Gold Price Tells Us Nothing About Gold

Analyst, Author, and Owner of Kelsey's Gold Facts
March 24, 2020

gold price analysis

If the title of this article is in any way disturbing or seems incorrect to you, then I sincerely recommend that you read it through carefully and completely. It was written for your benefit.

People are obsessed with the price of gold. That is not surprising, given that most people likely view gold as an investment opportunity. "How much can I make and how quickly?"

What really plagues gold investors and others is the question "Why didn't gold respond the way we expected?"

That is because their expectations were unrealistic. Here is why.

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.

Here are some examples of inconsistencies when viewed through the lens of faulty logic based on incorrect assumptions...

No Correlation Between Gold And Interest Rates

All during the 1970s, while gold was increasing from $40.00 per ounce to a high of $850.00 per ounce, interest rates were rocketing higher. The yield on 10-year U.S. Treasury bonds exceeded fifteen percent. There was a serious lack of demand for higher yielding investments.

Then, during 2000-11, while gold increased from $250.00 per ounce to a high of $1900.00b per ounce, interest rates continued their long-term decline to historically low levels, even approaching zero percent, and, in some cases negative numbers.

Two ten-year periods of outsized gains in the price of gold. And interest rates were doing something exactly opposite during each period. There is no correlation between gold and interest rates.

Here is another example of a faulty assumption that led to disappointment...

Gold Is Not A Safe-Haven

In late 1990, there was a good deal of speculation regarding the potential effects on gold of the impending Gulf War. There were some spurts upward in price and the anxiety increased as the target date for action grew near. Almost simultaneously with the onset of bombing by U.S. forces, gold backed off sharply, giving up its formerly accumulated price gains and actually moving lower.

Most observers describe this turnabout as somewhat of a surprise. They attribute it to the quick and decisive action and results achieved. That is a convenient explanation but not necessarily an accurate one.

What mattered most for gold was the war's impact on the value of the US dollar. Even a prolonged involvement would not necessarily have undermined the relative strength of the U.S. dollar.

We saw this sentiment and expectations for gold on several other occasions, too. One of them was when friction between the United States and North Korea was in the headlines a couple of years ago. Gold is not a hedge against world war.

One more example of an incorrect assumption...

Gold Is Not (Inversely) Correlated With Stocks

For five full years, from the fall of 2002 until late 2007, both stocks and gold prices moved in tandem. During that period, stocks were up eighty percent.

The price of gold was up too, much more than stocks. At the end of the five years, gold’s price had increased by more than double.

The next year, in 2008, stocks and gold turned about face and marched together in the opposite direction. Both stocks and gold prices declined by more than thirty percent.

The latest collapse in stock prices and gold's failure to charge ahead is quite ironic. It speaks volumes that the size and quickness of the stock decline was as great or greater than what not too few 'experts' claimed was necessary to propel gold's price to new highs and beyond. Gold is not correlated, inversely or otherwise, with stocks.

Gold’s Price Is All About The US Dollar

So why does the price of gold change; and what is the value of gold?

Gold is money; original money, real money. Gold's value is in its use as money; and its value is constant and unchanging.

The US dollar is a substitute for real (original) money, i.e., gold. Gold's price is a reflection of changes in the value (purchasing power) of the U.S. dollar. Nothing more. Nothing less. Nothing else.

The US dollar is in a state of constant deterioration, punctuated with periods of relative strength and stability. We are in one of those periods of strength and stability for the US dollar right now and have been since 2011.

Investors and others made two incorrect assumptions about gold...

1. That gold would go up because of all the non-fundamentals: low interest rates; declining stock markets; wars, including trade wars; recessions and economic collapse; political instability; social unrest; etc.

2. That Federal Reserve response to financial crises, such as stock market collapse, credit and liquidity issues, and potential economic calamity would result in a weaker dollar and higher gold prices.

Actually, they skipped over the part about a weaker dollar. They assumed that Fed action, itself, would send gold prices higher. That is because they assumed that Fed action would immediately be interpreted as negative for the US dollar and that others would respond similarly.

They were wrong. And, they were wrong twelve years ago, too. At that time, the expectations were for infinitely higher prices for all goods and services, maybe even runaway inflation.

Now, with stocks falling and economic activity slowing rapidly, QE and ZIRP are back again. Some are still expecting lower rates to "boost" gold prices and weaken the value of the US dollar. But it is not happening.

That is because Federal Reserve action continues to lose its intended effect. This might be compared to a drug addict who, after years of substance abuse, and continually higher doses with the drug of choice, shows no signs of response from the latest fix.(see Fed Inflation Is Losing Its Intended Effect)

What, then, 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?

What’s Next?

Scenario #1 - One possibility is another credit collapse. The unwinding of prices for all assets (stocks, bonds, real estate, commodities) denominated in dollars would trigger a full-scale depression accompanied by woefully lower levels of economic activity.

Don't look for gold to save you. The U.S. dollar would increase in value and gold's price in dollars would decline significantly. The US dollar would actually buy more, not less. The supply of US dollars would be significantly less. This is true deflation, and it is the exact opposite of inflation. (This appears to be where we are headed now.)

Scenario #2 - 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. (This is what many gold investors were expecting.)  Any profits would be elusive. At a time like that, the U.S. dollar price of gold becomes meaningless. You would need any paper profits in gold price to pay for the hugely higher price of basic goods and services.

Scenario #3 - Hey, things could get better, too. Stock prices could rebound and stabilize before moving higher. Companies could invest in productive efforts that would lead to gains in economic activity and individuals would spend, save, and invest. A relatively stable US dollar would provide stability. (Not likely at this time.)

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.

No matter how things develop, or whatever the ultimate outcome, the only sure thing we can know about gold's price is that it inversely reflects whatever is happening to the US dollar - and only that. Keep your eye on the US dollar. (see Gold - It's Still All About The US Dollar)

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!

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

One cubic foot of gold weighs more than half a ton (1,306 pounds).
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