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Gold Price, Inflation, Dollar Collapse, & BRICS

Analyst, Author, and Owner of Kelsey's Gold Facts
December 4, 2023

GOLD PRICE, INFLATION, DOLLAR COLLAPSE

Expectations for gold to move higher in price are often tied to worsening inflation and a possible collapse in the U.S. dollar.

That sounds logical and there is historical precedent to support such expectations; but, some clarification is necessary first.

DEFINITION OF INFLATION 

Inflation is the debasement of money by governments and central banks. The inflation is intentional and all governments inflate and destroy their own currencies.

The inflation occurs with the expansion of the supply of money and credit. This cheapens the value of all the money in circulation.

As a result, all of the money in circulation loses purchasing power. The loss of purchasing power shows up in the higher prices that consumers pay for goods and services.

The higher prices are not inflation. They are the effects of inflation. Those effects are cumulative and unpredictable. Over time they become more volatile as well.

In addition, the effects (loss of purchasing power, higher prices, etc.) of inflation are not proportionate to the amount of inflation which is created. In other words, a one hundred percent increase in the money supply does not mean that a doubling of consumer prices will result.

INFLATION AND THE GOLD PRICE 

Gold is real money. It is also original money. Gold was money before the U.S. dollar and all paper currencies.

The U.S. dollar is a substitute for real money, i.e., gold. A rising gold price over time is a reflection of the loss of purchasing power in the U.S. dollar that has already occurred.

When gold peaked in 1980, its price correlated to a ninety-seven percent loss of purchasing power in the dollar up to that point. The move was spectacular in nature, but it was mostly catch up to the decline in the dollar that had been accruing for the previous four decades.

Successively higher peaks in the price of gold in 2011 and 2020 reflected and confirmed a ninety-nine percent decline in U.S. dollar purchasing power.

When gold peaked at $2058 oz. in August 2020, its price was one hundred times higher than its original fixed price of $20.67 oz. when the U.S. dollar was freely convertible into gold at that rate.

Consumer prices also increased by a similar amount over that time frame. The U.S. dollar of ninety years ago is worth one penny today – a ninety-nine percent loss of purchasing power.

GOLD’S SINGULAR ROLE

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.

One ounce of gold is no more valuable today than it was fifty or one hundred years ago; or a thousand years ago.

Gold is the original measure of value. Before paper currencies, goods and services were priced in gold (ounces, grams, grains, etc.).

It was not a question as to how much your gold was worth. The question was did you have enough gold, i.e., money, to purchase a desired item.

US DOLLAR COLLAPSE

A collapse in the U.S. dollar means further, significant erosion of its purchasing power, possible loss of its reserve status, and potential repudiation. In other words, the possibility of the dollar becoming worthless is often inferred when the word ‘collapse’ is used.

Time might be more important than the total destruction involved. For example, if the prices of consumer goods and services doubled over the next six months, the meaning and intent of the term collapse would be satisfied.

But, if the U.S. dollar were to become worthless, the price of gold in U.S. dollars would be meaningless.

Pick a number, any number. Let’s say $100,000.00 oz. If no one is willing to accept dollars in trade, would you be willing to sell your gold at that price?

If the U.S. dollar were to become worthless, it won’t matter what the price of gold is in U.S. dollars. Again, what will be important under those conditions is how much gold you own.

Gold would retain its purchasing power. If there is a USD price it will only tell you how much more purchasing power the dollar has lost.

Gold at $100,000 oz. won’t be any more valuable than it is at $2000 oz. And gold at $2000 oz. today isn’t any more valuable than it was at $20.67 oz.

It does not make any difference what currency gold is priced in, either. Gold’s price in dollars, euros, yen or yuan does not tell us anything about gold, but only what happens to the currency itself.

For example, if gold were priced in Chinese yuan today and the yuan were to lose fifty percent of its current purchasing power, the gold price in yuan would reflect that loss by eventually move higher by one hundred percent.

The fifty percent loss of purchasing power in the yuan would increase the cost of goods and services priced in yuan by one hundred percent as well.

It is important to note, however, that an increase in the gold price comes after the effects of inflation are readily apparent and absorbed into the system.

BRICS 

Some countries (BRICS) have been vocal in their condemnation of the U.S. dollar. They have banded together with a seemingly common objective to “overthrow the U.S. dollar”.

It is important to understand that all of the rhetoric and publicity involving BRICS nations and their efforts to undermine and replace the U.S. dollar are political in nature.

To whatever extent there is merit to their arguments in favor of an alternative to the U.S, dollar as a reserve currency, can you trust the likes of Russia and China, etc. to sponsor and provide that alternative?

Trust is an issue when considering calls and promises for a “gold-backed” currency to replace the dollar. The key point of importance is not the gold backing; it is convertibility.

The success of any fiat currency or real money substitute (in other words, anything other than gold itself as the medium of exchange) depends on its convertibility into gold – on demand.

At this point in time, trial balloons and potential suggestions for a gold-backed currency alternative to the U.S. dollar do not include convertibility.

CONCLUSION

Gold is real money and a long-term store of value. All attempts to replace it are substitutes for real money and doomed to failure.

Credibility for the U.S. dollar was based on its convertibility into gold at a fixed, agreed-upon rate of exchange.

Absent that convertibility, the ongoing effects (loss of purchasing power in USD) of inflation manifest themselves in a higher gold price.

Without gold convertibility, any attempts to replace the U.S. dollar are doomed to failure.

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!

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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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