The Mystery Of The Falling Gold Price Solved

May 2, 2018

One Day They Will Wonder Why the Gold Price Dropped Amid So Many Risks

If you’re reading this, you must have pondered why the gold price has been dropping.

All the macro conditions should be pushing the gold price higher.

International risks and the very real prospect of trade wars between the U.S. and its closest allies—as well as the rest of the world—should have raised concerns about economic collapse.

And then there’s the risk that wars that are about to draw the United States into the Middle East could go “viral.” The prospect of World War 3 knocking at our doors is not an exaggeration.

There are efforts to pull the United States from the Iran nuclear deal, the Joint Comprehensive Plan of Action (JCPOA).

When that happens, there are those in the Donald Trump administration—Mike Pompeo and John Bolton, to mention two—who are ready to push for a wider conflagration. The world in spring 2018 has adopted the eerie semblance of the world in the spring of 1914.

The World Is on the Eve of Another 1914

World War 1 didn’t start because a 19-year-old Serbian nationalist decided to kill the heir apparent to the Austro-Hungarian throne. Rather, it started because that assassination lit a fuse that had long been connected to European tensions that had been rising for decades.

The year 1914 happened to be the peak of the gold standard. From the 1820s until the outbreak of World War 1, the world powers—starting with Great Britain—backed their currencies with physical gold.

It took the political and economic turmoil of World War 1 to break the gold standard. Yet, the United States was the country that had accumulated the most gold by the start of World War 1. The U.S. was the last to let go of the gold standard between 1968 and 1971.

Yet, the gold price surged in the period from 1971 to 1980. Inflation, low growth, stagnant industrial production, and high unemployment rates plagued the advanced economies. It was then that gold became a safe haven.

The Impact of Oil Prices

While many are quick on the draw to blame Keynesian distributive economics—the welfare state—for the economic troubles of the 1970s, few remember the impact of oil prices.

The Arab-Israeli wars that inflamed the Middle East in the late 1960s and throughout the 1970s caused oil prices to spike. The Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, enforced an oil embargo against the West after the 1973 Yom Kippur War.

The economies of the West relied on cheap oil and cheap resources. From 1973 to 1980, though, gas prices more than doubled from $0.30 to $0.88 per gallon. That made everything more expensive.

Oil was the fuel of industrialization. Everything ran on oil. Thus, everything became more expensive. It was in that same period that gold achieved one of its sharpest increases in history. The 1970s were a virtual oil bull market.

How Does the 1970s Gold Bull Market and World War 1 Relate to the Present?

In 2018, the world has been experiencing a combination of the geopolitics that burst wide open with World War 1. There’s the additional factor of suddenly and quickly rising oil prices. These are having a strong effect on inflation.

Yet, nobody is talking about inflation. And inflation is supposed to boost the oil price. Instead, the banks and economists have only discussed inflation as a factor emanating from alleged economic recoveries.

However, the Wall Street stock market records of January 2018 have blinded everyone. In the United States, still the world’s richest economy, unwise tax cuts have gone straight into the pockets of the rich and the corporations.

It’s a repeat of the well-documented failure of President Ronald Reagan’s “supply-side economics.” Critics of that system described the concept more sarcastically as “trickle-down economics.” The critics were right.

Corporate Tax Savings Won’t Be Trickling Down

The rich and the corporations will not re-invest their tax savings in increasing employment or workers’ wages. They will reinvest in the stock market—and corporations will often engage in the fine practice of “stock buybacks.”

The optimists of our age have not conceived of an adequate term to describe this inclination. Perhaps they might find inspiration looking up terms related to “greed” or “avarice.”

The average employee may enjoy about a hundred to a thousand dollars in extra income for the next few years. Those few people who count their annual earnings in millions, however, will be saving tens of thousands of dollars in taxes.

Oh, and what’s financing these tax cuts? The alleged higher numbers of employed Americans all having a grand old time? No. Debt is financing the cuts. More Treasuries sold to foreign governments. More debt sold, leaving the U.S. strategically vulnerable in case geopolitics erupt.

Unfortunately, this is not free. No economist believes that these tax cuts will generate enough revenue to pay for themselves (the debunked trickle-down theory). We fund these cuts by borrowing money from places like China, with interest.

Illusionists at Work Keep the Gold Price Down

The effect is a two-part illusion. There’s the illusion of growth and prosperity that comes from Wall Street, which, despite having come down from record highs, has managed to interrupt its fall.

The other ingredient of the illusion is the banks and certain media encouraging the Federal Reserve to raise interest rates. The reason they bring up that argument is the rising inflation. But they attribute the inflation to improving prosperity.

They see higher wages and lower taxes as being the driver of this “healthy” kind of inflation. Instead, the inflation is of the very worst kind.

Have you fueled up for gas lately or gone to a half-decent—I’m not even suggesting a high-end—clothing shop? Or have you been to a supermarket to buy groceries? All prices are higher, and one of the main reasons is that crude oil prices are going much higher.

Yet, the suddenly higher price of crude, which, in the 1970s was a top story on the nightly news, has not made a peep. Nobody talks about it, and it’s driving real inflation.

The perception of inflation has caused investors to drive up the yield on 10-year Treasuries. But, the crucial point is: It’s a perception. It’s not real. (Source: “US inflation is not a cause for alarm just yet,” Financial Times, May 1, 2018.)

The Federal Reserve Sees Inflation Everywhere, But It’s the Wrong Inflation

The Federal Reserve has been crying that inflation was too low for almost a decade. The moment it—that is, the healthy, higher-wage kind of inflation—made its timid appearance, economists channeled Paul Revere, warning that “inflation is coming” from the rooftops of Wall Street.

And then the lack of logic, which appears to be one of the plagues of the age in every human endeavor, is the real clincher. It’s hard to explain it because of an inherent self-defeating mechanism.

Nevertheless, the gold price has dropped in the past two weeks (after signs of improvement) because fears of inflation have prompted traders to expect the Federal Reserve to increase interest rates.

Indeed, as part of this faulty logic, the U.S. dollar has made a major jump over its main rival currencies. The EURUSD exchange has not been so favorable to the dollar since 2016. And sheepish thinkers have decided that a higher dollar should equate to cheaper gold.

How smart will those dollar bulls be when the U.S. gets caught in another dangerous war in the Middle East? The U.S. has not gone to Syria to fight ISIS. At least, not just ISIS. It’s there to keep an eye on Iran. And as the JCPOA deal could end any moment, the geopolitical tensions should finally encourage the gold bulls to come out.

One of the main effects of tensions, let alone war, with Iran will be spiking oil prices. How well will American families with wages that remain stagnant deal with much higher energy costs? Does it seem like the kind of economic scenario favorable to stock markets or the U.S. dollar?

Rather, these are the ideal conditions for the gold price to rise.

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Gold is one of the most recycled substances in the world.

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