A Lesson About Gold – How Bullish Can It Be?

January 16, 2020
Financial Analyst, Author, and Owner of Kelsey's Gold Facts

fine gold

Apparently, not enough. This seems especially true right now. With all of the "obvious" signs and indicators staring you in the face, it seems like blasphemy to speak cautiously. Better to let your imagination run wild and join in the revelry.

I can't do that. I don't choose to be dumped into the same cauldron of boiling fantasy with other analysts and advisors, who tout and promote based on the latest headlines. There has to be more to it. I think there is.

Some of this has to do with marketing. "Let's make hay while the sun shines!" I get that. But I don't like being in a large crowd when emotions grow unchecked and fundamentals are ignored.

If you are interested in attending a pep rally for much higher gold prices, move on. You won't find it here.

That does not mean that gold prices can't go much higher. They can. But calls for new highs in gold within the next year are probably premature. Actually, some were calling for new highs last year. It didn't happen.

For some, last year's prediction for new highs in the short term has become a long term prediction. Having to wait for another year to be right must be frustrating.

Whether it’s short-term or long-term, though, predicting the price of gold is a fool's game.  The odds for success are very long. (see Predicting The Price Of Gold Is A Fool's Game)

Some claim that fundamentals for gold are driving its price higher. But what are those fundamentals? Here are the ones that are more frequently mentioned - interest rates, debt levels, inflation, trade war,  poor economic conditions, concern about stock market(s), social unrest (terrorism, war), political problems, etc., etc.. But are they drivers of the gold price? Let's take a look.

No Correlation Between Gold And Interest Rates

For the past several years, correlation of gold with interest rates has been a popular topic. It seemed obvious to some that as the Fed tightened and interest rates began to rise, that  gold would decline in price.

One of the points offered in support of this argument was that gold paid no dividends. Hence, it was not competitive with interest-bearing obligations such as bonds. So, as interest rates rose, gold would lose value.

When the Fed publicly reverted to QE just over one year ago, investors pounced on gold with the implied assumption that lower interest rates would make it more attractive as an alternative investment.

Their enthusiasm was heightened by the return of ZIRP (zero interest rate policy) and the memory of declining rates during the decade-long run of lower interest rates and higher gold prices between 2000-11.

But, in the only other time of rising gold prices during a period of comparable length in the past one hundred years, interest rates were moving in the other direction.

Between 1970 and 1980 gold prices went from $42 to $850 per ounce. And interest rates soared.

"Rather than "struggling to compete" gold was galloping ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments.
The higher rates were a reflection of lower prices for bonds and particularly U.S. Treasury securities. The 10-year U.S. Treasury bond yield exceeded 15%." (see Gold And Interest Rates - There Is No Correlation)

Tariffs And Trade Wars, Economic Conditions Not Issues For Gold

Then why did gold prices go up last year? Maybe it was the trade war between the US and China. The back and forth announcements re: tariffs, trts (tariffs in response to tariffs) and mtrtrts (more tariffs in response to tariffs in response to tariffs) were almost comical but their potentially disastrous economic consequences seemed a likely catalyst for higher gold prices.

But the history of trade wars and tariffs in this country parallels economic depression and deflation; and lower gold prices, not higher ones.

Well, then, what about a stock market crash? Surely that would bring about a huge increase in the price of gold.

If that is the case, then why didn't gold increase dramatically in price with the stock market crash in 1929 and the onset of the Great Depression?

Will A World War Drive Gold Prices Higher?

Maybe it is the threat of large-scale war; another world war. On second thought, maybe it's not.

Otherwise, why did the most explosive bull market in the past two hundred years happen after the US pulled out of Vietnam? Why weren't gold prices out of sight during World War II, the Korean War, the Cuban Missile Crisis?

More recently, during 2018, the backdrop of world events was similar but the results for gold prices were different. News headlines and stories about North Korea seemed to indicate that a horrific confrontation was inevitable. The threat was real, and any fears were justified.

However, expectations for higher gold prices as a result of a potential war failed to materialize. The safe haven characteristics often attributed to gold did nothing to keep it from declining nearly two hundred dollars per ounce between January and August of that year.

Understanding Inflation, Gold…And The US Dollar 

Okay, fine! Maybe it's none of those other things. But what about inflation? Fed policy will ruin the US dollar, alienate holders of dollars, and gold will soar. We will get inflation on a scale that we've never had; maybe even runaway inflation. Complete repudiation of the US dollar will take gold to unprecedented levels.

People have been saying similar things for the past fifty years. It isn't that they are wrong. It has more to do with their perception of those events and what they mean.

Inflation is the debasement of money by government. This cheapens the value of all the money in circulation and leads to a loss of purchasing power. The loss of purchasing power shows up in the form of higher prices for most goods and services.

The higher prices you pay are the effects of inflation which has already been created by government.

What does this have to do with gold prices? Everything.

You see, gold is original money. It was money before the US dollar and other paper currencies. All paper currencies are substitutes for gold (real money).

At one time, there was a fixed ratio of gold vs. the US dollar. It was known and accepted as fact that one ounce of gold was equal to $20.67.

Unfortunately, government was not nice to the US dollar. They printed and created more and more of them. Eventually, the ratio of dollars to gold became almost meaningless.

Since gold is priced in dollars, its price represents the market's best estimate of the extent to which the US dollar has lost purchasing power. In other words, the price of gold does not tell us anything about gold. Rather, it tells us how badly the dollar has declined.

Do you think gold can go to $10,000 per ounce? If so, what you are saying is that by the  time it occurs (however quickly, or however long it takes) the US dollar will have lost another 85 percent of its purchasing power.

You will then be paying nearly seven times more for everything else too. If you think you will be rich because you bought gold today at $1500 and held it until it reaches $10,000, then you might want to reevaluate your expectations.

How rich will you be if you are paying $20.00 per gallon for gasoline? Or $200,000 for a new Honda Accord? The higher gold price compensates you for the loss in purchasing power in the dollar.

Maybe it won't get that bad. Maybe things will drag along for another ten years without much price action in gold. That won't make you rich either. A reasonably stable US dollar and mild effects from inflation would kill any chances for you to make a quick killing by holding gold.

What if the price of gold suddenly spurted to $1800 per ounce over the next couple of months? Would you sell and take some quick profits? Or would you think the end of the world was at hand?

What if you had profits now because you bought at $1200.00 a year or so ago? Do you sell? Depends on what you expect regarding the future of the US dollar.

Gold is not an investment. It is real money. Gold's value is stable and unchanging. It is not subject to traditional laws of supply and demand. The changing price of gold is a reflection of the changing value (both real and perceived) of the US dollar. It is all about the US dollar. Nothing more, nothing less, nothing else.

*********

Gold-Eagle provides regular commentary and analysis of gold, precious metals and the economy. Be the first to be informed by signing up for our free email newsletter.
 

Free Gold-Eagle Newsletter!

  • Fresh weekly insights on gold, precious metals, and the economy
  • Leading authors from around the world
  • Always free
  • Stay informed!

 

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 kwilliams@kelseywilliamsgold.com

Goldschläger and Goldwasser are liqueurs containing pure gold flakes.

Gold Eagle twitter                Like Gold Eagle on Facebook