultivating a financial system that would allow banks to create and lend money in perpetuity.

The Fed creates the money and the banks lend it. Even retail banks create inflation by making loans to their customers via fractional-reserve banking. The Federal Reserve also makes sure that the US government has all the money that it wants to spend.

WHAT INFLATION IS AND WHAT IT ISN’T

INFLATION is the debasement of money by government . The action of expanding the supply of money and credit is inflation.

The debasement of money leads to a loss in purchasing power of the currency which shows up in the form of higher prices for all goods and services over time. In addition, decisions regarding financial planning, capital expansion, etc., become skewed. These effects of inflation are unpredictable.

Inflation is NOT a spontaneous event that just happens under certain conditions. Inflation is the conscious and intentional act of debasing the supply of money by those in charge; whether that be a central bank or a government.

Before digital money, even before paper money, inflation was a problem…

“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. (see History Of Gold As Money)

FED IS AFRAID OF DEFLATION

Deflation is the opposite of inflation. DEFLATION is a contraction in the supply of money and credit.

The effects of deflation result in fewer dollars in circulation and an increase in purchasing power.

The overwhelming effect of deflation would be a catastrophic economic depression, such as that which occurred in the 1930s.

Deflation is the Fed’s biggest fear. It is the inevitable end result of too much inflation. A depression would not be good for banks and lending activities.

The problem is that the bond market is shouting that a credit collapse, deflation, and economic depression are on the horizon. The Fed knows this and can’t do anything about about it.

That is exactly why they want you to look the other way.

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!

For a look at all of today’s economic events, check out our economic calendar.

 

Gold’s Singular Role

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, brokers (make sure your broker is safe to trade), bankers, etc.

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, they 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.

historical-gold-prices-100-year-chart-2021-03-24-macrotrends

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 INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT

Gold And US Dollar Hegemony

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.

The possibility of gold reasserting itself as the international medium of exchange continues to increase; but, a lot more bad stuff has to happen before we get to that point. Also, governments around the world have too much at stake to capitulate when it comes to ceasing to issue ‘funny money’.

For the time being, let’s focus on things as they are.

PRICE OF GOLD IN EUROS AND FRANCS

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, what about those who live and work in Germany (euro), Japan (yen), China (yuan) or Switzerland (franc)?

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. However, 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 priced in US dollars was the same.

There are several things we can learn from this.

DEMAND FOR US DOLLARS

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

For another, changes in exchange rates of any other currencies relative to the US dollar must be considered and applied in order to complete the desired transaction.

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 changing continuously. In addition, the exponential growth of online brokerage platforms, such as Olymp Trade, make it possible for almost anyone to have access to foreign exchange markets around the clock. This increases potential volatility and adds to the confusion.

It is also 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.

In the examples cited, 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.

GOLD PRICE VS VALUE

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, has done. It also tells us what people think is happening to the US dollar currently and what they expect (further weakness, additional loss in purchasing power, etc.) in the future.

But what people think is happening changes all the time. 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.

The value of gold (see How Much Is Gold Really Worth?) does not change. It is original money. Gold’s value is constant and unchanging.

The value of the US dollar, however, changes all the time. This is 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.

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!

For a look at all of today’s economic events, check out our economic calendar.

Gold and US Dollar Hegemony

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.

The possibility of gold reasserting itself as the international medium of exchange continues to increase; but, a lot more bad stuff has to happen before we get to that point.

Also, governments around the world have too much at stake to capitulate when it comes to ceasing to issue ‘funny money’. For the time being, let’s focus on things as they are

PRICE OF GOLD IN EUROS AND FRANCS

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, what about those who live and work in Germany (euro), Japan (yen), China (yuan) or Switzerland (franc)?

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. However, 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 priced in US dollars was the same. There are several things we can learn from this.

DEMAND FOR US DOLLARS

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

For another, changes in exchange rates of any other currencies relative to the US dollar must be considered and applied in order to
complete the desired transaction.

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 changing continuously. In addition, the exponential growth of online brokerage platforms, such as Olymp Trade, make it possible for almost anyone to have access to foreign exchange markets around the clock. This increases potential volatility.

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.

In the examples cited, 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.

GOLD PRICE VS VALUE

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, has done. It also tells us what people think is happening to the US dollar currently and what they expect (further weakness, additional loss in purchasing power, etc.) in the future.

But what people think is happening changes all the time. 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.

The value of gold (see How Much Is Gold Really Worth?) does not change. It is original money. Gold’s value is constant and unchanging. The value of the US dollar, however, changes all the time. This is 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.

Kelsey Williams is the author of two books: How Much Is Gold Really Worth? and How Much Is Gold Really Worth?

Gold Prices Then (3/2020) And Now (3/2021)

Subsequent rebounds in stocks, bonds, and real estate took valuations to levels as high or higher (much higher for stocks and gold) than before the turbulence took hold. Some might refer to those valuations as nose-bleed levels, although the summit for peak ascension is always moving when the effects of inflation are factored in.

Gold had its day in the sun, too. After falling sympathetically with other markets, gold’s price began an aggressive climb of more than 40% in just four months’ time.

IS THAT ALL THERE IS?

It seemed like a runaway win for gold over everything else. Then something changed. While stocks and real estate continued their climb to lofty levels, gold began a seven-month slide back to its pre-pandemic price.

Over the past seven months, from its peak price in August 2020 at $2070, gold has dropped four hundred dollars per ounce back to $1683, its closing price last Monday on March 8th.

Almost exactly one year ago, on the inauspicious day of Monday March 9, 2020 gold closed at $1680.

After three huge monetary stimulus bills, ongoing new money creation by the Federal Reserve on a daily basis to support the bond and money markets, amidst expectations for rejection and repudiation of the US dollar, and possible runaway inflation; after all of this and more, the net gain for gold for the entire year March 9 2020 to March 8 2021, is a paltry $3 per ounce.

This is pictured on the chart below:

gold-price-last-ten-years-2021-03-14-macrotrends

It is what it is.

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!

Powell And Yellen – Team Fed

Flashback 11/21/2017:

“President Trump nominated Jerome H. Powell as the new Chairman of the Federal Reserve Bank. Don’t look for much to change. And Janet Yellen’s announcement that she will resign from the board upon Mr. Powell’s induction as board chair is pretty much a non-event.” (see New Fed Chairman, Same Old Story)

Chairman Powell said that as the economy improves, it “could create some upward pressure on prices” but that the effects would likely be transitory

Treasury Yellen likes the word transitory. Five years ago, when she was Federal Reserve Board Chair, she referred to a slowdown in the job market as likely “transitory”.

A year later, in 2017, in reference to concern that the effects of inflation remained weak, she said “My colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely,”

LOTS OF POSSIBILITIES

As it is now, Treasury Secretary Yellen appears to feel similarly to Fed Chairman Powell. When she was asked about volatility in the financial markets over the past two weeks, she said that rising interest rates are a sign that prospects for the economy are starting to improve.

That is a possibility. It is also a possibility that interest rates could move higher and that the economy wouldn’t improve; and that the effects of inflation get a lot worse. Or, rates could move much higher in tandem with a credit collapse resulting in deflation and another Great Depression. (see A Depression For The 21st Century)

THE FED – PROMISES, PROMISES

They tell us it will be better next year, but they have been telling us that for most of this century. They also promised us that things wouldn’t get worse, but they did.
Treasury Secretary Yellen told us when she was still Board Chair at the Federal Reserve that “another financial crisis is unlikely in our lifetime because of the measures the Fed has taken”.
Was what happened last year not a financial crisis?  Of course it was; and a lot more.
“Regardless of Covid-19, a lack of fundamental underpinnings had left the stock market extremely vulnerable to a selloff of considerable magnitude, regardless of the specific trigger event.”
Team management has even admitted some of their mistakes in the past (“Fed caused Great Depression” – Bernanke).
Nevertheless, it is late in the fourth quarter and we are way behind. And there is no air in the ball.

Gold And US Treasuries – Punctures In The Everything-Bubble

The size of the decline is not unusual at face value. But, in light of the expectations for hugely higher inflation rates and much higher gold prices that have dominated the headlines over the past year, the drop might signal a cause for concern among gold bulls.

Meanwhile, eyes are fixed on interest rates for US Treasury bonds. During the same six-month period (August 2020 – February 2021) during which the price of gold fell by seventeen percent, the price of the 20-year US Treasury bond fell by twenty percent. That IS a huge deal, as it corresponds to sharply higher interest rates from less than 1% last August to as high as 2.26% just the other day.

The rush to proclaim correlation between interest rates and gold has resumed. Also, warnings and predictions of much higher inflation from around the globe are increasing.

As we have said on several occasions, there is no correlation between gold and interest rates (see Gold And Interest Rates – There Is No Correlation).

This can be seen on the charts below. The first chart (source) is a history of gold prices over the past fifty-six years and the second chart (source) is a history of interest rates over the same time period.

GOLD PRICES 1965-2021

10 YEAR US TREASURY RATE 1965-2021

During the 1970s, the price of gold rose from $40 per ounce to an intraday peak of $850. All throughout that time, the interest rate on the 10-year US Treasury bond rose higher and higher; from approximately 4% to 12.5%.

However, during the years 2000-2011, while the price of gold rose from $250 to $1900, interest rates on the 10-year US Treasury bond dropped from 6% to 2%.

The two decade-long periods provide contradictory results for the argument that lower interest rates are correlated to higher gold prices.

And for those who argue that the higher rates we are currently seeing are an indication of significantly higher inflation, then why is the gold price declining?

The higher interest rates are possibly a market reaction to the brutal effects of infinite credit creation and interest rate manipulation by the Federal Reserve.

The entire world economy is funded with cheap credit and most economic activity is dependent on it. The prices for all financial assets misrepresent and grossly exaggerate any underlying fundamental value.

Higher rates might trigger a credit collapse so severe that any asset could decline in price by fifty percent or more.

As for gold, it would also decline – to a level commensurate with whatever strength the US dollar attains.

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 Treasuries – Punctures In The Everything-Bubble

The size of the decline is not unusual at face value. But, in light of the expectations for hugely higher inflation rates and much higher gold prices that have dominated the headlines over the past year, the drop might signal a cause for concern among gold bulls.

Meanwhile, eyes are fixed on interest rates for US Treasury bonds. During the same six-month period (August 2020 – February 2021) during which the price of gold fell by seventeen percent, the price of the 20-year US Treasury bond fell by twenty percent. That IS a huge deal, as it corresponds to sharply higher interest rates from less than 1% last August to as high as 2.26% just the other day.

The rush to proclaim correlation between interest rates and gold has resumed. Also, warnings and predictions of much higher inflation from around the globe are increasing. As we have said on several occasions, there is no correlation between gold and interest rates (see Gold And Interest Rates – There Is No Correlation).

This can be seen on the charts below. The first chart (source) is a history of gold prices over the past fifty-six years and the second chart (source) is a history of interest rates over the same time period…

GOLD PRICES 1965-2021

10 YEAR US TREASURY RATE 1965-2021

During the 1970s, the price of gold rose from $40 per ounce to an intraday peak of $850. All throughout that time, the interest rate on the 10-year US Treasury bond rose higher and higher; from approximately 4% to 12.5%.

However, during the years 2000-2011, while the price of gold rose from $250 to $1900, interest rates on the 10-year US Treasury bond dropped from 6% to 2%. The two decade-long periods provide contradictory results for the argument that lower interest rates are correlated to higher gold prices.

And for those who argue that the higher rates we are currently seeing are an indication of significantly higher inflation, then why is the gold price declining? The higher interest rates are possibly a market reaction to the brutal effects of infinite credit creation and interest rate manipulation by the Federal Reserve.

The entire world economy is funded with cheap credit and most economic activity is dependent on it. The prices for all financial assets misrepresent and grossly exaggerate any underlying fundamental value.

Higher rates might trigger a credit collapse so severe that any asset could decline in price by fifty percent or more. As for gold, it would also decline – to a level commensurate with whatever strength the US dollar attains.

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 To Monetary Base Ratio Says No Hyperinflation

As long as the amount of money that is created is somewhat moderate and regular, then the effects are presumed to be moderate, as well. Hence, we experience increases in the cost of living on an ongoing basis, but in incremental amounts of maybe two or three percent each year.

NEGATIVE EFFECTS OF MONEY CREATION

However, if the amount of money creation is liberal enough, and occurs over a very short period of time, the effects can be much more severe. In some extreme cases this can lead to hyperinflation; or runaway inflation, as it is sometimes called.

In those instances, the money can become nearly worthless, and the simple purchase of a loaf of bread (when the transaction can be made) might cost the buyer $10,000 or more.

A century ago, gold and the US dollar were interchangeable at a fixed price of $20.67 per ounce. The fixed price was supposed to be a restraint on government’s tendency to expand the money supply. Unfortunately, the government found lots of reasons to ignore the restraint which dollar convertibility required.

After the link between gold and the dollar was severed completely and restoration of private citizens right to own gold was restored, the price of gold continued higher. At a $1815 per ounce, the price of gold currently reflects a nearly ninety-nine percent decline in the purchasing power of the US dollar over the past one hundred years.

We have said, and we know, that money creation by the Fed cheapens the existing supply of dollars and leads to higher prices for goods and services. And that has happened progressively over time.

However, the extraordinary increase in the money supply by the Federal Reserve in such a short period of time last year has led some to expect the hyperinflation that we referred to earlier.

But, that does not seem to be happening. Nor, did it happen after 2008 when the Fed adopted very similar quantitative measures then. Let’s see why not.

RUNAWAY INFLATION IS UNLIKELY

There are two specific reasons why runaway inflation did not happen a decade ago, and why it won’t likely happen now, either.

First, the demand for money is overwhelming the desire to spend. People are choosing to pay bills, pay down debts and save money rather than borrow and spend more. The demand for cash counterbalances the supply of cheap credit available. (see Supply And Demand For Money – The End Of Inflation?)

As a result, the cheap credit has fueled price explosions in stocks, bonds, and real estate. Now, all financial assets are overpriced and subject to huge downside drafts. This could lead to further drops in economic activity and a full-scale depression.

Second, the effects of inflation created by the Fed are unpredictable. Also, the impact of that inflation has been declining for more than fifty years. (see Fed Inflation Is Losing Its Intended Effect)

The chart below (source) shows the ratio of the gold price to the St. Louis Adjusted Monetary Base back to 1918.

GOLD TO MONETARY BASE RATIO – CHART

gold-to-monetary-base-ratio-2021-02-15-macrotrends

A false assumption by some gold bulls is that the size of the money creation is mathematically correlated to higher prices for gold. If the inflation effects of money creation are not evident, it is assumed that gold’s price will eventually go up in a way that corresponds proportionately to the amount of money that has been created. This is not true.

As we have said before, the higher price for gold is correlated directly to the loss in purchasing power of the US dollar; NOT to the amount of money created. Just as important, the quantitative loss in purchasing power is unpredictable; and gold’s price increases to reflect that actual loss after it has occurred – not before.

A significant amount of new money creation is required ongoing just to keep debt deflation at bay and stave off economic collapse. Wait! Isn’t that what just happened?

As long as the Fed creates enough new money to prevent debt deflation, any amount of new money created above that level presents the potential for minimal inflation effects, such as higher prices for goods and services. Those minimal effects are unpredictable. (see The Fed’s 2% Inflation Target Is Pointless)

As the Gold To Monetary Base Ratio shows, hyperinflation isn’t in the cards.

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!

Barrick And Buffett – A Different Perspective

Buffett’s about face and sale of almost 9 million shares of Barrick the following quarter (Q3) seemed incongruous. The remaining 12 million shares were sold in the fourth quarter of 2020, and Berkshire Hathaway is now devoid of any holdings in the gold arena.

Further speculation about the intentions and reasoning underlying the purchase and subsequent sale of Barrick stock by Buffett seem almost moot. There are, however, a couple of other related events associated with Barrick and Buffett which provide adequate fodder for this article’s subject matter.

Not only did Berkshire Hathaway divest itself of all Barrick stock, it also sold entire positions in the following bank stocks: JPMorgan Chase, M&T Bank, and PNC Financial. In addition, it reduced its holding in Wells Fargo & Co. by almost 60%.

The latest sales of bank stocks by Berkshire Hathaway continue the pattern that began about the same time that Buffet acquired Barrick stock initially:

“Investor Warren Buffett sold his entire position in Goldman Sachs stock during the pandemic earlier this year. This was in addition to large sales of his holdings in other bank stocks such as JPMorgan Chase, Wells Fargo, and PNC.” (see Goldman Sachs Gold; Buffett Sacks Goldman)

Why is Warren Buffett getting out of bank stocks? The answer to that question might be more newsworthy than wondering about his reasons for buying, and then selling Barrick Gold so quickly.

Also, as noted in a previous article (see Barrick And Buffett; Gold And Goldman), a team of commodity analysts at Goldman Sachs raised their 12-month forecast for gold to $2300 from $2000 in July 2020.

The price of gold peaked at $2060 in the following month and then declined almost $300 per ounce to $1774 by late November 2020.

In December 2020, the Goldman commodity team reaffirmed their expectations and price target for gold at $2300 per ounce in 2021.

Gold is currently priced at $1779 per ounce and we are patiently waiting for Goldman’s next price prediction update.

Meanwhile, Barrick stock is at $19 per share, its lowest price since peaking at $31 last August. The stock appears to be breaking down.

At the very least, Warren Buffett has avoided further price erosion by selling his Barrick holdings last quarter.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT andALL HAIL THE FED!

Bubblicious Asset Prices, Debt Dependency, Economic Collapse

And, while some might be more stringent in their terms of definition and applicability, investors in stocks, bonds, real estate, etc. – pretty much anything with a $ sign in front of it – might want to rethink the current state of affairs as it pertains to valuation of their financial assets.

According to Merriam-Webster, a bubble is “a state of booming economic activity (as in a stock market) that often ends in a sudden collapse”.

More accurately, though, the bubbles to which we are referring have more to do with price valuations, not economic activity.

The economy of the United States has improved considerably since April 2020; but it hasn’t recovered fully. Nor, has it exceeded its previous level from prior to the pandemic. So, the term bubble probably isn’t applicable to current economic activity.

ALL FINANCIAL ASSETS ARE OVERPRICED

However, in the case of prices for stocks, bonds and other financial assets, those prices are already discounting years of profitability.

Even allowing for a highly generous application of price-to-earnings ratios, current prices far exceed the most favorable expectations for future growth.

The problem is much worse, though, than simple overvaluation of assets. The US and world economy is debt-dependent. The excessive valuations showing in financial asset prices are a result of an abundance of cheap credit.

One example is bond prices, which have risen to excessively high prices as interest rates fall to unsustainable historically low levels. Financial risk appears to be non-existent amidst the clamor to own debt at almost any price.

Economic activity is funded primarily by cheap credit; whether it be mortgages, business activity, even retail consumption. Without the access to unlimited amounts of credit the world economy would come to a standstill. The situation is precarious.

A FRAGILE ECONOMY AND A LOOMING DEPRESSION

The economy is not in a bubble, but it is very fragile and could collapse at any time. We saw how quickly this can happen last March.

Some are too quick to assume that the Fed will step in and take whatever steps are necessary to arrest the hellish descent when it occurs. Of course, they will try. But they likely won’t be successful.

We have advanced too far down the primrose path of money substitutes and cheap credit. And let’s not forget, that whatever the Fed’s intentions are (or were), they caused the Great Depression of the 1930s.

The Next Great Depression will be worse and last longer.

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!

Janet Yellen Re: Cryptocurrencies and Terrorists

Here are the statements she made in response to a question from Sen. Maggie Hassan, who asked Yellen during her confirmation hearing on Tuesday about the dangers of terrorists using cryptocurrencies:

“You’re absolutely right that the technologies to accomplish this change over time, and we need to make sure that our methods for dealing with these matters, with terrorist financing, change along with changing technology,” Yellen said.

“Cryptocurrencies are a particular concern. I think many are used – at least in a transaction sense – mainly for illicit financing.

“And I think we really need to examine ways in which we can curtail their use and make sure that money laundering doesn’t occur through those channels.”  

ARE TERRORISTS USING BITCOIN?

Are terrorists using Bitcoin to finance their “illicit” activities? And, to what extent?

I understand the concern about money laundering, but it is doubtful that “many” cryptocurrencies are used “mainly for illicit financing”. If that is the case, then why is the Secretary of Treasury encouraging lawmakers and regulators to “curtail” their use?

To answer that, we need to understand what Bitcoin and other cryptocurrencies are – in simple, straightforward terms.

Cryptocurrencies offer a PRIVATE process for digital transfer of money. Every single transaction is recorded within  a decentralized tracking system. The privacy is attractive for tax and regulatory reasons.

Is tax-avoidance an issue of concern for Ms. Yellen? In her role as Secretary of Treasury, the answer is probably yes. Although, at this point, the volume of financial transactions in all cryptocurrencies likely isn’t large enough to justify excessive concern on her part.

There must be another reason. There is; and that reason encompasses territory far beyond the potential loss of tax revenue.

MS. YELLEN’S REAL REASON FOR CONCERN

The reason: lack of control.

We live in a highly regulated society. Our financial system is the epitome of stringent regulation and control. That control is evident in the process involving financial transactions and the transfer of money.

The ever-present middleman in clearing all financial transactions is the bank; ultimately the US Federal Reserve. And, as we know, Ms. Yellen is a former board chair of the Federal Reserve.

Financial transactions in Bitcoin and other cryptocurrencies are “off the grid” so to speak. That means that they are unreported and do not come under the purview of the regulators.

However, it is not realistic to think that the system will be allowed to function unimpeded on its own for long. This is especially true if the dollar volume of transactions increases in significance.

Ms. Yellen’s inference of terrorists using cryptocurrencies appears to be an attempt to justify curtailment or clampdown on financial activity that is currently not under the purview of those who are in control.

It is naive and short-sighted to think that those who claim to have regulatory authority would sit idly by without making a concerted attempt to intervene in areas where activity is perceived as a threat to their own (the regulators)  interests.

(also see Judy Shelton – Thank You; Janet Yellen – She’s Back)

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!