Gold’s Next Big Surprise

Analyst, Author, and Owner of Kelsey's Gold Facts
March 8, 2022

Gold’s next big surprise could be on the downside. Continued strength in the US dollar throughout the current Russian – Ukrainian conflict is the indicator.

The higher price of gold over time is a reflection of the ongoing weakness and continual loss in purchasing power of the US dollar.

That is because gold is original money and the US dollar is a substitute for gold – literally. This is true of  all paper (fiat) currencies.

Gold acts as a restraint on government spending. The grandiose plans of the Roosevelt administration and the international bankers would have been hampered severely if convertibility between gold and the US dollar had been maintained rather than severed initially in 1933; and conclusively by President Nixon in 1971.

With inflation being practiced intentionally since the inception of the Federal Reserve, its effects have destroyed ninety-nine percent of the dollar’s purchasing power.

GOLD VS. US DOLLAR STRENGTH 

Nevertheless, the dollar does have periods of strength and stability which are concurrent with periods of lower prices for gold. The chart below shows this…

GOLD PRICE (inflation-adjusted) – 100 YEAR HISTORY

Beginning in 1933, each peak in the gold price on an inflation-adjusted basis is followed by a significant decline lasting for many years. Each period of decline is matched by a period of strength and stability in the US dollar.

Every major turning point on the chart corresponds to changes in direction of US dollar strength. In fact, the US dollar is the ONLY factor that is consistent in comparisons with direction and movement of the gold price.

The period of 1933-71 was characterized by a collapsing stock market, world-wide economic depression and world war; whereas the period of 1980-2000 was the epitome of economic growth and prosperity, technological advancement, leisure and luxury.

The one factor that corresponds in both cases with the decline in gold prices is a strong US dollar.

The rising gold price between 1971-80 was accompanied by historically higher interest rates which seemed to know no limits, but the rising gold price during 2000-2011 saw interest rates continuing their decades-long decline.

In this example, the only identifiable factor that corresponds similarly in both time periods is a weak US dollar.

Some say that gold is a safe-haven hedge, an investment for bad times. We might be in the middle of those “bad times” right now, but gold is not a safe-haven hedge, nor is it an investment. (see Gold Is Not An Investment)

Gold is real money – nothing else. Its continually rising price in US dollars is a reflection of the decline in the US dollar. More specifically, the higher gold price reflects the loss in US dollar purchasing power that has already occurred.

When the gold price peaked in 1980, 2011, and 2020, the price peaks represented the full extent of the US dollar’s loss in purchasing power that had occurred up to that point.

On an inflation-adjusted basis, the price peaks for gold in 1980, 2011, and 2020 are nearly the same. That is because the value of gold is constant. It is the US dollar which is volatile.

NO NEW HIGHS FOR GOLD

Current strength in the US dollar alongside a rising gold price should not be misinterpreted. Here’s why…

  1. Strength or weakness in the US dollar index tells us nothing about gold and is not the same as actual changes in US dollar purchasing power.
  2. Any new highs in the gold price will come after the effects of any recent inflation have taken hold and been felt and experienced for years OR
  3. A rapid renewal of US dollar weakness and a complete collapse in its value and use (not likely)

The effects of inflation that have occurred since gold’s peak in 2020 are not likely enough nor have they persisted long enough for gold’s price to react with much meaning.

As far as any influence from geopolitical forces or any other fundamental de jour, keep in mind the fact that the gold price is not affected by anything other than the US dollar.

The gold price has increased from $1675 oz last March but it is still below its previous nominal price peak and its inflation -adjusted peak. The increase so far is a retracement of ground previously given up.

In other words, don’t expect new highs in the gold price anytime soon. (also see What’s Next For Gold Is Always About The US Dollar)

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Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner. His website, Kelsey's Gold Facts, contains self-authored articles written for the purpose of educating and informing others about gold within a historical context. In addition to gold, he writes about inflation and the Federal Reserve.

Kelsey 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! 

Kelsey Williams is available for private consultations, public speaking, and interviews at [email protected]


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